The so-called Bill Consolidation Loans are advertised widely. Loan companies promise that such loans can be valuable because they lower a family's total monthly debt payment, thus leaving more money in the budget at the end of each month. This may be true in some cases, but there can be serious consequences to trading several small debts for one large one.

Consolidation doesn't mean you owe less money. In fact, in most cases you will owe substantially more because it will take longer to pay off the loan. You will pay more in interest even if the interest rate stays the same. In addition, you may have to pay an even higher interest rate for the new loan, increasing your total debt even more. Either way, in the long run you will pay more.

By consolidating, you may give up important legal rights. If you have purchased merchandise on credit, you may have certain rights against the seller if the merchandise is defective. If the seller assigns your debt to a finance company or bank you may be able to assert those same rights against them. For example, if you buy a vacuum cleaner that carries a guarantee on credit and the vacuum cleaner company turns your note over to a loan company, you may be able to force the loan company to honor that guarantee, even if the vacuum cleaner company goes out of business. This is because in many situations your rights travel with your debt.

The documents you signed for the vacuum cleaner give you rights as well as obligations. These rights must be observed by whoever is collecting the money for that particular debt. However, by paying off that debt with a consolidation loan you give up your rights against the finance company. The loan papers you sign will not have any guarantee for the vacuum cleaner and you might have to continue to pay even if the vacuum cleaner stops working.

Also when several loans are consolidated and paid off by the new loan, the payoff amounts may be greater that you thought. This is because most consumer loans permit the lender to use a formula that "frontloads" the interest (allocates most of the finance charge to the early part of the loan) to determine how much of the original finance charge the lender gets to keep. The effect of this formula is to make it cost you more to pay off the loan early.

Taking out an entirely new loan may also mean that the lender may ask you to put up more of your property as collateral. You might even be asked to put up your house as security for the new loan so, if something should prevent you from making payments on time, you could lose far more than if you had not consolidated or refinanced. To determine if your legal rights would be adversely affected by any loan, consult an attorney before you sign any papers.