These days, debt consolidation is the most popular method of debt management.

When you consolidate your debts, you combine several small debts into one. One of the most common ways to do this is through a loan. Most banks offer such loans believing that one payment would be more convenient and easier and cheaper to manage.

Even though this may be the case, a debt consolidation loan also comes at a price. Whilst you may take the pressure off individual accounts, you still have to pay interest and service charges. Also, its important to cancel the lines of credit or other credit facilities or risk accruing greater levels of debt i.e. having available lines of credit presents a artificial feeling of wealth that can lead to financial peril.

In this way, the consolidation loan should be used to break the cycle of spending. If you continue to spend more than you earn after a you consolidate your debts, the consolidation loan is purely a cosmetic, short-term solution.

If you are adamant that a consolidation loan is the right thing for you and you are committed to breaking the cycle of spending, then the most important consideration is the interest rate. You need to make sure the new interest rate, including fees and other costs, is significantly lower than the combined total of all the debts you're consolidating. If its not and you are paying higher interest, then it’s likely you will make the problem worse.

Another potential financial hazard of debt consolidation loans is the threat of hidden costs. Personal loans sometimes attract penalties or costs if you pay them off early. For this reason, its important that these costs are also considered when weighing up the benefits of a consolidation loan. Other costs may include application fees and other charges, especially if the new loan is secured against your assets, which means you may have to pay for applying, legal work, valuation and stamp duty.

If this is the case, and your unsecured debt is turned into a secured debt with a lien over the family home, then there is additional risk and the family home could potentially be jeopardised.

Notwithstanding these issues, when you get a consolidation loan you still need to exercise a disciplined approach to paying off the loan. If you struggle in this regard, and core reason for finding yourself in debt is due to the fact that you struggle to pay your manage your finances, then a consolidation loan may not be the best solution for you as it does not attend to the core of the issue i.e. efficiently managing your budget.