The term debt consolidation is being heard more and more often these days, as interest only loans financially strap debt-ridden families and many rely on credit cards to make ends meet. The result of plastic-oriented consumerism may be a budget that stretched to the limit. When there's no other option, debt consolidation may enter the picture.

The following frequently asked questions on debt consolidation should help you to get a good overview of the process and the steps involved, as well as some of the pitfalls that might await you if you are not careful.

What is the advantage of consolidating my debt with such a company?

If it is a reputable company, you'll usually be out of debt in three to six years. Additionally, you will be able to make one lower payment to the debt management company who will then disburse it to all your creditors. With careful management, you should have a good handle on your finances by the time you are out of debt; take care not to make the same mistakes again.

Are there disadvantages of consolidating my debt with a debt consolidation company?

Absolutely. Your credit report may have a notation that you have renegotiated your credit terms, which may be a red flag to future creditors and may adversely affect you when you shop around for a car loan or mortgage. Additionally, if you are living above your means and need that credit card to survive, plan now and either reduce your expenses or increase your income, so that you can do without it.

What is debt consolidation?

This basically means you take out one loan to pay off several smaller ones. The smaller loans can be personal loans, but may also refer to unsecured creditors, such as credit cards, medical bills, or student loans.

I don't want to take out a home equity loan. Is there still a loan product for me?

If you do not want to take out a loan against your home, you could apply for an unsecured personal loan. A local lender, such as your bank, may do this, or you can contact a lender online via the Internet. If you decide to go this route, make sure you read the fine print and understand the intricacies of the loan, such as the repayment terms, the interest rate, whether or not you incur a prepayment penalty if you pay off this loan early. Also make note of whether your interest rate is fixed or variable.

What kinds of personal loans are available for debt consolidation?

Some personal loans will be revolving lines of credit; these have an open-ended repayment date and a variable interest rate. Others will be a traditional loan with a fixed interest rate and a specified number of payments.

What do I do if I do not qualify for a loan and do not own a home?

In this case, you might be a good candidate for a debt consolidation company. While these companies do not make loans, they will contact each of your creditors to negotiate lower monthly payments, lower interest rates, and perhaps even a reversal of late fees you already incurred. They hay also be able to re-age one or more accounts on your credit report to move them to a current status. In return, they may require you to pay a small monthly fee to them, to cut up your credit cards, and to avoid incurring more debt.

Why does the lender ask if I am a homeowner?

If you are a homeowner, you will most likely be able to take out a secured loan against your home to pay off these smaller loans. If you decide to do so, the loan is called a home equity loan. The advantage is that the interest may be tax deductible - whereas the credit card interest most certainly is not - but the disadvantage is that you are putting your biggest asset, your home, up as collateral. In order to sell it, both the mortgage and the home equity loan have to be paid off in full before you can realize any profit from the sale.