Debt consolidation loans are a debt solution you may have heard of. Indeed, in many cases, it is much preferable to bankruptcy. Bankruptcy has the adverse affect of marring your credit report for 7 or more years and possibly forcing you to sell off some of your prized possessions in order to pay off creditors. Debt consolidation loans are a less damaging debt solution – but there are still some implications.

Before going ahead with debt consolidation loans, it’s imperative that you understand how a debt consolidation loan works. Unlike a debt solution like bankruptcy, you are not taken into “receivership” with debt consolidation loans. Essentially, a debt consolidator will bring all of your monthly payments and delinquent loans into one, easy to manage bill. Oftentimes, this consolidated loan has better terms and lower interest rates than your various other loans.

However, it is important to note that debt consolidation loan is indeed a new account. Your credit rating will be affected just as if you were to open a new credit card or get a new auto loan. And because many debt consolidation loan providers require you to close your old accounts, you will see a dramatic skewing in your credit utilization ratio. This may lower your credit score temporarily – but seeing as you are fighting your way out of debt, now is likely not the best time to be seeking new loans anyway.

So, when should you use debt consolidation loans as a debt solution? That all depends. If you do have a steady source of income and are simply having trouble keeping up with multiple bills and are being hounded constantly by collections agencies, then a debt consolidation loan can help you out. But if you are unable to pay off your consolidated loan, then you will be in a worse situation than you were before. Be sure to talk over a debt counselor or financial planner to ensure that consolidation is a viable debt solution for you.

It is also very important to make sure that you deal with a reputable debt consolidation provider. Many debt consolidators are sham operations who will actually charge you more money, steal your identity or otherwise exploit you. Look for reviews, accreditations and testimonials before giving them any money. Also check consumer complaint boards and other scam reports.

Also, before introducing a third party into your relationship between you and your creditors, you may wish to try to work out a plan with your creditors directly. You may be surprised at how willing creditors can be to work with you in order to devise a payment plan that works for both you. The truth is that most creditors would rather get paid a little bit over a long period of time than see you go bankrupt and possibly pay them nothing.

Debt consolidation is just one debt solution that you may choose. As with all important financial decisions, it’s extremely important that you investigate all avenues and possibilities before moving forward.