consolidation loan

How can I decide if it is wise to use a consolidation loan to pay off my outstanding debts?

Most debt consolidation loans will have fees you must pay. In order to reduce your monthly payments, a consolidation loan must have a lower average interest rate than your existing debt, or it must have a longer payout period, or both. It may be to your benefit to consolidate your debt if the total interest plus fees you pay over the life of the new loan is less than interest and fees on your existing loans. You won't come out ahead if you incur new debt and have an overall increased debt burden after your debt consolidation. Also, extending the time to pay off the debt might create problems for you in the future.

Consider an alternative strategy of paying off your current debt that has the highest interest rate. After it is paid off, start on the next one. It is difficult to come out ahead with a debt consolidation loan.

Michael W. Butler, PhD, Professor of Economics, Angelo State University, San Angelo, Texas