Exploring your options is always the best first step when you’re facing financial difficulties. There is no one-size-fits-all right answer, and making a quick decision or jumping at the first possible solution can leave you worse off than you started.

For some people, a debt consolidation loan can transform unmanageable debt into one smaller monthly payment. This is especially useful for people who have more than one credit card in addition to personal loans or other debts requiring monthly payments. The average Californian has two to three credit cards, with older residents likely to have more credit card accounts than their younger neighbors. But, of course, many households have more. Until recently, a California resident held the world record for holding the most valid credit cards at one time, with 1,497.

However, consolidating debt isn’t an option for everyone, and may carry risks you haven’t considered. Understanding the pros and cons of each of your options will help you make a more informed decision. It’s also important to be aware that many for-profit debt resolution companies use the term “debt consolidation,” though what they are offering is actually something very different. Working with those companies can be both risky and expensive. This post explains how debt consolidation loans work. We discuss the “debt consolidation” you hear advertised on late-night television here.

What is a Debt Consolidation Loan?

As the term suggests, a debt consolidation loan is a debt management solution that involves taking out a new loan to pay off other debts. Consolidating debts can be as simple as taking out a lower-interest credit card and transferring balances from other, higher-interest cards. Or, it may involve taking out a home equity loan or installment loan to pay off outstanding debts.

The key possible benefits of debt consolidation loans are:

Reducing the total amount you pay out each month,
Shifting from juggling several monthly debt payments to one payment each month, and
Lowering the overall interest rate on your debt

Many people who are struggling with debt are caught in a constant juggling act, pushing back one payment for a week or two to make sure another gets paid on time, monitoring grace periods and sorting a stack of monthly bills by priority rather than by due date. You probably already know that process can be stressful and exhausting. What many don’t realize is that it’s also expensive, because balances decline slowly–or not at all–as interest and late fees are added.

One monthly payment puts an end to the juggling, and may also significantly reduce the total amount you pay out each month. That’s especially true if you’re able to secure a favorable interest rate for the consolidation loan.

A debt consolidation loan can also help improve your credit history, for two reasons. First, consolidating into one monthly payment should make it easier for you to pay on time–if you’re not sure that’s going to be the case, then a debt consolidation loan may not be the right answer for you. Second, when you pay off balances on existing credit card accounts and don’t run them back up, you dramatically lower the percentage of available credit you’re using, which is a key factor in calculating your credit score.

Securing a Debt Consolidation Loan

A lower monthly payment coupled with a lower interest rate sounds great, but debt consolidation loans aren’t right for everyone.

First, not everyone will qualify for a debt consolidation loan. If you’ve already fallen behind on your bills and your credit isn’t great, you may have trouble getting approved for a debt consolidation loan. And, because interest rates are determined in part by your creditworthiness, you may have even more difficulty getting a favorable interest rate.

Some people with borderline credit are able to get debt consolidation loans by offering security. Because of the size of the typical debt consolidation loan, the most common type of secured debt consolidation loan is a home equity loan or home equity line of credit (HELOC). The downside to this type of consolidation is that by paying off credit card debt, personal loans, medical bills and similar debts with home equity, you’re turning unsecured debt into secured debt. That means if you aren’t able to keep up the payments, you could be facing foreclosure. That’s a big risk to take if you’re already struggling with debt. If you’re considering using your home as security for this type of loan, it’s important to take a very hard, realistic look at the numbers and be sure you are confident in your ability to make timely payments.

Debt Consolidation Math

For those who do qualify, it’s important to take a hard look at the numbers. Lowering monthly payments is understandably a high priority for people who are struggling to keep up with monthly obligations. It may even be the highest priority. Just make sure that you understand exactly what you’re gaining and what it will cost.

For example:

Debt consolidation loans can keep you in debt longer. While a lower interest rate may play a role in lowering monthly payments, this is often accomplished in part by stretching out payments. That makes it easier to keep on top of payments, but it may also add years to your repayment period.
Longer-term loans mean more interest. You may be able to secure a lower interest rate for your debt consolidation loan, but that doesn’t necessarily mean the total amount of interest you pay will be lower. For example, paying off $10,000 across four years at a 13% interest rate will cost you about $268/month, while paying the same amount at 10% across seven years means a monthly payment of about $166. But, if those loans are both paid off on schedule, the longer, lower-interest loan will cost more than $1,000 more in interest.

Investigate Your Debt Relief Options

If you’re seeking a debt relief solution, an attorney experienced in solutions like debt negotiation and bankruptcy can be your best resource. Before you make a decision that could seriously impact your financial life for years to come, arm yourself with information. You can schedule a free consultation with a Borowitz & Clark attorney right now. Just call 877-439-9717 or fill out the contact form on this site.