Consolidate carefully

It can often seem like a good idea to consolidate all the small loans you have into one big one, especially if that bigger loan company is offering a lower rate of interest than the rates you are currently paying. But it’s not just about the rate of interest you are going to be paying, although there is no doubt that that is one of the more important issues.

Generally the lower the rate of interest the less you will pay back overall, and so normal the lowest rate of interest on a loan is the best one to look at.

Where that might not be the case is when you compare short term loans with loans over a longer period of time. If your existing credit agreements are long-term, or are with credit cards and have no set term, then a shorter term loan, even at a lower rate of interest, might still cost you more every month.

So while you will save on the overall interest payments you will make over the term of the debt your monthly payments might be higher and you will need to factor this in.

There is one other really important thing that you will have to do if you are serious about using a new personal loan to deal with exiting credit card debt. Cut up your credit cards!

There is no point taking out a loan to repay credit card debt if you keep hold of the credit cards that caused the problem in the first place and start to spend again. You’ll only be throwing good money after bad and you’ll end up in exactly the same place in 12 months time.

The only time that I would change this rule and suggest that you keep one card is where you use it to buy things that you know you can afford, and pay the bill off in full at the end of every month. That way you’re not paying anything in interest and you’re buying a bit of free time before you have to repay.

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