When you move to consolidate your outstanding debts, you’ll be obtaining a new loan called a consolidation loan. You’ll pay off the old debts with the new consolidation loan and then have one payment – usually at a lower APR and for a fixed term limit of three to five years.

The lender (a bank or credit union) will pay off your existing debts with the loan you secured and you’ll now be responsible to pay off that loan and any other new debts you might incur in the meantime.

People usually opt for a consolidation loan when they would prefer a lower or fixed APR, pay only one bill rather than multiple or to pay one rate rather than rates that vary. Most types of debts can be consolidated, but people usually choose to consolidate personal loans or credit card debt.

You can choose from two types of consolidation loans – secured or unsecured. A secured loan is based on something you own that has value (an asset) and it should be worth enough to cover the consolidation loan.

An unsecured loan doesn’t require assets to back the loan, making it risky for the lender and you might end up living with a higher APR, but if you don’t have the collateral to offer, it’s a good option.

The first step in getting a handle on consolidating your loans is to gather all of the information about your debts (recent copies of loan statements and other pertinent information) and list them in a way that shows the present balance and interest rates on each credit card.

You may choose to consolidate all your debts or only certain ones such as those with high interest rates, but most prefer to consolidate all of them at the same time. Determine the total amount of the debts you’ll be consolidating and also figure the average APR on the loans by totaling the interest rates and then dividing it by the number of debts you’re consolidating.

After consulting with lenders to decide if consolidation will help you and which loan is appropriate for your situation, apply for the loan. After you’re approved for the loan, make sure you understand the terms. If your application is rejected, consider consulting with a credit counseling organization to formulate a get-out-of-debt plan.

If you get the consolidation loan, you’ll either receive a check or the amount will be deposited into your checking account. Make sure you use that money to pay off the designated debts in full. Never use the loan to make another purchase.

The terms of your consolidation loan will determine your payment and how long it will take you to pay it off in full. Most loans will be paid back in the 3 to 5 years, but some can take as many as 20 or 30 years. Just make sure you get the type of loan that’s best for your situation and that you can easily make the payments.