Considering Debt Consolidation? Read This First

By: Jacky W.

12. Get the right loan

Debt consolidation loans can be secured (backed up by collateral) or unsecured (also often called "personal loans") Secured loans, such as second mortgages, secured lines of credit, or home equity loans, will typically have lower interest rates than unsecured loan. Keep in mind, however, that if you fall behind on a home equity loan, the lender can foreclose on your house. Carefully consider the risk before opting for any secured loan. Unsecured loans are a safer option, because you don't have to risk your house or other assets. If you have good credit, you should be able to get a decent rate (at least compared to credit cards) on an unsecured personal loan.

13. Shop around

Get quotes from several different lenders, and compare the terms and interest rates carefully. Your own bank or credit union is often your best bet, particularly for personal loans, but it's a good idea to shop around. Get quotes in writing so you can compare lenders side-by-side.

14. Compare the total cost of consolidation to your current situation

Don't just pay attention to the monthly payment. That's how consolidation companies lure you in, but even with the lower payment you may end up paying a whole lot more under the consolidation. Instead, consider how much you'll pay for a consolidation loan, including the interest, upfront and recurring fees, closing costs and points (for secured loans), and any tax implications, over the life of each loan.

Choose the best option and then compare it to the total amount you'll have to pay to pay off your current loans (if you were to not consolidate). If you can realize substantial savings on the total cost of the loan, consolidation is probably a good option.

15. Reject credit insurance

Some lenders will attempt to pressure you into buying credit insurance, either by extolling its virtues, implying that your application will be rejected, or hiding it from you. If a lender does either of the latter two, get out of there and file a complaint with the appropriate authorities (in the U.S., the Federal Trade Commission (FTC) handles complaints, as do many state attorneys general). Credit insurance can add a huge cost to the loan, and it generally offers you very little protection. The lender may make the cost seem small by telling you the monthly price, but don't be fooled.

(Part of this article was derived with permission from 'How to consolidate loans' on wikihow.com)