Debt consolidation is a way of reducing your total monthly payments on your outstanding loans and credit cards.

How It Works

Debt consolidation is a loan to pay off other loans. You total your outstanding obligations and receive a lump sum to pay them off.

You then have a new loan, the principal of which is the total of the previous obligations. You make monthly payments on that new loan - essentially trading several payments a month of just one, lower payment.

Things To Be Aware Of...

While debt consolidation can make your monthly payments more manageable, it can also be the most costly type of loan. This is because you end up paying higher interest... or paying over a longer term. Either will increase the total amount it costs you to borrow. So you need to shop wisely for a debt consolidation loan.

You're also still vulnerable to another danger. Many people, after they've consolidated their debts to a comfortable level just go on borrowing. Before they know it, they're back where they started. Unless you're ready to put a curb on your spending, debt consolidation will not solve your financial troubles.

Tips To Make Debt Consolidation Work In Your Favor

Tip 1: Call a halt to spending! Cut up those credit cards-or put them away and don't use them except for emergencies.

Tip 2: Shop wisely for a debt consolidation loan. Look for an interest rate lower than what you're paying and a term no longer than your current term.