• When times are tight and debt seems overwhelming, debt consolidation can seem the answer to a downward monetary spiral. For a troubled debtor, businesses exist that promise a quick remedy to messy debt situations. However, it's always smart to take a close look at debt consolidation to see if it's a good fit for your particular situation.
  
  

What is Debt Consolidation?

• Debt consolidation is the practice of pooling together several different debts under one payment, in effect "consolidating" lots of debt into a neat, easy-to-handle package. In theory, a debt consolidator negotiates payments with various creditors, collects a monthly payment, then disburses the cash to pay the bills. Grouping the debt together and paying the bills at once save you from collector phone calls, keeping track of interest rates and having to handle lots of accounts. Debt consolidation cleans up a debt problem with one monthly payment, ending the hassle and stress of a messy situation.
  
  

What Are the Types of Debt Consolidation?

• There are three main types of debt consolidation: a debt consolidation loan, consolidation by agent and credit card balance transfer.
  
  The debt consolidation loan is a lump-sum payment in the amount of your past due accounts. The debt consolidator uses the loan amount to pay off the past due balances, while the debtor pays a regular monthly loan payment. People secure these loans with collateral, such as a car or home.
  
  An agent consolidation happens when an debt consolidation agent calls the various creditors, negotiates lower interest or payment amounts, then debits one lump sum from your account per month to cover the payments.
  
  Last is the credit card balance transfer. A debtor takes an empty credit card, usually with a low teaser-rate balance transfer annual percentage rate, and transfers the balance from any higher-APR credit cards. The cards are paid off, and the balance on the newer card costs less.
  
  

How Much Does Debt Consolidation Cost?

• Debt consolidation costs vary by method. According to Scott Kays, a financial writer and president of Kays Financial Advisory Corp., the interest rate on a debt consolidation loan can be as high as 22 percent --- potentially higher than the original credit card APR. The Federal Trade Commission also notes that you might have to pay points on the loan. Agent debt consolidation, on the other hand, charges a percentage of your monthly payment amount. Some places charge 10 percent of each payment; others require a fee of several hundred dollars up front, even though there's no guarantee of reduced payments or interest rates. With a credit card balance transfer, there may be a charge for each $100 transferred. Moreover, the costs can balloon after the teaser APR rate resets to the actual balance APR.
  
  

What Are the Alternatives to Debt Consolidation?

• If debt consolidation seems risky and potentially expensive, MSN Money writer M.P. Dunleavey points out other cheaper, simpler options. If you're a homeowner, pursue a home equity loan or line of credit. Another option is a signature or personal loan from your bank or credit union. To free up money, refinance your car or sell old items that you don't need. Also, don't be afraid to call the creditors yourself. When it comes down to it, the creditor simply wants to be paid and may try to work out a deal. This costs you nothing. Just make sure to get everything in writing before sending any money.