What is a Debt Consolidation Loan?

Debt consolidation loans are a way to pool all of your debt into one, low interest loan.  For example, if in addition to other bills, you have $6,000 of debt on one credit card with an interest rate of 12 percent and $2,000 of debt on a second credit card with an interest rate of 16 percent, you may only be able to make the minimum monthly payments.  With a consolidation loan, you could borrow $8,000 at an interest rate of 8 to 10 percent depending on your credit history, pay off your high interest credit card debt using the consolidation loan and pay only one low monthly payment at a lower interest rate.       

This sounds good, right?

It is as long as you can afford the monthly payments and are willing to continue the payments for several years.  When you use a home equity loan to pay off credit card debt you are swapping unsecured debt for secured debt. Secured debt is covered by your home, which could be taken from you if you never pay the money back.

In general, debt consolidation loans are worth looking in to as long as you don't continue to go into more debt after setting up a debt consolidation loan. You benefit by having one monthly payment, which is usually lower than the combination of your other payments.

One drawback is the long payback period.  You also could be transferring unsecured debt for secured debt and unless you turn over a new leaf, you may not be changing the basic behavior patterns that got you in trouble in the first place.