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Financial Questions & Answers

Financial Questions & Answers

Question:

Is it better to consolidate our debt on a credit card with an interest rate of 9.9 percent, or to take out a three-year loan at 12-percent interest? – Timothy

Answer:

Great question. In order to illustrate, I’m going to assume you have $12,000 of credit-card debt and are weighing the two options you highlighted. First off, a three-year, 12-percent loan would require a monthly payment just under $400. If you can afford that type of payment each and every month, this might be a solid option. I like that this strategy has a definite beginning and ending date. However, the risk is that you pile up your credit-card debt again, and then end up with both credit-card debt and your “tried-to-consolidate” loan. That’s bad news and often happens. If you fear this scenario, then I would opt for the lower-interest credit card. If you make similar payments of about $400 per month, you’ll still end up debt-free in three years (or less), and that is just plain good. Plus you would save a little over $400 in interest over the higher-interest-rate consolidation loan. No matter in which direction you head, it should all start with a focus on the basics: living within your means. Putting together a budget you can live with is the cornerstone of financial success.