Debt Consolidation Help: Borrow from Peter to Pay Paul
Contributed by Deb Powers
Debt Consolidation Help: Borrow from Peter to Pay Paul
If the idea of a debt consolidation loan sounds a little like borrowing from Peter to help you pay Paul, you're not too far off the mark. When you choose a debt consolidation loan as a solution to your debt, you are essentially borrowing enough money to pay off what you owe to everyone else -- and taking on a debt in the same amount to just one institution. Simply put - you start off $25,000 in debt, and you end up $25,000 in debt. Does it seem like an exercise in circular reasoning? There are a lot of reasons that consolidating all your debts into one make sense, though.
How debt consolidation helps lower your overall debt.
The most common way that combining all your debt under one debt consolidation loan can help lower your debt is by putting all that you owe into one loan with a lower interest rate than the others combined. If you're like most people, the largest portion of your debt is to credit card companies, with notoriously high interest rates. If the amount owed on your credit cards is high enough, you could spend years paying the minimum payment and barely make a dent in the actual amount that you owe.
By shifting that debt to a lower interest home equity loan, for example, you could conceivably save hundreds of dollars a year in interest charges.
How a debt consolidation loan can help lower your monthly payments.
Debt consolidation lowers your monthly payments in two ways. First, by choosing a loan with a lower interest rate than the one that you're currently paying, you decrease the amount that you need to pay each month. Second, by setting a fixed time length for repayment, and extending the life of the loan, you make smaller payments every month. On the other hand, you'll pay far more in the long run in interest payments.
If your real need is to lower your monthly payments, though, the tradeoff may be what you need. To give you an idea of how much you can lower your monthly payments, I visited the loan calculator at http://www.savvy-discounts.com/calculate/credit_card/debt_consolidation2.html and entered the following (totally fictitious)
