Should you consolidate your debt?
The answer to this question will be different for everyone. It will simply depend on your current financial situation. Sometimes it can be helpful if you are trying to decide whether or not debt consolidation can help you save money, to contact a financial professional who can help you crunch the numbers. There are also many free calculators online that can give you an idea of how much the debt consolidation will really cost you. Simply doing a quick search online can help you gain information on whether you should consolidate your debt.

Pros of debt consolidation

• One payment versus many-A debt consolidation loan can be helpful if you ran up your credit cards while you were in college or if you have a number of high interest installment loans (student loans, car loan, etc.) This can allow you to roll this high interest debt into one manageable payment. After you consolidate there is only one payment versus many payments. Studies show that the average American pays 11 different creditors every month. Making one single payment after you consolidate your debt is much easier than figuring out who should get paid how much and when. This can make managing your finances much easier. The thinking behind this is if you have an easier time making your payments, you can avoid late fees, extra charges, and the bad credit that will inevitably result when you can not afford to pay regular bills.


• Reduced interest rates-Since the most common type of debt consolidation loan is the home equity loan, (also called a second mortgage), the interest rates may be lower than most consumer debt interest rates. It is important however to understand the difference between secured and unsecured debt. Your mortgage is a secured debt. This means that they have something (your home) they can take from you if you do not make your payment. Credit cards are unsecured loans. They have nothing except your word and your credit history. Because of this unsecured loans typically have higher interest rates.


• Lower monthly payments-Since the interest rate will be lower and because you have one payment to make versus many, the amount you have to pay per month is typically decreased significantly. Borrowers with self-discipline and a plan to get out of debt will use the extra money to continue paying down their debts.


• Only one creditor to deal with-With a debt consolidation loan, you only have one creditor to deal with. If there are any problems or issues, you will only have to make one call instead of possibly several calls. Once again, this can simply make controlling your finances much easier.


• Tax Breaks-Borrowers should understand that interest paid to a credit card is simply money down the drain. Interest paid to a mortgage (home equity or home equity line of credit) can be used as a tax write-off. Before making a decision to consolidate your debt consulting your tax professional can give you specific information for your situation that can be helpful.

Cons of debt consolidation
For some people, debt consolidation may not be the right answer. Anyone considering a debt consolidation should examine the negatives as well.

• Difficulty getting a good interest rate or loan-It can be difficult finding fair interest rates. This is because if you have to ask to consolidate your debts your lender may already see you as a bad risk. You may find great difficulty in even being approved for a loan. In addition you will pay more in interest if you do not have a stellar credit rating. It is also important to keep in mind that if the rate on your new loan is not any better than the rate you pay on your current loans, consolidating your debt will not make much sense.


• Longer repayment terms-It can also take much longer to pay your debts off. Every borrower should understand that when you consolidate debt, you still end up owing the same amount of money. The main difference is when you consolidate you are usually lengthening the repayment term. This could leave you paying much more in interest if the term is really long. In addition borrowers should understand that most mortgages are the 10 to 30 year variety. This can mean that if you choose the home equity route to consolidate your debt rather than spend a couple of years getting out of credit card debt, you will be spending the length of your mortgage getting out of debt.


• Easy to get into further debt-With an easier load to bear and more money left over at the end of the month, it might be tempting to start using your credit cards again or continuing spending habits that got you into such credit card debt in the first place. Borrowers who are trying to get their debt under control will have to develop a high degree of self-discipline in order to prevent themselves from worsening their financial situation. Statistics show however that most borrowers who consolidate debt go on to get themselves further into debt.


• You will probably spend more over the long haul-Even though the interest rate is less on your debt consolidation; you may end up spending more than you would have if you had kept each individual loan. Consulting with a financial professional or using one of the online calculators can help you see the real cost of your loan in terms of interest paid. In addition you should be aware that there could be additional costs to your loan like an application fee, closing costs or other administrative costs put on by your lender. You must figure in any other additional costs to determine the true cost of your debt consolidation.


• You can lose everything-You should understand that most consolidation loans are secured loans. If you did not pay an unsecured credit card loan, it would give you a bad rating but your home would still be secure. If you do not pay a secured loan, they will take away whatever you secured the loan with, in many cases this can be your home.


• Disreputable debt consolidation companies-Sadly not all non-profit debt consolidation services are looking out for your best interests and often these companies prey on those who are the most vulnerable. It is crucial to make sure that if you choose to work with a debt consolidation company that you thoroughly check out its reputation since some companies may be downright scams. To find a reputable firm, make sure that you verify certifications or third-party registrations. You can also check with the Association of Independent Consumer Credit Counseling Agencies or the National Foundation of Credit Counseling to see if the service you are considering is a member of either group. Also ask the service themselves for references and then confirm them. And most of all make sure that the debt management or credit counseling firm answers all your questions and that you have a firm understanding of how the process will work and what it will cost. If the company will not give you straight answers or you do not understand what's going on that's a red flag to not sign up with that company.