Another advantage of debt consolidation is the ability to have reduced interest rates. A debt consolidation loan will have a lower interest rate from your current credit card interest rates. The company will contact each of your lenders and reduce your interest rates and this could save you thousands of dollars a year. Most debt consolidation loans are home equity loans, also known as a second mortgage. When individuals use a home equity loan to pay off their debts, they are putting their home on the line. If you default on the loan, the bank can repossess your home. This is why many people are willing to use a home equity loan and repay it because they do not want to lose their home.

People often look for debt consolidation as an answer to their financial woes. Debt consolidation companies can reduce the amount of money you pay to each lender because they roll all those payments into one comfortable lump sum. They will calculate the amount of money you pay to each company and they will show you how much money you can save by paying one payment to them instead of to each of your individual lenders.

Debt consolidation loans can cut down on the amount of time you are in debt. It can take several years to pay back all the money you borrowed, especially if you keep charging more. Instead of paying back money for 10 years or more, a debt consolidation company will help you pay back the debt in about 4-5 years. Not only does this get you out of debt sooner, but it also gives you a light at the end of the debt tunnel which can really boost your spirits.

Depending upon the type of debt consolidation loan you use, you can deduct the money on your taxes. If you pay the money to a credit card company, you don't get to do this. If you open a home equity loan, all that money that is going to interest can be written off.

The last reason why debt consolidation is wonderful is because you no longer need to speak to 7 different companies. All you need to do is call one company to get answers to all your questions. If you have a problem or issue, you contact the debt counseling company and they will take care of it. This makes it much easier to control your finances and it saves you a lot of time.

The cons of debt consolidation
Even with all the advantages of debt consolidation, there are some negatives. The biggest problem with debt consolidation is that it is too easy for some people. You really need to have a desire to get out of debt and stay out of debt. If you use debt consolidation to get out of debt and then start spending again, you will wind up right back where you started. Studies have found that 75 percent of all individuals that use debt consolidation increase their debt within 24 months because they cannot control their spending. A huge burden is lifted and they start using their credit cards to buy things again. All those little purchases start to add up and before they know it, they are $60,000 in debt.

Debt consolidation varies with each individual. If you use a home equity loan to pay off your debt, you will be in debt longer. It will actually take you 10 to 30 years to pay off the debt because it is rolled into your mortgage. So instead of paying off $35,000 in 5 years, you will pay it off in 20 years, plus interest.

You could lose your home, your car, and your retirement if you default on the loan. Since most people use home equity loans to pay off their debts, the bank can legally repossess it if you default on the loan.

If you chose an unconsolidated loan, like a credit card transfer, you will get a low credit score if you default. Most individuals that choose debt consolidation for their credit card debt will not get a tax break for the money they pay in interest. They also can be taken to court if they default on the loans and can lose a lot of money. This is why it is important to always pay on-time and in-full.

Debt consolidation companies can also charge high fees and large interest rates for individuals with poor credit. If you are already struggling, the debt consolidation company may not make your situation easier. Over the life of the loan, you will pay at least 10-20 percent of your total monthly payment right to the debt consolidation company. If you add this amount up and compare it to the amount you are currently paying your creditors, you will pay thousands of dollars right to the debt consolidation company. This money should have gone to the credit card companies instead so that you could pay off your debt sooner.

The initial payment you make to the debt consolidation company will go into their pocket. This can make the first month financially hard on most people and they could have a lower credit score because they missed a payment. Several debt consolidation companies are known for having late payments to creditors and this can really drop your credit score in a hurry.

When you use a debt consolidation company to consolidate your credit card debt, the credit cards will be "frozen" or closed until you pay off your debts. This will drop your credit score immediately because it looks like you have less available credit.

Debt consolidation isn't for everyone, in fact most financial advisors warn against it unless you are about to declare bankruptcy. Before you make your decision, you need to talk to several different nonprofit debt consolidation companies to find out if they truly can help you. You also need to have self-discipline and stick to a budget and financial agenda. There is not a quick-fix for debt; it is a burden you will need to carry for several years. The best way to pay off debt is to get a second job, reduce your spending, and start paying as much as you can towards your debt.

You should only use debt consolidation if the interest rates are lower than the interest rates you are currently spending. Usually car loans and student loan interest fees are low and you will save money by paying them off individually instead of consolidating them. Debt consolidation really works the best for individuals that ran up their credit cards and cannot learn how to control them.

Remember that you are still going to pay the same amount of money to the creditors when you use a debt consolidation company. Just because it will take you 4 years instead of 14 doesn't mean you are paying less, it just means you are paying it off faster.

If you can't decide if debt consolidation is right for you, speak to a financial advisor. They will be able to look at your current financial situation and help you find a way to get out of it. If they think debt consolidation is the right choice, they will let you know. Ask friends and family members for their advice or help. If someone close to you has used a debt consolidation company before, find out how their experience went. Ask them what their monthly payment was, how much they paid in interest, and if they felt like the debt consolidation company actually helped them.

Create a monthly budget for your family. Make sure the entire family is on-board and that they all want to get out of debt. If everyone knows what the monthly limits are, it will be easier to avoid spur-of-the-moment purchases that increase your debt. Lock up the credit cards and only use cash for all your monthly purchases. Once you have spent the cash, you are out of money. This is a great way to control your spending because you actually see how much money you have available.