The pros and cons of consolidating debt
Making only one monthly payment may be convenient, but make sure consolidating also eases your overall debt.
Does paying your bills put you in a state of panic? If you're feeling overwhelmed — financially, emotionally or both — by payments on your car, credit cards, student loans and other debts, then consolidation may be for you.
"The key to successfully rolling all your debts into one easily managed payment is to reduce your overall interest rate, not just your monthly payment," says Chad J. Larsen, president of Denver-based Moreton Retirement Partners. The lower your interest rate, the more you'll have left to save toward long-term goals such as retirement.
When debt consolidation might make sense:
- You pay high interest rates or annual fees. "If you're paying off high interest credit cards, then consolidating could save you a lot of cash," says Larsen.
- You can't keep up with your monthly debt payments.
- You have good credit, but your interest rates don't reflect it.
When consolidation may be a bad idea:
- If it would extend the length of time over which you make payments. You'll probably pay more interest that way. "If you've extended the loan period with consolidation, then you've taken a step backward financially," says Larsen.
- You're being rushed into a decision. A consolidation provider that pressures you into a hasty decision may be trying to scam you. Take the time to check the numbers and the consolidator's reputation before signing any agreement.
- You're likely to use your newly paid-off credit cards on a spending spree.
Here are some ways to roll your loans together:
- Get a consolidation loan from a bank, credit union or other financial institution that can offer a lower interest rate than the one you currently pay.
- Find a reputable credit counselor to negotiate with your creditors. Look for one that's affiliated with the National Foundation for Credit Counseling (NFCC.org). Be sure to consider the counselor's fees.
- If you're able to pay back the debt relatively quickly — generally within a year — you might transfer all your debt onto a low-rate credit card. Just make sure to read the fine print: You'll probably pay a transfer fee, often 3 percent of the balance, and you may pay much higher interest after the introductory rate expires, which is why this option is only helpful if you can pay off the debt before the lower rate expires.