Consider Debt Consolidation If You are Overwhelmed By Bills
In spite of your best intentions, the news you receive when you open your mailbox is nothing but bills. On the other hand, there is a loan offer for debt consolidation in the envelope with the bills. When monthly payments become too much to handle, debt consolidation may be an option to help get your finances in order. But are loans for debt consolidation the best option, or are there other ways to get your finances back on firm ground? Although a debt consolidation loan may seem like a lifesaver at the time, you should give serious thought to the loan's terms before signing any paperwork.
Getting a loan to consolidate your debts should be possible if your credit is good. But exercise extreme caution; there are likely to be a plethora of lenders that will present you with loans that appear enticing at first glance but will ultimately end up costing you more than paying off your current obligation. Consider the following example:
Assume that you have a total of $11,000 in loans with an interest rate of 14% and that you have 60 months to get the money out. You should expect to pay around $260 every month. Now imagine that other lenders approach you with debt consolidation loans for the entire amount you owe ($11,000), but instead of $260, they offer you a little over $190 per month. You might think it is a great deal because you can save $70 every month. On the other hand, this new loan has a longer period (ten years instead of five) and a higher interest rate (17 percent).
So, taking out one of these loans to consolidate your debt would save you $70 a month, but how much would it cost you in the end?
Keeping up with your $260 monthly payments and remaining faithful to your original loan terms would result in a total repayment of approximately $15,400 for the $11,000 in loans. Taking out the new loan to pay off the $11,000 would result in new payments of around $22,900 over the course of 10 years, or $11,900 in interest!
While it is true that a higher interest rate and longer repayment period could seem like a good idea at the time, they will really wind up costing you much more money when you consider the whole cost of your debt consolidation loan. Before you sign any papers for a debt consolidation loan, make sure you completely understand what you are agreeing to. If you don't, you can end up suffering from severe borrower's guilt.
