With a slew of credit card debt, you think it is time to aggressively tackle your finances and clean up the situation.
Debt consolidation may be the process — however, do not be tricked into thinking that the process is going to be inexpensive. Typically a debt consolidation loan is offered at a competitive interest rate, you take that money, pay off all your bills then focus your efforts on paying off that one debt consolidation responsibility.
Higher Overall Cost for Debt Consolidation
Although your monthly payments may indeed be less than the total you were paying for your credit card debt, the repayments are generally spread over a longer period of time thus adding to the higher overall costs of your debt consolidation strategy.
The marketing used to promote debt consolidation loans certainly make debt consolidation seem like a bargain. Although debt consolidation is an extremely helpful tool to those who need the assistance, consumers need to be aware of the total cost, commitment length or nature of the consolidation debt.
Fluctuating Interest Rates
The interest rates for debt consolidation loans fluctuate vastly based on a consumers credit history. If a person has a history of poor credit, they can get charged astronomically high interest rates for borrowing the money. Their monthly payments would be smaller, however the loan will run for extended periods of time thus increasing the amount of interest being paid. Depending on your initial debt and the terms of the debt consolidation loan you agree to, you may end up paying thousands of dollars more over the lifetime of the loan. If you try to pay off your loan earlier, you may get hit with sizable prepayment penalties as well.
The Bottom Line
As long as you are aware of the hidden costs for a debt consolidation loan, it may be an excellent tool for helping you to better manage your finances.
Before opting into a loan, make sure to review the terms thoroughly and if you can avoid a prepayment penalty doing so can save you some more money in the long run. Most importantly, focus on your goal of paying off the consolidated debt loan in a timely fashion in order to truly reap the rewards of the consolidation process.