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Debt consolidation loans are designed to help people pay off bills and pay down debt. A debt consolidation loan may appeal to you because it is much easier to make one payment instead of making individual payments to all of your creditors every month. But the reality is that it is hard to borrow your way out of debt. Before you rush out and apply for a debt consolidation loan it makes sense to do a quick analysis of your situation.

If more than 20 percent of your disposable income is going toward unsecured debt repayment, you should act to reduce your debt load. A debt consolidation loan can help, but only if it’s a good deal financially. When evaluating whether a debt consolidation loan is a good deal financially, consumers should perform the following analysis.

What is the interest rate of the consolidation loan?

The interest rate of the debt consolidation loan should be less than what you are currently paying on your debt. However, realize that you may be able to negotiate lower interest rates on your current accounts by contacting your creditors.

What is the length and terms of the consolidation loan?

Often debt consolidation loans offer low attractive monthly payments by extending the loan for a number of years. In these cases, you can end up paying substantial sums in interest. Calculate how much your total payments will be and ask for a breakdown of principal and interest.

Am I swapping unsecured debt for secured debt?

When you get a home equity loan, you take out a loan against the equity you own in your home. The advantage of this type of loan is that the interest charges are often tax-deductible if you used the money to improve your home. However, you are putting your home at risk for foreclosure if you are unable to make the payments.

Am I willing to make lifestyle changes?

All too often, people take out these types of loans, only to run up their credit card balances within a year or two. To be successful, you have to make significant lifestyle changes and alter your spending patterns.

Also, it is important to remember that there are alternatives to debt consolidation loans. Consumers should consider collecting on money owed, selling-off unneeded items, and/or establishing a strict budget. If you experience difficulties creating a workable plan, seek professional help.