Debt consolidation was designed to help individuals who are drowning in debt to regain control of their financial lives. Consolidating debt gives individuals the chance combine their various monthly payments into a single monthly payment that is usually lower than the sum of the individual monthly payments on the same debt. Payments on consolidated debt are also quite often at a lower interest rate than the rates offered by the individual lenders.

Warning Signs

If one or more of the following applies to you, debt consolidation may be in order:

* you pay for normal living expenses with credit;

* you transfer balances around from one credit card to another;

* you can only afford the minimum monthly payments on your credit cards, and no more;

* you have maxed out one or more credit cards;

* you find yourself spending more than half your income to pay your monthly credit card payments;

* you're looking to open yet another line of credit in order to better manage your current debt, expenses, and lifestyle;

The following is a breakdown of some of the best and most common ways to consolidate debt:

Debt Consolidation Loans

The traditional way to consolidate debt is to take out a debt consolidation loan. This is a personal loan that is unsecured, and therefore considered riskier other types of loans. Lenders therefore will usually charge higher interest rates for these loans, the advantage to getting such a loan being the single (and hopefully smaller) monthly payment. People with lots of debt may find they have difficulty getting a lender to give them a debt consolidation loan, however, and may need to look further to find a viable debt consolidation solution.

Debt Settlement

Debt settlement agencies help you resolve debt by becoming the intermediary between you and your creditors, You stop paying your various creditors and instead make a single payment to the debt settlement agency. The agency then becomes the one your creditors contact rather than you. They negotiate new payment and settlement terms, typically for half (or less) of the total balance you owe. Your credit rating does not go unmarred with this solution, however you will be able to get out of debt in just a couple of years this way. You'll just have a little difficulty in obtaining future credit for a while afterwards. But not nearly as much as if you had to declare bankruptcy.

Home Equity Loan or Line of Credit

By taking out a home equity loan or a home equity line of credit, you can borrow money against the value of your home (minus the amount of money you still owe on the home) to pay down other, higher interest debt, such as your credit cards.

Cash-Out Refinance

Another way to utilize the asset of your home to help you climb out of debt is to refinance your current mortgage and borrow more than the amount you currently owe on the home. This extra money will be delivered to you in the form of cash that you can then spend on whatever you want (hopefully, to pay down your other debt).

Key Points on Consolidating Debt

Whichever option you choose to consolidate debt, just be sure that the new debt is cheaper than your current debt. In other words, after fees and finance charges are taken into account, will you be paying less to borrow the same amount of money through debt consolidation than you currently do with your debt dispersed as it is.

Once you've gotten a handle on your debt, the next step to financial freedom (and to keep you from winding up in the same position again), take the money you've freed and start building up an emergency fund.