Whether debt consolidation makes sense or not can really only be determined by the debtor. When it comes to a consolidation, debtors have two options, which will be discussed here, but as to whether debt consolidation makes sense, period, will come down whether it improves the debtor’s finances. With that objective in sight, the following considerations need to be reviewed.

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.

In this case, whether debt consolidation makes sense will depend on how the debtor can curtail (or ideally eliminate) future consumer debt. Debtors who simply rack up more and more in consumer debt following a debt consolidation will simply erode their net worth on a continual basis and, truthfully, their problem is not a debt problem, it is a spending problem.

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.

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.