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Debt Consolidation Loan

Bringing your debts together under one rate may be helpful, but it's not the only option.

Consolidation means "bringing together", not "reducing". A debt consolidation loan won't usually reduce your debts; indeed you'll owe more in the long run. This type of loan rather bundles up your existing debts into one lump; which you can then pay off over a longer period thereby reducing your monthly repayments to a more manageable level.

The principle behind a debt consolidation loan is that you put together all your existing debts in one large pot. This means the resulting debt is simpler to understand, the repayment will happen once a month rather than multiple times, you can clearly plan ahead, and ideally the payments will be lower.

In general, specialist debt consolidation companies like Baines and Ernst claim that the monthly repayments are lower in 90% of cases. That sounds great, but often that's just achieved by spreading the loan over a longer period. If that's what you need to get out of debt, then fine- but be aware you're paying plenty more in the long run.

You don't necessarily need a debt consolidation loan in order to consolidate your debts (unless they're pretty big). For example, why not chuck out those store cards and move the balances to a lower-interest credit card? You'll still be consolidating the debt (i.e. moving it to one place) but quite possibly paying less. Note that the term "debt consolidation loan" sounds like you'll be paying less overall, but technically only means the process of bundling up into one easy payment each month.

Lastly, you also need to understand that credit card and most loan debts are generally unsecured. A debt consolidation loan is almost certainly secured against your home, so unless you're sure you have a way out of debt with the new payment structure; you stand to lose your home if you don't keep up the repayments. Many people believe a debt consolidation loan is the best solution when you've hit rock bottom- and for a certain type of person it is. But it won't get to the root cause of your debt; namely bad financial management. Get that sorted first!