Reducing Credit Card Debt Part 1 - Debt Consolidation Loans

You've seen the ads everywhere you turn. "Consolidate your debts into one easy lower payment." "Interest rates killing you?" "Trade those high-interest payments in for a new low one!" They are pervasive on the television, and even worse on your email account. But are they advertising anything that is of real worth to you or is it just more fuel for the fire?

The basic idea behind debt consolidation loans makes sense on the surface.  The ability to bundle a large amount of loans and debt into one lower-rate loan sounds smarter, more convenient and a step in the right direction.  Maybe.

There are categories for homeowners and non-homeowners, and the difference basically is that if you have any sort of substantial assets (a home) you can get better interest rates and terms overall if you are willing to put another debt on your home. If you don't have anything of worth to back this loan up, you'll be paying very high interest rates and in fact the payment may not be much different than you presently are paying. The rates you will be paying on a loan like this will depend on several things. Is the borrower a homeowner, and is the property used as collateral for the new debt consolidation loan?  What other assets, if any can be used to secure the loan? What is the borrower's credit history?

The concern with attaching your real estate to this type of loan as collateral is that while you may well be exchanging a higher rate for a much lower rate, (because of your home as collateral) the overall debt repayment may be many thousands higher at the end of the day. Not only that, but switching from unsecured debt to a secured debt makes your primary asset, (your home), vulnerable in the event of a further monetary disaster. In other words, you could lose your home, whereas you wouldn't if the debt had not been attached to your real estate. The main point here is, think long and hard before encumbering your house. It may well be worth much more interest in the short term for a debt consolidation loan than to risk your most precious asset.

One of the primary dangers of credit card debt consolidation loans lies with the borrower. While a loan of this type may erase credit card balances overnight and the new loan may even be tax-deductible, the real danger lies in the behavior that got the borrower in trouble in the first place. Many times a borrower will use a loan like this, erase the high interest credit card debt, and then start racking up charges on those very same credit cards again.

If a debt consolidation loan is being considered, count the cost in terms of financial vulnerability, and try to see about changing the habits that led to this point in the first place. You'll thank yourself later!