Proper money management with debt consolidation is the most practical solution to your debt problems. A debt consolidation loan can help you maintain sound financial health. It is the most preferred alternative to declaring bankruptcy. It enables you to rebuild your credit rating and make payments without having creditors breathe down your neck or paying high interest rates. Nearly all debt consolidation loans are given in the form of home equity loans. Once you pay your debt, all your payments are consolidated into one monthly payment to the lender, at a lower interest rate. Borrowing more money to pay your bills will not help you to get rid of your debts but a low interest rate will surely help you to pay your bills faster.

Pros of debt consolidation loan:

• A debt consolidation loan will combine all your payments into one payment. According to the statistics, an average American citizen pays 11 different creditors, monthly. Making a single payment will help you in figuring out how much and when you need to pay. You will be able to manage your finances easily.
• Home equity loan, also called a second mortgage, is the most common type of debt consolidation loan. The interest rate of this loan is lower in comparison to other consumer debt interest rates. Since the interest rates are lower, the amount you pay per month will decrease gradually.
• You need to deal with only one creditor. If you have any financial issues, you need to call or visit one creditor, instead of several. This will help you to save on time and energy.
• The interest that you would pay on a mortgage or a home equity loan could be used to reduce your taxes.
• A debt consolidation loan helps to improve your credit rating.
• Although the idea of getting a debt consolidation loan may sound great, it is important to understand the cons involved.
• Make one monthly payment instead of many – It simplifies your financial life if you only have to make on payment every month to one creditor instead of figuring out who to pay, when, and how much.
• Save on fees – Since you only have to make one payment each month, your odds of incurring late fees and interest are very slim.
• Lower interest rate – Since a consolidated loan usually uses the equity of your home as collateral, which makes it a secured loan, the interest rate is lower than that of credit cards or other unsecured debt.
• Longer payment period – Consolidated loans usually have longer repayment periods than consumer loans, credit cards or personal loans. They can even have longer repayment periods than car loans, since homes usually outlast cars.
• Lower monthly payments – The lower interest rate and a longer payment period will reduce your monthly payment significantly.
• Tax deductible – Since the consolidated loan is a home equity loan, the interest paid each month can be tax deductible.

Cons of debt consolidation loan:

• You need to qualify for a debt consolidation loan or mortgage.
• Debt consolidation loan is a secured debt. A secured debt enables the lender to take away whatever was secured for the loan, if you fail to pay back.
• You may end up spending more than what you would have, if you kept to the individual loans. This is due to the fact that the interest rates of these loans are comparatively low.
• Debt consolidation helps to make your payments easier and this may make you resume your old spending habits and the use of credit cards all over again.
• Puts you home at risk – With a consolidation loan you are putting your home up as collateral. While your previous debts were not secured, this loan is guaranteed by the equity in your home. If you fail to keep up with your payments you risk losing your home.
• Prone to take on more debt – Since your credit cards are now debt free, you can more easily start overspending and get into financial trouble again.
• Spend more on interest – While your overall interest rate will be lower, the fact that you will be taking longer to pay off your debts means that you will end up paying a lot more in interest over the long term.

There are many advantages of debt consolidation but as the saying goes prevention is better than cure. So it is always important to inculcate disciplined spending habits. As a thumb rule, always spend less than what you earn so that your finances are under control and you save enough for the rainy day.