A consolidation loan is a loan that can help you take small or large amounts you owe to different people and place the debt obligation with one company, instead of in the hands of the several different lenders. People may choose this option if they’re refinancing a house and want to add the money they owe to various creditors to the money they owe on their home. Alternately, some people contract with a new lender to take out a personal loan, which consolidates all their debts. Sometimes, a consolidation loan can save people money, especially if they get loans at an interest rate lower than the ones on the debts they currently owe. However, this is not always the case.

A straightforward consolidation loan that many people undertake is consolidating their student loans after graduating from college. These tend to be very easy to get and they aren’t solely based on creditworthiness. It can be helpful to only make one student loan payment a month, instead of making several payments to different lenders.

As with any consolidation loan, it’s important to understand if consolidating student loan debt changes anything about the debt you owe. For instance, taking on a higher interest rate or stiffer repayment terms may not be in your best interest. Make sure to crunch the numbers so that such a loan is to your advantage, or doesn’t put you further in debt. Be certain to figure in things like loan origination fees, if they exist. Look at all the companies or agencies to which you owe money and see which truly has the best deal for a consolidation loan.

Other people opt for a consolidation loan when they owe money on a number of different credit cards. This again needs to be approached cautiously. You should look at all your current lenders, the interest you pay, and the fees involved in loans you might take out to create an arrangement with a single lender. Consolidation loans do not always work to the borrower’s advantage. This is particularly the case when some loans have 0% or very low interest introductory offers, but then jump to a much higher rate of interest at a set point. Read all the fine print before deciding whether consolidating debt will cost you more or less money in interest payments or loan fees.

Another thing to watch out for, particularly when you’re adding your debt to a home mortgage, is the idea that you’re free from debt because you’re not making a lot of small payments. Some people consolidate debt only to indebt themselves again to the same amount in a couple of years time. If you do get a consolidation loan, it’s a good idea to end your relationship with most of the creditors to whom you no longer owe money. Get rid of the department store credit cards, and perhaps keep one credit card for emergency use only. Try to work on the principal of cash payment, and try not to go back to credit card spending when it can be avoided. In the end, creating more debt will cause more harm, since now you will have a consolidation loan to pay for and again need to make many credit card payments each month.