Debt consolidation loans offer a ray of hope for those who find debt management to be an increasing difficulty. Consolidation loans work on a simple premise; combine a debtor’s high interest personal debt into one low rate loan.

Notable benefits of a debt consolidation loan include:

• One monthly payment rather than several creates a huge reduction in fees and interest charges commonly associated with falling behind on numerous bills.
• Consolidating debt allows for more financial freedom. Having one lower payment a month may help debtors afford to put more money towards paying off the mortgage or start a savings plan.
• Debt consolidation may improve lagging credit scores by lowering the number of accounts a debtor holds and by showing the rolled over debt as having been paid as required.

For many individuals, a debt consolidation loan is an efficient weapon in the battle of the bills. For others, however; consolidation of debt may prove detrimental in more ways than one.

• For poor financial planners, debt consolidation may give the misconception of freeing up money and credit for the purpose of obtaining more debt. An example of this would be as follows:
  • Sarah has four credit cards, a car loan, and many regular bills such as a house payment, electricity, trash, etc.
  • Sarah finds that with all the money she pays out, there is little left over to enjoy life.
  • To remedy this, Sarah consolidates all her debt into one low payment loan.
  • This frees up a substantial amount of money for Sarah and looks great on her credit score.
  • Now with a seemingly fresh start and a renewed vigor, Sarah rushes head long to the mall to buy that diamond tennis bracelet she’s been dying to have.
  • The problem; the bracelet goes on her newly re-filled credit card and gives her another monthly payment.

Those with poor spending habits rarely learn to manage debt more accurately through debt consolidation.

• Debt consolidation may reduce stress by lowering payments, but has the added inconvenience of extending the debt to longer terms. In theory, this would be ideally rectified with the debtor paying any excess income towards the goal, thus eliminating the debt quickly. Unfortunately, most people do not do this and instead acquire more debt thinking they have enough money to afford them now.

When discussing debt consolidation loans, it is important to note that there are two types. Secured and unsecured.

Secured loans are obtained through the process of using collateral. This means that items such as owned vehicles, homes, or other assets will be attached to the loan and upon failure to repay, the items become the property of the lender. If the debt consolidation loan is paid as agreed, all collateral is then released by the lender.

Unsecured debt consolidation loans are more difficult to acquire. These are often given to consumers who have a high credit analysis and good employment. An unsecured loan is more desirable in the event that financial hardships may increase as it reduces the amount of damage that may be suffered by the borrower if obligations are not met.

When seeking a debt consolidation loan, always do your research. There are many reputable companies who offer these services, but many others impose unfair interest rates and use improper lending practices. Before deciding on debt consolidation, be sure to consider all other methods of debt reduction.