Debt consolidation loan may reduce payments but may also increase total interest paid

The credit repair industry has made the term “debt consolidation” a household term during the past few years. With an astonishing amount of advertising, including e-mail spam, the industry makes it appear that with a snap of the fingers, you can reduce a pile of bills to just one, and that it’s cheap, easy and carefree. That, of course, isn’t true, but it is possible to reduce your bills to just one if you go about it the right way. There are advantages and disadvantages to consolidating, so you will want to think it over very carefully before you proceed.

Here are some things to consider if you are thinking about a debt consolidation loan:

Unsecured loans generally are not possible - Unless you can move credit card balances to a new account with a low introductory or “teaser” interest rate, you probably will not be able to obtain an unsecured loan. That means that you will have to put up collateral, and doing that requires risk. The most common form of secured debt consolidation loan is a home equity loan, where the debtor borrows against the equity in his or her home. This financial product offers lower interest rates than for credit cards, and the interest can be tax deductible.

Secured loans come with risk - The downside to a home equity loan is that you are now putting your home at risk. If your debts were all on credit cards, they were unsecured. There was no collateral put up against them, and the lender has nothing to take from you should you default. That’s not true here; if you fail to pay, you could lose your home to foreclosure. Not a good thing if you have a bad habit of not paying your bills.

Consolidating reduces several bills into one - This is good from several points of view. You will now have only one check to write each month, instead of several. Even better, the minimum payment due on a consolidation loan is probably less than the sum of the minimum payments from your other bills. You will probably have a smaller payment. You will definitely have a smaller payment if you have taken out a loan for an extended period of time. A home equity loan, for example, could easily have a repayment term of ten years.

You could pay more in interest - The longer term of repayment means that, over time, you could be paying more in interest than if you had simply paid off your original accounts. This is a tradeoff - lower payments vs longer time. Most people benefit from the lower payments, but you should be aware that you may be paying more in interest.

Most financial solutions come with both good and bad points. This is true here, but for many people the convenience of a single payment outweighs everything else. If you are thinking about a consolidation loan, be sure to think it over carefully.

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