Balance Transfers
Transferring credit balances to the wrong lower interest loan can be financially unhealthy. By choosing the wrong consolidation loan you are placing your financial health in danger.
So, how do you know when balance transfers and consolidation loans are right for you? Each situation is different, and it is best to seek the advice of a professional that you can trust.
If you do it correctly, debt consolidation can save you a fortune, but done wrong, you will fall deeper into debt. Often when consolidating debt, the consumer looks only at the payment, not at the real cost of the loan. Just because the payment is lower does not mean you are saving money, you are only extending the time that you pay and increasing the total loan amount.
For example, the minimum monthly payment on a credit card is typically 1%-3%. In most instances the less you pay per month, the more you pay overall. Paying the minimum with a $10,000 balance and a 19% interest rate could take you as much as 25 years to pay off. Chances are whatever you bought won't even be around or in style after than much time!
Please remember that if you have multiple loans that you are considering for consolidation, you have to be careful not to fall into the trap of "one lower monthly payment" or "less interest than you are currently paying". It simply doesn't matter. What matters is, what is the total interest in dollars you currently will pay versus what is the total interest in dollars with the consolidation loan.
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Re-financing a mortgage at a lower interest so that you can have a lower payment can dig you into the same hole. You must calculate the total cost in interest to know if it will save you or cost you. Remember your "friendly lender" is anxious for you to lower your payment. Why? A longer refinance loan earns more interest and you now have more monthly money to borrow still more money. It is often the case, those who lower their monthly payments still get deeper in debt because of the false sense of security of a "lower payment".
There is only one way to save money and only one way a consolidation loan can help rather than hurt you: payoff the debt as quickly as possible so that you pay less interest. As previously stated, making small extra monthly payments can greatly reduce the load of debt that you carry.