Writing Off Debt Article

All indications are that low-rate debt consolidation loans may disappear in the foreseeable future. If you\'re thinking about consolidating, consider putting the wheels in motion sooner rather than later.

The Roman Empire fell in 476, and the Berlin Wall came down in 1989. Every era must end sometime, including the current trend of historically low interest rates that have reduced borrowing costs across the board.

Debt consolidation helps you most when the new financing has a lower rate than the debt that you\'re replacing. After all, the reason you\'re consolidating is to lower the overall cost of your debt. You could reduce your monthly payment burden without changing the interest rate, but this would require a longer pay-off period and increased total interest costs-two factors that ultimately work against you.

The best debt consolidation scenario, therefore, is to trade in high-rate debt for lower-rate debt-the lower the rate, the easier the payoff. This fact takes on some added significance when you consider the state of today\'s economy and the future of interest rates. Since September of 2007, the prime rate has ticked down from 8.25 percent to today\'s rate of 5 percent. Aggressive rate reductions like this tend to put inflationary pressures on an economy. And, indeed, our economy has shown signs of rising commodity prices. Many experts believe that the Fed will have to end the era of low interest rates by implementing rate increases to combat inflationary pressures.

Domino effect If interest rates do rise, credit card debt and debt consolidation loans will get proportionately more expensive. Because your credit card balances carry adjustable interest rates, you\'ll start absorbing those increases almost immediately. Once rates start to tick up, your options for consolidating will be more expensive. An increase of 1 or 2 percent means an extra $50 or $100 in interest for every $5,000 of debt.

Charting a course To decide if now is the time to consolidate, run an informal sensitivity analysis on your debt. This involves calculating the added interest costs associated with higher interest rates. You\'ll start by listing out your debts and their respective rates. With the help of a credit card payoff calculator, compute the total interest that you\'ll pay at your current rates. Then, calculate the total interest you\'ll pay if rates tick up 0.5 percent. Also examine how a rate increase will affect the time it takes you to pay off your debts.

If you\'re having a hard time with your debts now, a sensitivity analysis may indicate that a rate increase will push your debts beyond affordability. That puts the pressure on you to implement your debt consolidation solution before the era of low interest rates comes to an end.