Consumers have been sold a debt consolidation loan on the basis of reducing their monthly payments with a term of 15 or 20 years, or even longer, which can cost thousands of dollars more than a shorter term loan.

The purpose of the loan should focus on eliminating the debts, not just providing lower monthly payments.

It's not difficult to compare credit card rates to consolidation loan rates, and see how much money can be saved, but take a closer look at the amount of interest paid on different loan terms. For example, compare the following estimated payments and total interest paid for a $35,000 loan at 8%:

A 20 year term would have a payment of $293, and total interest of $35,261. A 15 year term would have a payment of $335, and total interest of $25,206. A 10 year term would have a payment of $425, and total interest of $15,958. A 5 year term would have a payment of $710, and total interest of $7,581

This example makes it clear to see how much it can cost for a lower monthly payment. Does it make sense to pay about $10,000 in interest over 5 years to save $90 per month, or pay $20,000 in interest over 10 years to save $132 per month?

The cheapest loan would be one with zero percent interest and zero closing costs, but since those are hard to find, a loan with the lowest rate and fees, and the shortest term, would be the next best thing. The most common debt consolidation loan is basically a home equity loan or second mortgage, which can provide the lowest available rates and fees, plus has the potential benefit of tax-deductible interest.

There is an exception to the rule of payment vs. term, and that is if the plan is to sell the home within a few years, otherwise try to consolidate high interest credit card debt with the shortest loan term, and avoid running up the credit card balances again.