Is a Debt Consolidation Loan Worth It?
A debt consolidation loan is typically where you trade in your lower-balance loans and credit card debt for a higher-balance mortgage, home equity loan, or home equity line of credit. Here are three questions to determine if a debt consolidation loan may make financial sense for you:
WHAT'S MY TOTAL ANNUAL INTEREST ON EACH DEBT?
First, calculate the annual interest expense on each debt: interest rate x loan balance = Annual Interest Expense. Then, add up all your annual interest expenses on all your debts. The total number is how much you are paying every year in simple interest.
WHAT'S MY "BLENDED INTEREST RATE" BEFORE AND AFTER THE DEBT CONSOLIDATION LOAN?
This is the weighted average interest rate you’re paying on all your debts combined. Total interest on all your debts / total loan balances = Blended Interest Rate.
WHAT WILL I DO WITH THE EXTRA MONTHLY CASH FLOW?
For example, if you roll in your car loan balance into the mortgage balance, you’d be spreading out your car payments over 30 years whereas your car loan would otherwise have been paid off in 3 or 4 years. This might only make financial sense if you invest your extra cash flow in a way that benefits your overall financial situation.
(a) You lower your blended interest rate; or, (b) You invest your monthly cash flow savings; or, (c) Your monthly payments become more affordable.
Source: Momentifi