Bad Credit Debt Consolidation: When One Payment Is Not Automatically Cheaper

Replacing several debts with one monthly repayment can make budgeting easier, but financial simplicity and financial savings are not the same thing. A consolidation arrangement may reduce immediate monthly expenditure while still costing more over its lifetime.

Before choosing bad credit debt consolidation, borrowers should calculate what their existing debts would cost if left in place and compare that figure with the proposed replacement borrowing. This can reveal whether a lower monthly payment is actually being achieved through a much longer repayment period.

Calculate the Existing Debt Total

Include credit cards, loans and any other balances intended for consolidation.

Obtain current settlement figures where appropriate.

Compare Current Interest Rates

Some existing debts may be expensive, while others could already be on relatively competitive terms.

It may not make financial sense to replace every balance.

Understand the New Rate

Previous credit difficulties can affect the rate available on the consolidation borrowing.

Use the actual terms offered when making comparisons.

Look at the Final Payment Date

If current debts would be cleared within a few years but the new arrangement lasts substantially longer, lifetime interest can increase.

Consider Any Fees

Charges can reduce or eliminate apparent savings.

Include all relevant costs when calculating the total.

Be Careful With Secured Consolidation

Homeowners may be able to use property to secure the borrowing.

However, this changes previously unsecured debt into a commitment that can put the home at risk if payments are not maintained.

Stop the Debt From Returning

Consolidation does not change spending habits automatically.

If cleared accounts are used again, the household can end up with even more debt.

Judge the Outcome Over the Full Term

A useful consolidation arrangement should make debt manageable without introducing excessive additional cost or risk.

The smallest monthly payment should never be the only measure of success.