Debt consolidation loans should be used only when everything else fails. If your more savvy than most and have seen your financial problems coming, you might just pull it off. Lenders usually like you to put up collateral. (That means they can take your house, car, or first born if you don’t pay them back.) However, if your credit is already on the rocks, chances are the lender will give you that phony sympathetic smile (mortician comes to mind) as he boots you out the door.

You’re still not out of options though. If you usually pay your bills and haven’t bilked your relatives or friends out of any money, you might get one of them to cosign for you. (That means they promise to pay if you don’t.) Whether you can do this or not depends on your relationship with the person you ask and his or her credit. I have friends and relatives I would do this for in a half a heartbeat. On the other hand, I would rather have my skin ripped off in one-inch strips than cosign a loan for others. Keep in mind these loans are designed to lower your monthly payment to something manageable and will be at a lower interest rate than the 34% or more that the credit card companies are dinging you.

The three types of debt consolidation are home equity or home lines of credit, zero interest credit cards, and the true debt consolidation loan. With the home equity or line of credit, you put your property at risk of foreclosure. Zero interest credit cards are usually for a relatively short period of 6 to 12 months at which time the interest can pop right up there with the cards you now hold. Plus, the chances of qualifying for enough to pay off all existing debt may be a problem. Plus, if you default on these cards, guess what? Up goes your interest and you’re right back where you started with the balance transfer fee of 2 to 3 percent of your initial loan added.

The loans referred to as debt consolidation loans offer money with no collateral to back it up. If you have had trouble paying your bills, that will be reflected in your credit report. That means if you get a loan at all, chances are it will be at a higher rate of interest. If you try for one of these loans shop around for the best deal. There can be significant differences from, say, a bank and your local credit union.

The most important thing to remember is that you will end up right back in debt like the 70% of other people using this type of loan if you don’t change your spending habits. Do your very best to solve the problem before you borrow to bail yourself out of a borrowing problem. Remember rule #1: Budget baby, budget. Use a credit counselor if you have a problem getting on track, check out the Internet for suggestions, pray to the gods of finance to smile down on you (didn’t work for me). But be proactive. It’s your financial life and you need to take care of it.

The next post will be on the totally ugly business of bankruptcy.