How to Calculate Debt Consolidation

Debt consolidation sounds like a promising option to many people struggling with consumer debt, mortgage payments, student loans, and car payments. Guarantees of lower interest rates and lower monthly payments entice many people to seek out services that combine all of their existing debts to yield a new single monthly payment. However, debt consolidation may not always be advantageous for the average consumer. Hidden fees, higher interest rates, and a lower credit rating may end up making your debt management situation worse than before. However, it is possible to calculate how to use debt consolidation methods to your advantage.

Instructions

Calculating Credit Card Debt Consolidation

1

Create a cash-flow plan. Write down all of your income and expenditures and determine how much you are currently paying toward your debts each month. Use this plan to determine if you can afford to make higher monthly payments.

2

Check your recent credit card statements to find your current APR. Call your credit card companies to see if they will reduce your interest rate. Customer service representatives may offer you a lower rate over the phone. After doing what you can to lower your interest rates yourself, record your new interest rates as part of your financial planning.

3

Calculate how long it will take to pay off your credit card debt with your current rates and monthly payments. There are several online financial calculators, such as through CNNMoney.com, that can find this information if you simply input monthly payments and interest rates.

4

Evaluate the terms of various debt consolidation services by calling them for consultations. Do not necessarily trust what they might tell you about how long it will take you to pay off your debt without their services. Only ask what the fees, interest rates, monthly payments, and length of repayment would be using their plan. Many debt consolidation services charge a monthly fee that amounts to a certain percentage of your payments toward your debt. Given that you have already taken measures to negotiate superior terms, it is unlikely that they will be able to reduce your total interest rates much.

5

Find information about taking out a home equity loan if you are a homeowner. You may be able to borrow money against your home for a lower interest rate than credit card companies, use the loan to pay off your debts, then make payments on the low-interest loan instead. Furthermore, interest payments toward a home equity loan are tax deductible. Take into consideration any fees or extra expenses this would require, then calculate how long it would take to pay the debt using this scenario.

6

Consider refinancing your home or car, then using the reduced monthly payments to pay more towards your consumer debt. Home and car loans offer lower interest rates than credit card companies, so extending your home or car repayment plan in order to reduce your credit card repayment plans may be financially advantageous. Contact your lenders to research different terms that they can offer you, then calculate how much more this would allow you to pay toward your debt. Compare the potential new terms with your old debt repayment plan to determine which one would result in lower overall debt.

7

Research personal bank loans to consolidate your debt. Most banks offer far lower interest rates than credit card companies. Set up a consultation with a bank to see what you might be approved for, and compare the terms of the possible loan to your old debt repayment plan.

8

Determine which debt consolidation option is the best given the various terms you have researched and repayment plans you have calculated. You may find debt consolidation services, a home equity loan, refinancing, a personal loan, or simply not consolidating to be the most feasible for your particular financial situation.