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Loosely defined, debt consolidation is the combination of most or all of your debts. These debts are typically from unsecured credit cards and can be rolled into a single payment that is normally much lower than the sum of the payments you are making now. So how do you determine if debt consolidation is the right solution for you?

Debt has a way of sneaking up on you. Mortgage loans, auto loans, credit cards and even your medical bills lead you into severe hardship. But it is possible to get out of that situation and become debt free in a relatively short time.

You may be required to restructure your spending habits and/or lifestyle. You can do this by consulting a debt counselor.

At first, you may feel a little unease, but the end result is well worth the adjustment. Just think how you are going to feel with all your debt wiped clean. You may also gain a tax advantage as the interest on a consolidation loan for your home might be deductible on your income tax return.

First, you must understand what a debt consolidation loan is. Debt consolidation loans make it possible for you to pay several accrued debts with one low payment. Reasons to consider a consolidation loan include:

To secure lower interest rates.
To secure a fixed rate on those debts.
To achieve the convenience of managing a single payment opposed to several. It's just easier.

Debt consolidation loans can move a number of unsecured forms of debt, like credit card debt, into another unsecured type of loan. Most often, though, the consolidation loan is secured with an asset, like a home or a car.

This asset serves as collateral and you agree up front to the sale of that asset in the event you cannot make the payments for any reason. By using collateralization, the lender will most times lower the interest rate. Without the collateral, your rate could soar.

In some cases, debt consolidation companies are able to discount the loan amount. If the debtor is facing the possibility of bankruptcy, a debt consolidator may purchase the loan from the original lender at a discounted amount.

The interest rate on debt consolidation loans may be higher than those on home equity loans but they are still significantly lower than ANY credit card APR out there.

For example, if your debt is divided between several cards, you could have interest rates anywhere from about 8% up to as much as 32%.

In some cases, where the debtor has a good credit rating AND a decent amount of equity built up in their home, you can expect rates close to those for a first mortgage. Presently, that stands around 7%. On the other hand, debtors with a poor credit rating can look for rates to rise significantly, probably in the range of 15% to 18%.

Most credit counselors offer a free consultation via phone. Take advantage of this and you could find yourself with some freed up cash every month.