Debt consolidation involves the taking out of one loan which will be used to repay all other loans/debts you have. This provides debtors with a lower interest rate as well as the convenience of only having one payment to make as opposed to the several payments which would be required on unconsolidated debts.

As enticing a solution as debt consolidation appears to be – it is not an option for everyone. In order to grant a loan large enough to service all other debts, banks would require some form of collateral – and sadly many people do not have ample collateral in order to secure a loan to consolidate their debts. Those individuals who do have a house to mortgage or some other asset which the bank accepts as collateral for the loan, run the risk of losing these assets in the event of them being unable to fulfill their obligations. Some banks may offer unsecured loans (where there is no collateral) however these loans have much higher repayments and interest rates, something which wouldn’t be a very good idea for someone already experiencing financial difficulty.

Debt consolidation is an advisable solution for someone struggling with the repaying the debts on several credit cards. Credit cards carry a significantly larger interest rate than the interest rate on an unsecured loan from a bank. Debtors with assets such as property and vehicles can attain a lower interest rate on a secured loan, using their property as collateral. Debt consolidation usually results in a smaller outflow of cash as a result of the lower interest rate and also because of debtors only having to make one payment. This will in effect help debtors do one of the two things, use the additional cash to make additional payments toward the loan so as to repay it faster or they can save the money to ensure that they don’t land in financial trouble again.

Debtors need to be especially weary of debt consolidation programs which are actually just debt repayment programs. These companies will not always be the optimal solution as this option doesn’t involve the servicing of all your debts with a single loan. These companies act as a third party – negotiating with creditors on your behalf to secure lower repayments and reduced interest rates – they then collect a lump sum payment from you and make the necessary payments thereof. Due to the debts still remaining separate, differing interest rates result in higher interest than one would be paying on a single loan taken to service all debts.

While debt consolidation is a simpler more cost-effective root, debtors must be careful of converting their unsecured debts into secured debts through the taking of bank loans using their assets as collateral – because if a debtor defaults on repayments of a secured loan – he/she runs the risk of having their assets offered as collateral attached by the bank.
There are several options available to consolidate ones debt, credit counseling programs, debt settlement, debt consolidation loans, bankruptcy are just a few options available today and finding the optimal solution for your particular case can be a rather confusing and difficult process – but this process can be eased with the guidance of a debt consultant, financial advisor or debt consolidation consultant.