Scott,

I have debts that have different interest rates: 9 percent, 10 percent, 28 percent and 29 percent. I want to consolidate my debt at 16 percent interest rate. But my spouse doesn't agree! Is this a wise move on my part? If I do this, we will reduce our monthly payment from $1,700 to $612. But we will end up paying twice the amount of the principal of the loan over a ten-year term.

What I can't figure out is how much we will pay in interest if I don't consolidate all the debts and how long will it take us to pay them off when we can only afford minimum payments each month on all the cards?

William

William,

You are wise to be thinking continually about refinancing your debts! It's not the debt that destroys people, but the cost of that debt. Think about it. If you could have borrowed $100,000 at 0 percent 20 years ago, with payments starting today, you would have been given a gift. That gift is that money is easier to get now because of inflation. Twenty years ago you might have to work 5 years to come up with that principal. But today, it may only take two years because salaries have increased.

Okay, back to your specific question.

The quick answer is that you and your spouse are both right! You are correct to look at reducing the cost of your debts. She has good reason to disagree because you want to refinance 9 and 10 percent debts with 16 percent loans.

You need to refinance only those debts that are greater than 16 percent. In your case, these are obviously the 28 and 29 percent loans. Of course, if the 9 and 10 percent debts you have are credit cards, you should transfer as much of the high-rate debts to these lines before using the 16 percent loan. Ask those lenders for a credit line increase, which will enable you to transfer even more money from the higher-rate loans.

Some people may argue and say that it's easier to simply take out one loan and repay all the debt rather than making 3 monthly payments. However, this is more costly because the rate is greater. Your goal should always be to save money. Reducing your interest costs allows you to take that money and apply it to the principal of the loan, thereby paying it down more quickly.

It can also be argued that the monthly payment will be reduced because you're refinancing the entire amount. You mentioned that your payments would drop from $1,700 to $612. This is a better argument for refinancing the entire amount under one loan. That is, if your only goal is to lower the monthly payment.

Figuring out your savings is a more technical matter. The best way is to use my DebtSmart Loan Calculator or any other financial calculator. You also need to be sure to compare the payoff time by keeping the monthly payments constant. In other words, if you're paying $500 per month total to all your debt now, when you calculate your savings based on the new rates, you need to use the $500 per month figure or else your savings analysis will not be accurate.

You can also use the free DebtSmart 5-year loan worksheet to help with all these calculations. This is the free download that you received when you signed up to get the free DebtSmart Email Newsletter.

Best,
Scott