How Much Does Debt Consolidation Cost?

When you consolidate two or more existing loans, you take out a new loan to pay them off. You then make a single monthly payment. How much your debt consolidation loan costs depends on several factors that differ for each person.

Consolidation Options

There are various consolidation options available for consumers. Home equity loans, credit card balance transfers and debt consolidation loans are the most common. Like all other loans, these come with their own terms, and each has different benefits, risks and associated costs. The only way to know how much each option will cost is to look carefully at the loan terms and calculate your outlay over the loan's lifetime.

Credit Card Transfers

Credit card companies frequently make balance transfer offers to lure potential new customers. These offers generally come with terms such as low or no interest for a limited time, but they have conditions. The low interest rate usually applies only for a limited period and is not for new purchases you make with the card. Also, companies charge a transfer fee, usually a percentage of the amount transferred.

Home Equity Loan

Another popular form of debt consolidation is the home equity loan. When you take a home equity loan, you use your home as collateral. While these can have the lowest interest rates of any consolidation loan, there are other costs involved. For example, you may have to hire an appraiser to determine your home's value. In addition, the lender might require you to purchase title insurance to assure there are no other claims against your property.

Consolidation Loans

A pure debt consolidation loan is just like any other loan from a lender. You receive the money and agree to pay it back over a specified period. Loan companies tout the convenience of making a single payment instead of several, and a lower monthly outlay. However, over the long run, these loans cost you more money than paying off the individual loans. Though you pay less each month, you pay longer and pay more interest than you would on the original debt.