Debt Consolidation

• When a person consolidates his debts, he is not reducing his debt, only restructuring it. A finance company is essentially combining all the separate payments that the debtor must make during the month into one mega-payment. However, in some cases, the size of this payment may be smaller than the amount the person is currently paying in total for all of his loans.
  
  

Advantages

• If a person needs to reduce the size of the monthly payment he makes on his debts, then debt consolidation can be a good idea, so long as he can structure the debt in this way. In addition, if the person has a good credit rating, he may be able to secure a low interest rate on his new loan. Consolidating debts into a single payment simplifies monthly payments.
  
  

Disadvantages

• Often, consolidating debts will not reduce a person's debt burden, but add to it. Some debt consolidation companies charge fees, while others tack on money to the principal of the loan. If the loan is structured so that a person pays smaller monthly payments, the debt will last longer and the total size will likely increase. Also, according to Bankrate.com, consolidating debts may free a person up to take out more debt and get back into the same pickle.
  
  

Considerations

• If a person can qualify for a low interest rate on the new loan and believes that he will not run up any new debt, then consolidation may be a good choice for him. However, there may be other ways in which the person can reduce his debt load or make payments easier, such as by restructuring his loans or refinancing them individually. In addition, the person may do better simply cutting back his spending and paying off his debt.