Debtors who want to determine whether debt consolidation makes sense should consider a couple of things. Ideally, both considerations will lead to improving the financial well-being of the debtor. With an improvement to personal finances as the ultimate objective, deciding whether debt consolidation makes sense becomes a much easier task.

The first option facing debtors is whether they can use the equity in their home to repay consumer debt. This was dealt with in greater in another recent article, but the bottom line is that debtors should use their home equity in order to achieve two things. The first is to obtain a better rate on their total borrowers and the second is to improve cashflow.

What happens next becomes the debtor’s issue, but if consumer debt is not avoided on a go-forward basis, then the debtor is simply deteriorating his or her net worth. In this case, whether debt consolidation makes sense will come down to the debtor’s interest in staying out of debt and putting a real use to the improved cash flow.

The second option that debtors will face will typically arise when there is not enough home equity, or none at all. This leaves them with the only option being an unsecured consolidation loan, which normally come at higher rates. In these instances, debts need to question whether or not such a loan will improve cashflow.

With cash flow as the only possible benefit, deciding whether debt consolidation makes sense becomes extremely easy. Simply compare all currently payment outflows to the payment on the new, proposed consolidation loan. If the loan payment is lower, then the debtor will experience an improved cash flow. The question, however, really becomes whether the improvement is sufficient to the debtor afloat throughout the month. In cases where it is insufficient, debtors will need to examining other options.

Evidently, debt consolidation through home equity makes the most sense when consider both cash flow and total interest costs. When this is not an available option, borrowers need to decide whether debt consolidation makes sense through an unsecured loan. Often, only cash flow will come into question as rates will typically be higher. Options are available through specialized lenders, however (see below) where rates are usually lower than typical unsecured loans.

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