The role of the loan must concentrate on eliminating the debts, not only offering lower monthly payments.
It is not hard to equate credit card rates to consolidation loan rates, and see how much money could be saved, simply take a close look at the sum of interest given on different loan terms. For instance, compare the following estimated payments and total interest paid for a $35,000 loan at 8%:
A 20 year term will have a payment of $293, and an interest of $35,261. A 15 year term will have a payment of $335, and an interest of $25,206. A 10 year term will have a payment of $425, and an interest of $15,958. A 5 year term will have a payment of $710, and an interest of $7,581.
This instance gets in clear to see how much it can cost for a lower monthly payment. Does it make sense to give about $10,000 in interest over 5 years to save $90 per month, or pay $20,000 in interest over 10 years to save $132 per month?
The most inexpensive loan would be one with zero percent interest and zero closing costs, but as those are difficult to get, a loan with the lowest rate and fees, and the shortest term, would be the next best thing. The common debt consolidation loan is normally a home equity loan or second mortgage, which could offer the lowest available rates and fees, plus has the potential advantage of tax-deductible interest.
There’s an exception to the rule of payment vs. term, and that’s if the plan is to sell the home within few years, or else try to consolidate high interest credit card debt with the minimum loan term, and avoid running up the credit card balances again.
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