Will A Consolidation Debt Option Make Things Worse?
Doug Smith

Defined Tag: Consolidation Debt.

The use of a consolidation debt strategy to pay off existing debts seems the perfect way to become debt-free. Many consumers with heavy debts feel that consolidating their debts is the best option. Others feel that the risks of consolidating one's debt outweigh the advantages. Low lending interest rates have many consumers trying to consolidate what they owe. The allure of getting a low-interest consolidation loan to pay off past high-interest debts is attractive. If you are not careful, however, you can consolidate yourself deeper into debt.

How can consolidating your mortgage, credit card bills, car payments, and other bills you owe into a single, lower monthly payment possibly be bad? Homeowners, the easiest way to obtain a debt consolidating loan is through a Home Equity Line Of Credit (HELOC). Home equity loans are secured by the value of your home, so if you have trouble paying the loan back, then the lender gets your house.

In a HELOC, the bank loans you money, and you essentially agree to give the bank your home if you can't pay the money back. Once the bank loans you the lump sum of cash at a low interest rate, you take that money and pay off your high-interest loans, such as mortgages, car payments, credit cards, and other debt. Once all those debts are paid, all you have to do is make one monthly payment to your bank to repay the home equity line of credit. Converting many high annual percentage rate (APR) payments into one low-interest payment is called debt consolidation.

Consolidating all your debts sounds like the perfect solution, until you have the big lump sum of cash in your hand. If used properly, that money will be used to pay off your other debts. However, some people cannot avoid temptation, and instead spent their line of credit on luxuries instead of on consolidating their bills. Now those people are in even more debt, and in greater risk of losing their house. If they cannot pay their new debt burden, the bank will repossess their home, and sell it to recover the loan amount.

There are other methods of bill consolidation without using your home as security. These loans will likely have a higher interest rate, because no collateral is used to secure the loan. Be sure to check that the interest rate on your consolidation loan is lower than your other debts, or you just might end up paying more interest, not less. You haven't consolidated your debt, you've increased it!

Even if you use your home equity loan responsibly and consolidate your other debts as you are supposed to, there is still some risk. You have simply converted many high-interest monthly payments into one. The bank essentially paid your other bills, now you must repay the bank. If you are sure you can make the loan payments reliably, then using a consolidation debt option may be right for you.

Copyright 2008 by Doug Smith. All Rights Reserved Worldwide. Unauthorized Duplication Prohibited. Not Intended As Professional Advice.