DOES A LOWER MONTHLY PAYMENT ACTUALLY SAVE YOU MONEY?

When money is tight, a smaller payment feels like oxygen. I know that feeling well. When I was raising my boys on public assistance, the only number I could think about was the one due this month, because this month was all I could see.

That is the number lenders and sales people know you are watching. It is also the number that tells you the least.

THE TWO NUMBERS YOU NEED

Every loan, consolidation offer or new payment plan has two costs. The first is what you pay each month. The second is what you pay in total by the time the debt is gone. A lower monthly payment usually comes from stretching the debt over more months, and more months means more interest.

Here is a simple example. Say you owe $15,000 at 12 percent interest.

1. 1

   Paid off over 3 years, the payment is about $498 a month, and you pay about $2,936 in interest.

2. 2

   Paid off over 6 years, the payment drops to about $293 a month, and you pay about $6,114 in interest.

The second option saves you about $205 every month. It also costs you more than $3,000 extra by the end. Neither choice is wrong on its face. A lower payment can be the right call when it keeps you current and keeps a late fee or a default off your record. What matters is that you choose it knowing the full price.

WHERE THIS SHOWS UP

You will run into this almost everywhere money is borrowed.

Car dealers often lead with the monthly payment and stretch the loan to 72 or 84 months to hit it. Debt consolidation offers can roll several balances into one payment with a lower rate, which can help, but a longer term can eat that savings. Federal student loan repayment plans set your payment by your income, and a lower payment there can mean a balance that keeps growing while interest builds. Credit cards make the point most clearly of all, because the minimum payment is designed to keep you paying for years.

QUESTIONS TO ASK BEFORE YOU SIGN

Before you agree to any new payment, ask for these in writing:

1. 1

   What is my monthly payment?

2. 2

   How many payments will I make?

3. 3

   What will I pay in total, interest and fees included?

4. 4

   Is there a fee to start, and is there a penalty for paying it off early?

If someone will only show you the first answer, keep asking. A good offer can stand up to all four.

HOW WE LOOK AT IT

This is the heart of how we work at Key 2 Debt Free. We lay every debt you have side by side, with the balance, the rate and the due date, and we look at whether combining some of them actually lowers what you pay in the end. Sometimes it does. Sometimes the honest answer is that it does not, and you deserve to hear that too. Key 2 Debt Free is not a lender, and when a consolidation loan fits, a licensed lender makes every approval decision.

If you want a second set of eyes on your own numbers, you can book a consultation.

I wrote more about how I learned to look at money this way in The Key, the plain steps I followed from getting by to getting free.

Rachael J Katz is a financial educator, author and speaker. This article is general education, not personal financial advice. Figures above are a simplified example and your own terms will differ.