A few years ago USA Today published some good advice for people considering debt consolidation. Even though it is a few years old, it points out the major pitfalls that people run into with consolidation loans. Here is an excerpt of part of the article:
Don’t confuse lower payments with lower rates. Just because the monthly payments for a consolidated loan are lower doesn’t mean you actually are paying lower interest rates. This is especially true with plans offered by some debt consolidation programs. The lower monthly payments occur because the consolidation stretches out the life of the loan. A similar mistake is transferring lower-interest-rate loans into a higher-interest-rate consolidation loan. For ease of bill paying, and because most of their loans can benefit from consolidation, people may consolidate all of their loans. Yet, one or more of the original loans may actually have lower rates.
Undoubtedly the biggest mistake occurs when consumers confuse lower monthly consolidation payments with saving overall finance charges. The college loan consolidation program, offering its lowest interest rates in its history, illustrates this point. Graduating students typically end up with multiple loans from multiple lenders, so consolidation makes paying easier, and the consolidation rates typically are lower than the rates for the original loans. However, here’s the catch. Say an individual has $20,000 in student loans. In one example from a commercial lender, a consolidation loan would cost the student $222 a month for 10 years. Total interest payments would be $6,640. The student could lower that monthly payment to $143 a month by paying off the loan over 20 years–tempting considering the tight budgets of students just out of school. Yet, the total interest payments over the life of the loan would run $14,320!
USA Today Magazine, Sep2003, Vol. 132
I think confusing lower payments with lower cost is a very common problem. No matter what you do, make sure you sit down and work out the math yourself.
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