Paying your four maxed out credit cards is tough enough without the added weight of a car loan, a consumer loan and a house payment. How many of us have sleepless nights over making the minimum payment? Surely we have better things to worry about than debt?

Some of us consider debt consolidation loans to be the very best option available to us. These loans pay off other loans or lines of credit. A fair percentage of people have decided a consolidation loan will help them. Those advertisements of happy, smiling people may seem far removed from reality, but perhaps there is a grain of truth in them.

Let us take a brief look at the advantages and shortcomings of these loans.

Advantages

1. You will only make one payment. On average, UK citizens have 11 different creditors and by just making one payment, it would be far easier to budget.
2. The odds of your interest rate being lower than before are very good. The average debt consolidation-type loan is a second mortgage and its interest rate is significantly lower than other consumer debt interest rates. Mortgages are secured debts. These loans allow the creditor to repossess your assets if you are unable to pay up. Credit cards and consumer accounts differ from these loans; creditors rely on your good word and payment history and interest rates are significantly higher than that of a mortgage.
3. The monthly payments could be lower. As tempting as it is, you should not fall into the habit of only paying the minimum monthly amount. Your interest rate will surely be lower and you should have one only payment. This would be much better than having to figure out which creditor to pay in full this month, and which creditor to underpay this month.
4. There is only one creditor to keep happy. Your consolidated loan makes it far easier to deal with queries you may have about your finances. You would just need to make one phone call to a single company, instead of making three or four phone calls to different organisations.
5. Tax breaks. Paying interest towards a credit card may not be very wise. Should you pay that same interest towards a mortgage you can use it as a tax write-off.

Disadvantages

1. It is very easy to get into even more debt than before. The monthly payment is lower than what it used to be, so it is not surprising that there is money – sometimes a nice, big amount – left over at the end of each month. So we do what anyone else would do – we start using our credit cards again. Our spending habits remain the same and we do not rehabilitate ourselves, partly because there is no real need for it.
2. You spend longer paying it off. Mortgages are normally paid off over a long period, some up to 30 years. Do you really want to pay off your car over 30 years as opposed to the normal five or six years?
3. The interest rate creates an artificial sense of liberation. No matter how low the interest rate is, you will end up paying more on this loan. Would it make better sense to keep the smaller loans and pay them off rather than consolidating them into your mortgage?
4. The risk exists that you could lose everything. As long as you are aware that consolidation loans are secured loans that could drastically alter your financial situation, you should be fine. Losing your assets is not fun and in most cases, you would lose your home.

You might find you are just not one of those people who can use a consolidated loan. Or you might be only too happy to get one. Whatever your decision, know what the possible consequences may be and whether it is the right thing to do.