|
The adverts on television make it sound like debt consolidation
loans will solve all my financial problems. Are these loans really
the perfect way to solve my debt problems?
For some UK And US people debt consolidation loans can work
very well. For others they may come with disastrous side effects
and ano.ther form of debt management may be better
How can I determine if a loan is right for me?
Isn't
a debt consolidation loan just a loan where you get money to pay
off your bills?
What
difference does that make?
Most debtors attempting to obtain a debt consolidation loan
face issues with unsecured debt, such as credit card bills.
A second mortgage represents a secured debt. This becomes of
critical importance if things go from bad to worse. In the case
of secured debt, such as a second mortgage, even in a bankruptcy
situation, the creditor has the right to seize the collateral
if the loan cannot be repaid. When speaking about a second mortgage
that would mean foreclosure on the property.
I
intend to make all my payments, why is this an issue?
You may have taken the credit cards with the intention of
paying off the balance each month as well. Good intentions are
fine, but unexpected things happen in life. One of the most
critical issues to analyze before taking on a debt consolidation
loan will be the borrowers ability to weather a financial down
turn. I recommend that anyone taking on a debt consolidation
loan be very comfortable that should they have a health issue,
loss of job or other unfortunate financial surprise that they
would remain able to make the payment for some time on the new
debt consolidation loan. To be even more clear, a debt consolidation
loan means you "bet the house" that you can repay your credit
card debt.
My
monthly payment with a debt consolidation loan will be much more
affordable, what is wrong with that?
What
if a debt consolidation loan would really cure all my problems?
Are there any other dangers?
Yes. The debtor must examine how the trouble began. One of
the most common pitfalls and recipes for the worst of disasters
happens when people take on a debt consolidation loan without
rectifying the true cause of the debt. A typical situation would
play out like this: Individuals get into debt trouble because
they are living beyond their means and supporting their spending
habits with credit cards. A debt consolidation loan seems to
solve things by paying off the debts. Unfortunately, if the
spending habits continue, the individuals find in another year
or two they have run their credit cards up to the same levels
or higher than they were before the debt consolidation loan.
Only this time the equity in their house has all been used up
by the debt consolidation loan. They are unable to pay either
the new bills or the debt consolidation loan and bankruptcy
and foreclosure await them.
What
is the best way to avoid this scenario?
Find out why the debt has truly accumulated. In a case of
irresponsible use of credit cards, after paying off the credit
cards with a debt consolidation loan, cut the credit cards up.
If you need to have credit cards for rental cars, business trips
or on-line purchases consider secured credit cards or debit
cards. Spending on secured credit cards cannot exceed a limit
based on the value of an accompanying savings account. Use of
debit cards require you have money in an account in order to
use the card.
Is there a way to get a debt consolidation loan that does not
require pledging your house as collateral or a way to get a debt
consolidation loan if you do not own a house?
No. You may be able to get an unsecured personal loan, but
unsecured personal loans will always require good to excellent
credit and come with interest rates even higher than debt consolidation
loans. Some people may refer to an unsecured loan as a debt
consolidation loan, but the typical advertising you see on television
or in the newspaper for a debt consolidation loan refers to
one secured by a second mortgage.
Ok,
Mr. Doom and Gloom, are there any good points to a debt consolidation
loan?
Yes. When debt consolidation loans carry a low enough interest
rate payments can be significantly reduced. Many people find
making one payment can be much more convenient that making five
or ten smaller payments. Even if not the best long term plan,
in the short run longer amortizations available with debt consolidation
loans can help with cash flow.
Are
there cases where it's not a bad idea to pledge the house as collateral
for a debt consolidation loan?
Yes, I can envision some situations, particularly in state that
offers very little in way of homestead exemptions for homeowners
in bankruptcy. In some places the equity in ones home is significantly
at risk whether a debt consolidation loan is taken out or not.
When the writing is on the wall that a debtor will lose their
home unless they can clean up some of their financial mess,
a debt consolidation loan can be the tool to save a home.
|
