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A Debt Consolidation Loan combines into one single loan all your consumer and credit card debts, and other debts which are not secured by collateral.

Generally Debt Consolidation Loans are used to reduce the amount of interest being paid on debt. A Debt Consolidation Loan can also be used to move debt to a loan with credit life and/or credit disability and/or loss of job insurance. As an added bonus, you end up with only one check to write each month instead of one per debt.

You can consolidate debt in a variety of ways:

Debt Consolidation Loan From A Bank or Credit Union

You can get a Debt Consolidation Loan at a bank or credit union.

While it is usually easy to locate a bank because there are so many branches, it may be more difficult to locate a credit union. Following are alternatives for finding a credit union. Be sure to check eligibility requirements.

  • Check with your employer, family members or organizations of which you're a member to learn about local credit unions and to find out if you are eligible to join one.
  • Several web sites list credit unions by ZIP code. For instance:

Be careful. A loan from a bank or credit union only works if the new loan has a lower rate of interest than your credit cards. Most loans of this type charge an interest rate higher that that on your cards, but you may be able to find one that's lower. Rates will definitely be lower if you have collateral you can use to secure repayment of the loan. 

If you are having trouble meeting your monthly credit card payments, don't be lured by consolidation loan offers. Explore whether you're better off working with a consumer counseling agency or working out your own repayment plans with the credit card companies.

If you obtain a debt consolidation loan, only use your credit cards for amount you can pay off the month the bill arrives -- except for unexpected medical expenses or other real emergencies.

Debt Consolidation Onto One Credit Card

The easiest way is to consolidate credit card debt and save a lot of money is to transfer all your credit card balances to one card with a lower interest rate.

Debt Consolidation Loan Using Your House As Collateral

If you have equity in your home, consider using a home equity debt-consolidation loan to consolidate your debt.

The interest rate on a home equity loan will almost always be better than that on credit cards. Pus the interest on home equity loan is likely to be tax-deductible while the interest on your credit card debt isn't.

Just make sure you'll be able to make the payments on a home equity loan. Otherwise, you'll lose your house.

Resist the temptation to spend money unnecessarily until the equity loan is paid down. For example, pay cash instead of using either a debit or credit card. Put your credit cards in the freezer -- to be used only in emergencies. (You don't want to end up with the equity loan plus more credit card debt unless it's due to medical necessity. If you're paying large medical bills, see Uninsured to learn techniques for reducing your medical bills.)

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Debt Consolidation Loan Using A Loan From Family And Friends

It is not a good idea to use your goodwill with family and friends for a debt consolidation loan. It is preferable to save friends and family for an emergency reserve in case you become stuck without other options.

The underlying premise behind a debt consolidation loan is that you can afford to pay the debt. That you are merely trying to reduce the interest and the number of checks you have to write each month. The word "merely" is used only in relation to the purpose for making this transaction compared to asking family and friends to help.

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Debt Consolidation Loan From A Retirement Account

Don't dip into your 401(k), IRAs or other retirement accounts to consolidate unsecured loans. If you're under 59 -- you may face early withdrawal penalties. In addition, money in your accounts is protected in bankruptcy.

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Retirement Accounts