By Deanna Lynn Sletten

In this struggling economy it isn’t surprising that many people are going deeper into debt.…  With the average American owning 8 credit cards and owing an average of $10,000 in credit card debt, the idea of a debt consolidation loan sounds appealing.…  But is a debt consolidation loan right for everyone?…  Here are a few points to consider before deciding if a debt consolidation loan is right for you.

What is a Debt Consolidation Loan?

A debt consolidation loan is a loan in which you acquire in order to pay off all of your credit cards, student loans or other high-interest loans so you are able to make only one payment a month.…  Generally, a debt consolidation loan is obtained by using the equity in your home through an equity line of credit, a second mortgage or a home equity loan.…  Some people refinance their home for a lower interest rate and take out additional money to cover their other debts.…  These loans generally have a much lower interest rate than credit cards or other loans, so you are able to save on interest expenses while paying off excess debt.

The Benefits of a Debt Consolidation Loan

If a person owes money to several credit card companies as well as other loans, the minimum payments each month can be costly and take a large amount out of their income.…  Additionally, by only making the minimum payments it can take years to pay off these debts.…  By consolidating debt, the one payment a month is generally lower than the combined payments are and because of the lower interest rate the debt can be paid off faster.…  By having a lower monthly payment, you will also free up money in your budget so there is more cash left at the end of the month.

The Disadvantages of a Debt Consolidation Loan

In most cases a debt consolidation loan is derived by using the equity in your home and puts your home up as collateral for the loan.…  If you are unable to make your payments on the loan, you risk losing your home.…  Also, consider why you are in debt to begin with.…  If the reason is because you can’t control your spending, you may find yourself in the same situation later on.…  If you are unwilling to change your spending habits, you will end up even deeper in debt.…  Before deciding on a debt consolidation loan, first be honest with yourself on how you got into debt and what you are willing to do to change spending habits.

Debts to Consolidate

Credit card balances, car loans, boat loans, student loans or any other high interest loan are good candidates for consolidation.…  Of course the amount of money you will be approved to borrow will be the deciding factor in what loans or credit cards you are able to consolidate.…  Also, remember that the debt consolidation loan will be for many more years than what may be left on some of your current loans.…  If you only have two more years left on your car payment but your debt consolidation loan is for 10-15 years, then you may be better off not adding the car loan to the consolidation.…  Look over your options carefully before deciding which loans and credit cards to consolidate.

Applying for a Debt Consolidation Loan

The best place to start looking for a debt consolidation loan is through the bank or lender you already do business with.…  Compare their interest rates with other lenders in your area.…  You will want to work with a lender you trust.…  You will need to give such information as your total assets, gross income, overall debt and employment information.…  The lender will also look at your credit score to determine if you are a good risk.…  The interest rate you pay will be determined by how high your credit score is and your history of making payments.

Obtaining a debt consolidation loan can be a positive step in eliminating your debt.…  Even if you are offered a higher interest rate due to your credit score or payment history, in most cases it will still be much lower than what you are currently paying on your credit cards.…  Weigh your options to see if consolidating the debt will save you money in the long run. If you are willing to control future spending and pay your debt consolidation loan on time, then this may be the right way for you to finally become debt free.