When you're deep in debt and barely able to make your monthly payments on the bills, debt consolidation may seem like the answer. When you consolidate your debt, you take out one big loan to pay off all your smaller loans. You can often do this through credit card balance transfers, home equity loans and personal loans. Consolidating your debt isn't always the best choice, though.
Monthly Payments
If you're barely able to make ends meet, a loan consolidation can help you reduce your monthly payments. For example, if you currently are paying $200 a month on a $7,000 loan and $130 a month on a $3,000 loan, and consolidate at 7 percent interest rate, your minimum monthly payment would drop to $116, for a savings of $214 a month. Your exact savings will vary based on the interest rate that you get and the amount of the loan.
Interest Payments
If you're willing to pay the same amount that you're currently paying but want to lower your interest rate, you can save money on the total amount of the loan. If you're paying 20 percent interest on $10,000 in loans over four years and are able to consolidate at 10 percent interest, you can save more than $2,000 over the life of the loan.
Fees
If you're trying to consolidate your loans, read the fine print before you sign the papers. Most methods of consolidation involve fees to consolidate. In some cases, these fees could cancel out your savings or mean that you pay even more on the consolidation loan over its lifetime.
Warning
Late payments on your consolidation loan may increase the interest rate. This interest rate may be higher than the rates that you're currently paying, which will equal a higher overall payment. Research these potential costs before you consolidate.
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