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Who Should Consider a Debt Consolidation?

Aug 17, 2007
Okay. You are in over your head in debt or fast approaching the situation. You see all these advertisements as to how you can consolidate all of your credit cards into one monthly bill by just taking out equity on your home. Sounds good right? It sounds like a way out. But is a debt consolidation right for you? Consider the following in determining if a debt consolidation is the way to go: The most import thing you need to remember is that a debt consolidation loan where your home is placed as security will convert your unsecured debts (credit cards) into secured debts (secured by your home). When we are in the middle of desperate situation, we are quick to jump to place our home as security and start making that "one lower payment each month." But what if you take a financial downturn and can't make that one payment each month? Now they can take your home because it is security on the loan. This is an especially risky situation for those who own their homes outright.

Another point to consider is the cost of a home consolidation loan. Yes, you probably will get a lower single payment or at least one payment but you could be making that payment for 30 years. And yes, the interest rate will be lower but accumulated over 30 years; the load could end up costing you quite a bit.

Some lenders will present to you an option of borrowing more on your home than it is worth. This is a very risky type of move on your part if you go for this. Of course it may be for you and it is your choice but realize what you getting into. Your home will build in equity with time. At the point in time that you take out the loan, it will have a certain value. But let's say the loan is a 125% equity loan. Any equity you build in that home after the loan will get absorbed by the loan itself. If you are aware of that and willing to accept it then this type of consolidation may be for you. Think about it though. Although not entirely the same situation, part of the cause of the U.S. Stock Market Crash of 1929 was people buying stocks on credit hoping that if the stock price rose then they would be able to pay off the creditor and make a hefty profit. But the stocks didn't rise and people had money that in essence didn't exist (but yet they owed) and invested in stocks with no value. That is a generalization but it is somewhat similar to getting a loan on equity that may or may not be realized.

In conclusion, a home debt consolidation loan can be a way out of an out - of - control debt situation. You can get your debt refinanced over a longer period and at a lower interest rate which could be what you need for peace of mind. But be careful that when your credit cards are paid off that you don't charge them up again. Then you have a real tough situation where you could lose your home and be stuck with credit card debt again. Just know what you are getting into.
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For more resources on managing your debt visit: http://www.debtconsolidatecenter.com/
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