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 is whether a debtor can and should use the equity in their home to pay out their consumer debt. Although this was the topic of a recent article, borrowers should always use their equity if it means improving their financial wherewithall. The reason? Cutting total interest costs paid to lenders and improving monthly cashflow for the household.

Whether debt consolidation makes sense in this case really depends on the debtor’s determination. If the debtor can avoid future consumer debt, then it has been; otherwise, racking up additional consumer debt only results in an erosion personal net worth and the underlying issue is not debt, but bad spending habits.

Second, if the debtor cannot secured a loan with home equity they may have to resort to an unsecured debt consolidation loan. In such cases, unsecured debt consolidation loans probably will not yield much better rates. So the question to ask will be whether or not a consolidation will improve cashflow.

For debtors who have only this option available, it is relatively easy to calculate whether debt consolidation makes sense. All the debtor needs to do is add up all existing payments and compare that figure with the payment on the new loan. If the loan payment is less, than the debtor will improve cash flow. However, will such an improvement be “enough” to carry the debtor from month to month? If not, the problem may be bigger than something a debt consolidation loan can resolve.

Without question, consolidating consumer debt with home equity provides the ideal solution to debtors. In instances where there is no home equity or the equity is not enough, debtors need to work harder to determine whether debt consolidation makes sense with an unsecured loan. On such loans, rates will be higher and repayment terms shorter, meaning higher payments than, say, a refinanced or second mortgage. Since rate is the only controllable factor, debtors need to find the lowest-rate loan possible (see below) so that payments are lower.

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