More For Your Money - University of Illinois Extension

http://MoreForYourMoney.extension.uiuc.edu

Get a Consolidation Loan

If you have a lot of debts with multiple payments each month, you may be tempted to get a debt consolidation loan.  Usually, when you get a debt consolidation loan you exchange paying several smaller debts with varying payment dates and interest rates with one large loan, interest rate, and monthly payment. 

Because you have combined your debts, you will usually have a lower payment each month.  However, the interest rate for the consolidation loan is often at a higher rate, and the time it takes to repay the debt will be significantly longer.

You will also need to consider what debts you put into a consolidation loan.  For example, if you only have two payments left on your car loan and include this debt in the consolidation loan, you won’t have your car paid off until the consolidation loan is paid. 

Take a look at this example.

Before Debt Consolidation Loan

Current Monthly Payments

Debtor
Total Amount Owed
Monthly Payment
Interest
Credit Card
$1,200.00
$ 35.00
18.5%
Department Store
$ 400.00
$ 40.00
10.5%
Car Dealer
$ 1,000.00
$ 75.00
8.0%
TOTAL
$ 2,944.59*
$ 150.00
 

*includes interest

By power paying, it will take 1 year, 8 months to repay the debts.

Debt Consolidation Loan

New Monthly Payments

Debts
Total Amount Owed
Monthly Payment
Interest
Credit Card
$ 0
$ 0
 
Department Store
$ 0
$ 0
 
Car Dealer
$ 0
$ 0
 
TOTAL, if paid in 2 yrs.
$ 3,004.04*
$ 119.96
9.9%
TOTAL, if paid in 3 yrs.
$ 3,144.68*
$ 83.88
9.9%
TOTAL, if paid in 5 yrs.
$ 3,313.80*
$ 55.23
9.9%

*includes interest and $125 bank preparation fee
(# months x monthly payment + $125 = amount owed)

How much extra will it cost you to have the debt consolidation loan?

2 years
$
3 years
$
5 years
$