Should I Consolidate All My Debt?

by Craig Peters, Contributing Writer   

If you're looking at debt consolidation loans, you're probably wondering which of your monthly bills to consolidate. You don't want to make a mistake and wind up paying more money than necessary to pay off any given debt.

As you think about all your debt consolidation options, be sure to consider these issues in detail:

  • Interest rates. If you're carrying a lot of high-interest debt, a debt consolidation loan is probably a good idea. Thousands of dollars of high-interest credit card debt? Good candidate for debt consolidation. A car loan for which you're paying at or near the same interest rate as your debt consolidation loan? Probably not. The convenience of one less payment per month may wind up costing you more money in the long run. Why? Read on …
  • Debt size. You may be paying 18% interest on that credit card in your pocket, but if the balance is just a few hundred dollars, think about being more disciplined in your monthly payments. If you can eliminate small amounts of credit card debt without the aid of a debt consolidation loan, do it.
  • Time frames. Let's look at a $10,000 debt consolidation loan at 8% interest. If that's a five-year loan, you'll pay $202.76 per month and $2,165.85 in total interest over the life of the loan. If that's a 10-year loan, you'll pay less per month — $121.33 — but the total interest paid will increase to $4,559.31. That's why it's important to do all the math: That debt you're carrying at or near the same interest rate as your debt consolidation loan may not be worth consolidating after all.
  • Speaking of math: That debt consolidation loan you're considering probably has a variety of fees associated with it. Don't forget to include those costs in your calculations, too.

Consolidating all your debts into one monthly payment may seem like the way to go, but make sure you crunch all the numbers. Otherwise, those lower payments could wind up costing you even more money before the debt is finally paid off.