Debt consolidation loans allow a borrower to roll multiple types of secured and unsecured debt into a single loan with a set interest rate and a single monthly payment. Consolidation is a good option if you have a variety of debt at a variety of interest rates, but there a few important things to consider before agreeing to a debt consolidation loan.
First, determine which debts you plan to consolidate into a single loan. Determine the total of your monthly payments if you are paying each bill in full (or use the amount you normally send each month for revolving debt like credit cards). Make note of this total. This will help us determine the value of a consolidation loan versus keeping your debts unconsolidated.
Second, research your total balances on all forms of debt that will be consolidated. Make note of this and move on.
Third, determine how long you plan to consolidate your bills over (this will be the length of the consolidation loan). Consolidation terms vary by lender, but typical terms range from 12 to 300 months. The term for which you will be eligible will depend largely on the amount of debt you are consolidating. You may need to consult with a lender to determine which term you will be eligible for. Rates for consolidation normally range from 8% APR to 24% APR.
Finally, use a simple interest calculator to determine your monthly payment over several terms and interest rates. Remember to set the principal balance to be equal to the total of your balances across all debts. If you can consolidate your debt, lower your payments, and do so in a short enough term to make things worthwhile, consider a debt consolidation loan by speaking to a lender or a financial adviser.