If you are facing a mountain of different types of debt, you may see debt consolidation as the answer to your dreams. But be careful. Even though it sounds like a real and easy solution to your problems, debt consolidation is exactly what it says it is. It is transferring all of your smaller debts into one big debt. To continue with the analogy, it is taking all the little piles of debt and lumping together into a huge mountain of debt.

This larger debt will be taken out for longer than your original debts. If you can get yourself an unsecured loan, over the long run, you will actually end up paying more money out than you would have done before the consolidation. Your monthly payments might be lower because you are stretching the payments out over a longer period of time and the interest rate may also be lower.

In the short term you will experience a huge relief because every month, you will be paying out maybe a lot less money compared to before. But if you work it out over the whole loan term, a compounded interest loan may mean that you actually pay thousands of dollars more.

A secured loan is taken out against your home. By consolidating your debts, you are putting all your loans into your mortgage which is a secured loan. The caveat here is that the loan term may be longer. You may have already spent ten years paying off your mortgage, but now you may have extended your mortgage loan back to twenty five years by consolidating.

Loan consolidation sounds like a quick and easy solution, but it is important to consider the options carefully and choose the right answer for your own personal circumstances. If you can avoid it, don’t just swap all your little loans for one big loan.

By Jasmina