Debt Consolidation Loans

A consolidation loan is different from other products because you are taking out a new line of credit in order to pay off others.

For more information, read Knee Deep in Debt

Debt Consolidation Loan Pro's

The most common form is by taking out a loan against the equity in your home to pay off your high interest debts. You have one consolidated payment to make every month to the new lender, and your monthly payment will generally be significantly less than your old debts. You will also be paying more towards principle since the interest rate is lower.

Taking out an equity loan to pay off your debts will generally not negatively impact your credit. It may, in fact, help since your debt-to-credit-limit ratio will be lower.

The other option is a balance transfer line of credit. Be careful to read the fine print -- often what starts as a 0% balance transfer only lasts for a few months, after which you are no better off than you would be now.

Debt Consolidation Loan Con's

For starters, if you don't own a home with equity or have good credit a debt consolidation loan is likely not an option.

The other problem with a debt consolidation loan secured by the equity in your home is that if you default, your house is used as collateral and the lender has a note on your house. If you aren't sure you will be stable enough to pay this loan in the future, opt for a debt management plan instead.