Loans are an easy thing to get these days – and an easy way to get into debt. If used carefully, loans can help you manage your debt too but remember they are still debts themselves and need to be paid off.

Consolidation loans

Give you the ability to lump together debts to pay them off and then you only have one repayment back on your loan. The money you owe hasn’t gone away – it is just in a different place. Quite often, the repayments on your consolidation loan can be cheaper than all your other payments added together but you need to check what the interest rates are, how long you will be paying back for and what the total debt will therefore be.

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Calculating What You Will Repay

Remember, when you borrow money in the form of a loan, you will have to pay back the amount you borrowed AND interest. This is something most of us never really look at properly when signing up for a loan. We just look at the monthly amount, see if we can afford it, sign the paper and take the money. What we should look at is how much we will be repaying back overall.

A quick and simple way to find out the total cost of the loan is to take the monthly repayment amount and multiply it by the number of months the payment must be made. The results might give you quite a shock as the following example shows:

You owe £8,000 to various lenders. You take out a consolidation loan of £10,000 to pay these off and give you a little extra in case you need it. The terms of the loan wereMonthly repayment of £208.13 for 60 months. This equates to a total repayment of £12,480. You now owe £12,480 instead of the original £8,000 or the £10,000 you were borrowing.

By taking this loan you will have spent an extra £4,480 in 5 years time, on repayments.