Debt Consolidation Basics

A debt consolidation loan helps you beat debt by paying off all of your existing credit accounts, reducing them into one monthly payment. Because several accounts are consolidated into one, your monthly payment will be lower, your budget will be more manageable and you won't have to worry about keeping track of several due dates. Because your revolving credit accounts will be replaced by a fixed-rate loan, you'll actually see your balance shrink with every payment. And because interest rates are lower than they've been in years, your savings over the life of the loan will be astronomical.

But the benefits of a debt consolidation loan don't end there. Making it easier to meet your monthly obligation, the convenience and affordability of the monthly payment will likely do wonders for your credit score and leave you with more cash in your pocket than you've had in years. Cash that can be spent on your family, used for your home or saved for your future. In other words, a debt consolidation loan can do more than just beat debt; it can actually change your life for the better.

Getting the Right Loan

In spite of the extraordinary benefits they offer, all debt consolidation loans are not created equal. Like anything else you spend money on, it pays to compare the various products offered by lenders and select the loan that best suits your needs. Getting the best deal possible will make it that much easier to beat debt once and for all. Here are some things to consider:

• Interest rate. While selecting a loan with the lowest possible interest rate might seem like a no-brainer, remember the reason you're looking for a loan in the first place: to beat debt. So in addition to comparing it to the interest rates of other loan packages, hold it up against the rates of the credit accounts you're using it to replace. When you factor in any additional costs associated with the loan, will it be worth your while?
• Timetable. When comparing two loans, don't just consider the interest rate or the amount of your monthly payments; also take into account the length of time you'll be given to pay off the loan. While loans that give you more time to repay the money offer lower monthly payments, a short-term loan with an identical interest rate will save you a considerable amount of money in the long run. Also consider the timetables associated with the credit accounts you're replacing. If your new payments are scheduled to last well beyond the date you would have settled your former loans, getting a debt consolidation loan might not be in your favor.
• Trustworthiness. Unfortunately, the economic crisis has resulted in the emergence of a number of shady fly-by-night lenders looking to pad their pockets with the money of unsuspecting consumers. The first red flag to look for is an application fee. If a lender requires money in advance to secure your loan approval, not only should you head for the door, but you should also report the company to the authorities because they've broken the law. A common scam is for an unscrupulous lender to convince an applicant he or she's almost guaranteed to be approved, accept an application fee, and then decline the application.
• Validity. Although not illegal and not necessarily a scam, something else you might want to watch for in your quest to beat debt are loans that aren't actually loans. Some debt consolidation programs will merely make deals with your creditors and combine your monthly bills instead of giving you a whole new loan. Some are up front about it while others aren't.