Longer Terms or Lower Payments: Which Debt Consolidation Strategy is Right for You?

Longer Terms or Lower Payments (2)

Life is about choices. Do you want chocolate or vanilla, hardwood or carpet, Star Trek or Star Wars? Many times, there isn’t a “right” choice—it’s just about what you prefer. If you like the taste of chocolate better than vanilla, then chocolate is right for you. If you hate cold feet in the winter, then you should choose carpet. (This does not apply to Star Trek vs Star Wars. The correct answer is always Star Wars. Come at us, Twitter!)

The same is true when you’re choosing a loan to consolidate your debt. Any debt consolidation loan you choose will reduce the number of payments you need to make each month, but there are a lot of other factors that can impact your decision as well. And the most important choice you’ll have is between short-term relief and long-term savings. Do you want lower monthly payments, or to save money on your loan overall?

There is no “right” answer. However, there are downsides to each option that you may want to consider.

Can I Score Lower Monthly Payments and Save Money Overall?

No. Probably not. Here’s why:

The vast majority of debt consolidation loans are amortizing installment loans, which means that they come with set repayment terms. If you take out a five-year consolidation loan, you’ll be paying it off in monthly installments for the next five years. And if you take out a three-year loan, you’ll be paying it off for three (read more in What You Need to Know about Consolidation Loans).

Now, if you get the five-year loan, the amount you owe is going to be broken up into 60 monthly payments. If you get the three-year loan, that same amount of money is going to be broken up into 36 monthly payments. So by taking the five-year loan, each individual payment will be a smaller portion of the principal loan amount. The longer the payment term, the less you will pay each month. Make sense?

However, assuming that the three-year and the five-year loan both have the same annual percentage rates (APRs), the five-year loan will also be accruing interest for an additional two years. While your monthly payments will be smaller with the five-year loan, you will end up paying more overall.

The chances of finding a loan with a longer repayment term and a substantially lower interest rate are pretty much slim to nil. If you are taking out a debt consolidation loan, you are going to have to choose between lower monthly payments and paying less money overall.

So Which Strategy is Better?

It depends!

If you are someone who is struggling to afford all your monthly payments, getting a loan with lower monthly payments could give you some much-needed breathing room. You could use that extra money each month to build up your emergency savings or pay for additional necessities. Plus, you can always start paying more than your monthly minimum if your financial situation improves down the line. Either way, the benefits of temporary relief will still outweigh the long-term costs.

On the other hand, if you’re someone with a bit more breathing room in your monthly budget, getting a debt consolidation loan with shorter terms can help you save money in the long run. When you sit down and look at your long-term financial goals, spending less money on your debt will be key. Saving up for a home mortgage or for a new car means tightening your belt and finding savings wherever you can.

And you know what’s pretty great? Getting out of debt ASAP! The sooner you are debt free, the sooner you can start putting your money towards what really counts: Your future.

The Choice is Yours

As you can see, there are benefits and drawbacks to each debt consolidation strategy. But as long as you’re picking the one that’s right for you, you’re making the right choice.

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