Thousands of consumers owe more money than they should. The amount of debt held by Individuals is not really a shock; no one saves money these days. A lot of the astonishing debt in this country is tied up in credit card balances. Credit card debt is particularly costly, as the interest rates charged on balances are higher than for other types of debt. One often-suggested solution to the problem of having too much or too many debts is to consolidate them. Is consolidating debt a good idea? Is it the cheap solution that all of the advertisers that promote it really suggest?



Debt consolidation, on its face, seems like a good move. The average consumer has almost $10,000 worth of debt, but that debt is often spread out among a variety of different credit cards. Each card has its own due date, interest rate and minimum monthly payment. Each month, the debtor must write checks to every one of his or her lenders. Debt consolidation companies simplify this process by providing just one loan for an amount sufficient to cover the balances of all of the borrower's outstanding debts. The debtor then needs to write just one check each month instead of many. If the loan is collateral-backed, as with a home equity loan, the rate of interest will be lower than the interest rates charged by the credit card loans the new loan replaces. That being the case, the consumer can frequently pay less money every month than she was paying previously.

In some cases, consolidation of debt makes sense. Each borrower should carefully look over the numbers involved before responding to pressure from a consolidation company. Sure, replacing several loans with just one, low-interest loan is appealing, but that does not tell the complete story. The real question is "How much will I repay in total?" A number of lenders promise lower payments, but those lower payments are many times achieved by extending the life of the loan. If you have credit card debts that you might be able to repay in five years, and you replace them with a home equity loan with a 25 year term, you might actually end up paying more money in the end, even with a lower interest rate.

Frequently, what seems to be a good idea is not a great idea upon closer inspection. If you are not sure whether or not a debt consolidation loan is proper for you, consult with a reputable financial advisor.