Debt consolidation is a wonderful concept in trying to save money

Debt consolidation is a wonderful concept in trying to save money. In this process, a person takes out a new loan that is large enough to pay off several others, bringing everything under one roof, so to speak, with one payment monthly. A good reason to do a debt consolidation loan is to achieve an overall lower interest rate and lower total monthly payments. Also, you receive just one bill, and deal with just one company.

Sometimes, you can achieve a debt consolidation by opening a new credit card and transferring all other balances into that account, at a lower rate. They will occasionally offer you a certain time period with zero interest, say 6 or 12 months time, on your balance transfers. This can work positively for the borrower also, provided payments can be made in a timely manner, and/or if the balances transferred can be paid off within the zero interest time period.

Another reason to do a debt consolidation would be to gain a fixed interest rate.

This brings peace of mind because you do not have to worry about rising interest rates jumping up your variable interest rates. It would only be good if the fixed rate is the same or lower than your current variable rates, but the peace of mind factor is something to consider if you don't want to worry about a shaky economy.

If you transfer balances to a new credit card, most likely this is an unsecured loan, with no collateral. Many bank loans for debt consolidation involve moving your credit card balances into a new bank loan that does involve a secured interest for the bank. In most cases, it will be a house or car for security. If you default on this loan, you could lose your security property, so it is important to toe the line with payments and get them in on time, and pay them all.

The problem with moving from unsecured loans to secured loans is that if you are late, in default, or totally do not pay it, not only will your credit report rating suffer as with non payment on unsecured loans, you will lose your home or car used for collateral. Think about why you would risk those real assets when the worst that will happen under non payment of unsecured loans is that you have a loan collector on the prowl after you, or you end up in small claims court, or you have damaged your credit report. If you are late and in default, your credit report will already be damaged.

Debt consolidation loan can be a good choice

With a debt consolidation, you encounter the same risks as you are already with the loans you want to consolidate if you are late or in default. If you are in default and have a bad credit rating, you probably won't be able to get a different loan of any kind. Owing money, and borrowing on credit does require that you live up to your agreements for timely payments. Another thing that occurs with many borrowers having trouble paying bills, is that after they take out a consolidation loan and get lower payments, they go and run up even more bills, and get more credit or use the old cards again. That can be the road to bankruptcy that the debt consolidation is designed to avoid. If bankruptcy is a possibility, taking out a consolidation loan can become a problem in getting bills discharged.

Another problem would be an unscrupulous lender charging high fees for the loan. Shop around for the best offers from reliable banks. The new loan payments may be less, and interest less, but the time of the loan payback can be much longer, thereby costing more in the long run. If you are in a sticky situation, there may be other alternatives to debt consolidation, so talk with a financial advisor if possible.

There are some debt counselors who can offer free advice, and it may be advisable to consult with them before making a decision. For the right reasons, and with ability to pay, saving money by consolidating high interest credit balances into a lower interest debt consolidation loan can be a good choice.