Debt consolidation may be appropriate for consumers who find themselves with numerous high-interest credit card debts. Debt consolidation allows many debts to be rolled into a single loan or credit line. While debt consolidation may be of benefit to some, those whose credit history is flawed or without collateral to secure a loan may find debt consolidation more risky than beneficial.
Home Owners
Consumers with home equity and access to low interest rates may find debt consolidation a favorable option, note the financial advisers at Credit.com. Refinancing a home or taking out a loan against existing equity permits consumers to pay off higher-interest debts at lower interest rates. Additionally, the interest on home loans is tax deductible.
Risk to Collateral
Using a home as collateral puts a precious asset on the line. The Federal Trade Commission states that if the consumer is unable to make the payments or if payments are late, she may face foreclosure. Additionally, Credit.com points out that variable rates on the loan can actually increase costs, as will extending the period of time a consumer is in debt.
Personal Lending
Another way to handle debt consolidation is to take out a personal loan with a financial institution. Credit.com notes that if there's competition between local lenders, consumers may be able to get a low interest rate. MSN Money's Liz Pulliam Weston states that low interest rates are available to those with good credit---as low as 14 or 15 percent as of December 2009.
Loans and Bad Credit History
Consumers with a considerable amount of debt or numerous black marks on their credit history may not get an unsecured loan or may be subject to high interest rates, warns Weston (18 to 21 percent---or more as of December 2009). These consumers may unknowingly fall into the hands of a scurrilous online credit consolidation company, which lures them in with the promise of a low-interest loan but charges excessive monthly fees that actually drive up the cost of the debts.
Balance Transfer
Consumers with a good credit history can roll existing debts into a single low-interest balance transfer card. Low annual percentage rates (APRs) may last for a certain period of time, after which they increase; then the consumer must find a credit card issuer that offers a lower APR. Savvy consumers can choose to contact their existing credit card issuers to see if they can get lower interest rates, notes Credit.com.
Balance Transfer Risks
For consumers with a bad credit history, securing a credit card with a low APR may not be an option. Also, MSN Money's MP Dunleavey warns that applying for new lines of credit shows up on the applicant's credit history, making her look like a high risk to future lenders.
Other
Debt consolidation can be of benefit to the consumer with a good credit history who pays off a low-interest loan as soon as possible. But most methods of debt consolidation aren't available to consumers with poor credit. Debt consolidation does nothing to encourage better spending habits. Weston warns that regardless of whether consumers opt to consolidate debt or pay off debt themselves, it's imperative to stop using credit cards.
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