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Debt consolidation is the practice of replacing a number of financial obligations, such as credit card balances and car loans, with a single loan. By replacing many debts with just one, borrowers simplify their lives. They only have one bill to pay each month instead of many, and the new loan’s repayment schedule may reduce the total monthly outlay for the consumer. If the interest rate for the consolidation loan is lower than for the loans it replaces, the consumer can save even more money. These are definite benefits, and many people have successfully used such loans to get out of financial trouble.
It’s up to the consumer to make sure that he or she actually benefits, however. People with problem debt often have low credit scores, and that can make it difficult to borrow money at favorable interest rates. If you take out a new loan at the same rate or even a higher one than the previous loans, there is only one way that your monthly payments can drop, and that is by extending the length of the loan. Lower payments are nice, but if you extend the length of the repayment schedule, you also increase the total amount of interest that you have to pay. It’s quite possible that by consolidating debt, you could actually end up having to pay back more money than you originally owed.
Before rushing to take out new financing to pay off your old bills, you need to do the math and see if you will really benefit from adding another loan to your life. If you can lower your payments by getting a lower interest rate, you will probably benefit. If you are merely taking longer to repay, you may end up paying more. It’s up to you to figure out if you will actually save money, and that may be the most important part of the process. If you aren’t good with math, find someone who can help you. The last thing you want to do is make a bad situation worse by taking out another loan that hurts you instead of helping you.
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