Signs That Debt Consolidation May Be Right for You

When you are drowning in debt, it's sometimes hard to keep track of all the payments and interest rates.

In fact, with varying due dates and interest charges, it's easy to find yourself constantly juggling finances in order to satisfy your creditors each month.

In such circumstances, a debt consolidation loan may make sense, according to George Poitou, the COO of SCE Federal Credit Union, based in El Monte, California.

"It can help bring the borrower back to a healthy financial situation," he says.

What is a debt consolidation loan?

A debt consolidation loan allows you to take multiple debts and combine them into one loan with a single payment.

"Generally, consolidation loans are unsecured," Poitou says. "But in some cases collateral such as a car may be used to qualify a borrower, or to obtain a lower interest rate."

Once you no longer have multiple payments to juggle, it may become easier to focus on paying down that debt.

You may save on interest costs when you consolidate depending, on your consolidated interest rate.

Signs that you may benefit from a debt consolidation loan

All personal finance is, indeed, "personal." Look at your individual situation and see what is likely to work for you. Some signs that a debt consolidation loan might be right for you include:

• You have a hard time making all of your debt payments on time.
• Your balances go down at a very slow rate because so much of each payment goes toward interest, rather than principal.
• You feel overwhelmed and you aren't sure where to start.

Poitou says a debt consolidation loan also can make sense in some situations that aren't quite so dire.

Avoid the downside of debt consolidation

Once you consolidate your debt and start making payments, it's important to avoid potential pitfalls.

"The most common mistake consumers make after getting a debt consolidation loan is that they accept new credit card offers," says Poitou. "Creditors see that the individual has no credit cards - or just one credit card - after a debt consolidation, and begin to offer credit cards."

Many consumers see these new credit cards, or even the "freed up" cards they just paid off, as "new" money they can access. As a result, they end up in even more debt.

Before you consolidate your debt with a loan, make sure that you are committed to quitting overspending.

It's often a good idea to get on a budget, apply principles of good financial management, and avoid getting new credit until the debt consolidation loan is paid off.