Debt Consolidation Advice & FAQs

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 another form of debt management may be better

How can I determine if a loan is right for me?

Start by understanding what a debt consolidation loan is and how it fits into solving your personal debt situation.

Isn't a debt consolidation loan just a loan where you get money to pay off your bills?

No. In alot of cases a debt consolidation loan is structured as a second mortgage on your primary residence.

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?

There is nothing wrong with lower payments as long as you understand the mathematical reasons why the payments will be lower. Take a hard look at your current debt including the payments and the interest rates

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 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 secured loans, 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.

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THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.

All loans subject to status in the UK to home owners aged 18 and over and may be secured on property.

OUR TYPICAL, VARIABLE RATE IS 10.9% APR. RATES RANGE FROM 7.25% APR to 27.60% APR

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