Q: How much does debt consolidation cost?

A: Debt consolidation can cost a lot, a little, or nothing at all. In fact, an ideal debt consolidation actually saves you money -- that's the whole point!

It really depends on what is meant by "debt consolidation." If you are referring to a debt consolidation loan, then the interest rate should be lower than the composite (average) interest rate you had been paying on your unconsolidated loans. However, even if this is the case, a debt consolidation loan may still be costing you due to a mismatch of maturities. For example, if you had three five-year loans at 18% interest, consolidating them into one ten-year loan at 17% would still cost you more in the long run, even though 17% is less than 18%.

Another type of "debt consolidation" is using a credit counseling company to establish a debt management plan (DMP). In this case, again, the idea is that you should be saving money. Credit counselors should be able to get your creditors to lower your interest rates and forgive old late fees, etc., or why else would you bother? However, there is still a cost, even if you are saving money on a net basis. Credit counselors charge all different types of fees, but a common practice is to charge you one month's worth of debt payments.

Finally, it should also be noted that certain types of debt consolidation can cost you a lot of money. First, we discussed debt consolidation loans, which are presumably "unsecured loans," and then we explored debt management plans, which aren't loans at all. But the third common type of debt consolidation is the secured loan -- most typically, home equity loans. Here, you might be able to really get your interest rates down, but at what cost? If you're unable to make future payments, you've now put your home at risk. With plain-old credit card debt, which is unsecured, your home is never up for grabs since most states have homestead exemptions. Although home equity loans can really help you cut your monthly interest Other Debt Consolidation FAQ's

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Please Note: Unsecured debts are debts such as credit cards, personal loans, lines of credit, store cards, medical bills, and utility bills that are not secured by collateral. Mortgages and car loans are NOT considered unsecured debt.
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