How Debt Consolidation Works

If you struggle to pay bills, you might consider debt consolidation. See more debt pictures.
Sheer Photo, Inc/Getty Images

You see advertisements for it all the time -- "Get debt-free and lower your monthly payments! Call now!" Debt consolidation ads are as ubiquitous as diet pill ads and sometimes just as outlandish. Despite the remarkable claims, debt consolidation isn't magic and doesn't really eliminate your debt (at least not immediately) because it involves getting new debt. That's what debt consolidation is -- taking out one new loan to pay off all your other loans. Still want to call now? Be warned: You may wind up in worse financial straits than you were before.

Debt Pictures

Dealing with student loans, car loans and mortgages, as well as any other debts is daunting. If you can pull all those expenses together under a lower interest rate, like many ads boast, you will end up making lower payments. In addition, the idea of lumping several payments into one might appeal to you. Indeed, with this process, you are far less likely to forget to pay a bill. It seems like a win-win situation.

But is it too good to be true? Yes and no. If you dive into a debt consolidation deal without reading the fine print, hidden fees can worsen your financial situation. You may even owe money for longer, and it might cost you more long term. However, when entered into cautiously, debt consolidation can help you get control of your finances.

It can be frustrating to wade through the decisions involved in debt consolidation. Several methods exist, including using a bank, a finance company or even credit card offers. Often, you can qualify for lower interest rates if you are willing to put up your home as collateral, but you risk losing your home if you cannot make payments.

In this article, you'll find out about the different methods of debt consolidation, how to tell the bogus deals from the legitimate ones and how to combine those pesky student loans (or not). Read on to find out if you show some of the telltale signs of having too much debt.