Know the Benefits of Debt Consolidation

One of the things that can make debt management such a chore and, potentially, backbreaking for the debtor is that lenders may be so many in number it is hard to keep track of them. Ideally, winning the lottery would take care of all of one's obligations, and perhaps even income for as long as the debtor shall live. More realistically, though, a debtor will need to come up with a different solution.

Debt consolidation almost uniformly involves the creation of a new loan that is more or less a composite of separate existing financial agreements. One of the possible benefits of consolidation is the idea that it allows its users to consolidate debt from a variety of different sources.

Rather than having, say, three individual loans which to take care of credit card charges, car loan installments, and student loan dues, debt consolidation can condense these fees into one organized obligation, and often for a reduced interest rate. One particular instrument that is commonly used to consolidate debt is what is known as a home equity loan, which is a loan secured against the equity of the house (market value of the home minus remaining mortgage payments).

Of course, some debtors are not homeowners, and therefore, there is no home equity for them to "tap into" in offsetting their debt. Nonetheless, some financial institutions may still afford individual debtors the opportunity to engage in debt consolidation. Within this scenario, a debtor would likely obtain a "personal loan" to consolidate debt.

Certainly, in terms of debt consolidation options, this is an inferior option to a home equity-based solution, as the interest rate is higher and there are more specific eligibility requirements for personal loans (including credit rating). That said, in equally relative terms, using a personal loan to consolidate debt may be much more preferable than outstanding balances on a number of credit card balances, as they themselves often come with steep interest rates attached.

As stated, debt consolidation can be dangerous, especially if one fails to do his or her research and is hooked by an agency's promises that they will provide what is tantamount to a magic cure to their debt woes. While consolidating debt may reduce monthly payments and lower interest rates, it may also significantly extend the duration of the loan. As such, prior to signing up for a home equity loan or personal loan, debtors should first meet with a credit counselor.

NEXT: Learn How to Make a Budget