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Determining if consolidation loans are the right decision for you requires serious thought. As with any decision of magnitude, carefully weighing the pros and cons is important.

The Pros of Consolidation Loans

Consolidation loans allow you to lower your monthly payments. Lower monthly bills can help strengthen your cash flow. Or the surplus can be used to pay down your mortgage principal, allowing you to pay off the total amount owed in a shorter period. The consolidation of consumer debt into one loan means you have only one payment to make each month. Also, the terms of consolidation loans can be longer than individual loans, giving you a longer time to pay back the money borrowed. Research your debt consolidation options.

Consumer debt, such as credit card balances or charge accounts, generally carry higher interest rates than a mortgage. Consolidation of consumer debt into your mortgage allows you to enjoy the associated lower interest rates. Additionally, consolidation loans that are associated with your home mortgage may be eligible for tax deduction. Interest paid on a home equity loan is usually deductible up to $100,000 – you should, however, consult a tax professional for more information. You may be able to decrease your interest rate further by opting to have the payment debited automatically from your savings or checking account.

Uses for Consolidation Loans

Credit Card Debt

Bill consolidation should begin with a look at your outstanding balances. In all likelihood, your credit card debt should be the first target of bill consolidation.

Credit cards are easy to come by, easier still to use, and come with relatively high interest rates. Paying the minimum can create a vicious cycle: You pay the interest on the debt but never manage to reduce the principal while adding new charges to the total.

If you suffer from high credit card debt, consider giving yourself a clean slate by paying off these creditors with money from a bill consolidation loan or a home equity line of credit.

A word of warning: Falling into the credit card trap is all too easy. Once the plastic slate is wiped clean, you can be tempted to use your cards again and the bill consolidation effort will have been wasted. Close credit card accounts you don’t plan to use, or if possible, tuck those credit cards away and keep a zero balance, which can help improve your credit rating.

Student Loans

College grads whose student loans were disbursed after 1998 can take advantage of record low interest rates. The rest of us, however, struggle to pay our debt locked in at eight percent.

With mortgage rates at record lows, consider bill consolidation by rolling your student loan into your mortgage payment. Depending on the amount of your student loan and the interest rate, you could end up taking fifteen to thirty years to pay it off anyway! You can apply the monthly savings to paying down the principal on your mortgage.

Auto Loans

Auto loans usually come with high interest rates. Don’t be fooled by the popular “Zero Down, Zero Interest” teaser – what will the interest rate be at the end of the zero interest term?

Take advantage of low interest rates by including your auto loan in your bill consolidation plans. Or hunt around, you may find a lender who is offering a low interest rate on auto refinancing. You can save hundreds of dollars.

The Cons of Consolidation Loans

Transferring all of your debt to one lender can have some drawbacks. Consolidation loans can keep you in debt for much longer periods. The “easy” fix of rolling consumer debt into lower interest rate consolidation loans is great if you have established healthy spending habits. If consolidation loans end up freeing you to spend more and rack up additional high interest debt, they may not be the best move. Also, if you are considering consolidation loans, check with your lender to find out if your home loan has a balloon payment – a large sum of money due all at once.