Watch You Don’t Pay More on Loan Consolidations
©Shane Flait 2010  

In preparing for retirement, you may consider consolidating your loans for ease of payments. Perhaps you may just want to make one payment per month and minimize that amount. Your intention may be to payoff your debts or reduce payments to free up income for daily living.

This article warns you to beware you don’t end up paying more financing fees than you would on your original loans for consolidating them.

Here, we’re treating considerations of loan consolidation. These loans are directed at people with good credit ratings. Debt consolidation, on the other hand, is directed to people with serious debt problems. Debt consolidation may hurt your credit rating.

For consolidating your loans, you may be interested in lowering your monthly payment. But lower monthly payments are the result of increasing the number of payment months or a lower interest rate loan – or both. Even a higher interest rate consolidation loan can lower your monthly payment if you extend the loan time out far enough.

So what should you consider on a loan consolidation?

Generally, extending the months to pay your loans back will increase your overall financing charge. In this case you’re paying for your lowered monthly payments!

If interest rates drop so that your consolidation loan rate is lower than your original loans, then if you maintain the same number of remaining payments you’ll truly reap both a lower overall finance charge and a lower monthly loan payment.  But if you double the remaining number of payments, your overall financing cost will go up considerably.

Let’s get an idea based on 5 and 7 percent interest rate loans over 5 and 10 year paybacks. We’re interested on comparing the associated monthly payments and the overall financing cost of a $10,000 loan. We include no fees here.

The monthly payments for a 7%, $10,000 loan for 5 years is $197 and decreases very little, to $188, in going to a 5%, $10,000 loan for 5 years but the total financing cost goes down about a third – from $1812 to $1276. The financing cost is the amount you pay beyond the $10,000 in the payback process.

Now, if you double the term from 5 years to 10 years for the second loan, the payments almost halve, but the total financing costs increases by over a third. In the case of the 7% loan, the monthly payment drops to $115, but the overall financing cost jumps to $3852.

So, if interest rates remain the same, then consolidation for a lower monthly payment can be quite costly.

Be very leery at extending the payment term. It’s extremely costly. If you can work a little extra and save a little harder to pay off your original loan, then you may well be better off in the long run.

 Shane Flait is a writer and educator. Get more info at www.EasyRetirementKnowHow.com