Debt consolidation is one of the few financial remedies a person can avail to prevent further financial problems. In gist, debt consolidation will allow the debtor to pay off all outstanding loans. The debtor would then have a single payment responsibility. Instead of paying different companies, the debtor would just have to work with a debt consolidation company.

But there are things that you need to consider before signing the agreement to go into loan consolidation. Debt consolidation can definitely work to your advantage but it can also cause further financial problems if you are not careful in using its advantages.

1. Debt consolidation doesn’t reduce your principal debt – no company in their right mind will reduce your principal debt. What you will do in debt consolidation is to transfer your debt to another company with a lower interest rate. The principal loan is still there and you need to pay them on time.

2. Debt consolidation is not necessarily the answer – debt consolidation might be the answer to your financial problems but there might be better answers to your problems. Seek government assistance first before approaching any private company about debt consolidation or its better counterpart, debt forgiveness.

3. Debt consolidation should be a lesson – you are currently in a dire financial situation for a reason. Let this financial transaction be a signal that you have to make some aggressive changes in your lifestyle. A simple tip: spend less and earn more.

4. Scam, scam, scam – before you sign or give out any information, be sure that you are working with a legitimate debt consolidation company. Check the Better Business Bureau website, get their phone number and physical address and ask if they are tied up to any other financial institutions to ensure their validity.

5. Renegotiation not consolidation – before you panic about your mounting debt and seek assistance through debt consolidation, talk to your lenders and/or credit card issuer if you could renegotiate your loan. Because of recession, many financial institutions are allowing aggressive negotiation of debts which could even result to reduction of principal loan.

6. Check with your lender first – even though debt consolidation could be done in an instant, the fees and penalties could cripple you. Some debtors do not allow debt consolidation because they will lose the cash flow. Others require fees to be paid before you can actually transfer your loan.

7. Offer collateral – a secured debt consolidation plan is a lot better than unsecured debts because of the lower rate. Ask the debt consolidation company if you could offer some of your properties such as your car, boat or anything valuable. These items could be used as collateral and be granted with a secured type of debt.

8. Opt out on cash out if you don’t need it – remember the word NEED. It’s quite tempting to take case out in debt consolidation since you will have to pay it back slowly. But this will only become an additional burden especially if you spent the cash out on something totally unnecessary.

9. The NGO alternative – there are non-government organizations that are set up to assist those who need debt consolidation. Look for these organizations to know if you’ll qualify to one of their numerous programs including debt consolidation with lesser interest.

10. Avoid taking out your savings – if you know that you’ll be consolidating in the future, its better not to take out some of your savings. Cashing in some of your 401(k) should only be considered as the last financial solution if you can’t really find any help from various financial institutions, the government and non-government organizations.