Debt Consolidation Loan Advice

If you have multiple debts and are unable to pay them off now, a debt consolidation loan may be a very smart move. There are three primary considerations however: interest, term, and risk. Will your new loan lead to a lower overall interest rate and total interest payment? Will your term or payment period be shorter? And what risk does your new loan carry?


The biggest problem with debt is the interest you pay to carry it. Credit card debt is generally the worst by far, with interest rates often around 20%. If you have $10,000 of credit card debt at 20% and you make $250/month payments, you'll end up paying an extra $6,617 in interest, for example. With the same figures, if you're making 3% minimum payments instead of a $250/month fixed payment you'll spend an extra $12,240 in interest over 25 years. Therefore, any loan you get to consolidate your debts needs to have a lower interest rate. Don't get scammed into looking only at the monthly payment. Some dishonest loan sharks will attempt to raise your interest and increase your term so that you feel you're getting a better deal with lower monthly payments, when in fact you'll end up paying them more money and being in debt longer.


As mentioned above, a longer term will lead to a lower monthly payment. But, it will also mean you pay more in interest and carry your debt for a longer period. You'll be much better off with a shorter term and lower interest rate than the same interest rate and a longer term. You should aim to have as short a term possible with the highest monthly payment you can reasonably afford. This will ensure you pay off your debt as quickly and cheaply as possible.


There are two major types of loans you can get to consolidate debt: home equity loans and personal loans. By adding your debt into your mortgage through a home equity loan, you put your house at risk. If you can't make the higher payment for any reason, the bank may claim your house as collateral. So before you decide to go with a home equity loan, make sure you feel comfortable with this increased risk!

Personal loans carry less immediate risk, but also generally come with higher interest rates. If you own a home with enough equity, then a home equity loan is normally a better option. With either home equity or personal loans, use our free debt consolidation calculator to make sure you're actually ending up with a better deal.

After Consolidation

One of the most important things to change after you consolidate your debts is your behavior. If you continue spending more than you have, you may end up with both a debt consolidation loan and the same additional debts you had previously. Don't spend money you don't have, and you'll never have bad debt again.