For the consumer who has a number of debts, including multiple credit cards, and has trouble keeping track of who was paid when, then a debt consolidation loan might make good sense. If there is no drastic change in the interest rate between your individual obligations, and the rates charged for the debt consolidation loan, just having one monthly payment may simplify your already complicated life. That's if you have the money to pay your debts.

Most people facing financial hardship are under the pressure of not being able to meet their obligations, and realize they may have to take out a debt consolidation loan, whether they want to or not. The appearance of an easy solution, can lead them into more and deeper debt, complicated by the lending process itself.

In the first instance we showed you, the person with multiple debts but the means to pay, plus good collateral (such as their home), has good credit and likely qualifies for a low interest debt consolidation loan. On the other hand, those who are on the brink of bankruptcy, pose a much greater risk, and may be looking at interest rates exceeding 18%. Lenders in accepting less surety for their loans, also face less chance of being fully paid, and charge accordingly.

The first thing a potential borrower must understand is that a debt consolidation loan in no way erases any of your debts. It simply transfers the whole amount to one creditor, and often at excessive interest rates. It also poses greater risks to you as a borrower, if you have pledged your home as collateral.

Before entering into a debt consolidation loan agreement, consider whether the advantages are enough to offset the risks. You may be able to get an overall interest rate that is lower than what you are currently paying on your various debts. This would be a good move. If you have past-due or delinquent accounts, they would be brought up to date instantly, with the loan pay-off, which would restore some of your credit rating. But are you sure that you will be able to meet the conditions of the loan, and not default on the payments? Be very sure of this, before you take the plunge.

Your present debts may be one of two types, or a combination of both: secured and unsecured. Secured debts are the kind for which a creditor could recover something "real" if they sued for non-payment, such as a car loan. Unsecured debts include things which could not be re-possessed or recovered, including medical expenses, and credit card bills. A debt collection loan is almost always a secured debt, which means they will ask for collateral, and in most cases that means something substantial, such as your home, car, or real estate holdings. Should you default, instead of initiating a legal action, the lender may choose to "possess" your collateral. Be sure to thoroughly read and understand the terms of any debt consolidation loan agreement before you sign it, and end up in this type of situation.

There are lending institutions that while operating within the law, don't operate to the lender's benefit. They are fully cognizant of their rights under the debt consolidation loan agreements signed by their clients, and are prepared to initiate legal action or pursue their options for full recovery of their money. On the other hand, most "unsecured" creditors are less willing to invest the time and money that legal action requires, and are open to negotiation of new payment plans, suspension of interest for short periods, or other measures that will result in them getting all the money owed them, even if it takes more time. Are you willing to trade the possibility of re-negotiating your commitments for the potential risks of being tied to an agreement that has no flexibility?

Don't forget that a debt consolidation loan has the same kinds of penalties and late payment fees as a dozen smaller debts, but they are often levied for the smallest underpayment, or at the first sign of late payment. If your interest is higher, the total amount of your debt can rise alarmingly in a very short time, and you could soon be right back where you started before the loan. The opportunity to pick and choose between which payments you can make or reduce for the month, is gone. It's all or nothing, and there is little room for negotiation. In worst case scenarios, consumers who have not gotten a handle on their spending habits, and still have credit cards, may soon find themselves buying on credit to use cash for their loan payments, and eventually even taking cash advances to use for payments. Then they're not only saddled with the loan payment from their old debts, but a whole new set of debts as well.

In short, you must be sure that you can meet the terms of a debt collection loan agreement, before taking one out. It must provide you with a financial advantage, or you can risk everything for a temporary reprieve, when there are other options that may take longer to relieve your debt situation, but which won't leave you with nothing in the end, if you get into trouble.