Debt Consolidation Guide

By: Charles Essmeier

The concept of debt consolidation is simple. You transfer the debt from one or more high interest loans to a single, larger loan at a lower interest rate. The most popular way of accomplishing this is to transfer debt from a credit card, which often carries an interest rate of 20% or more, to a home equity loan with an interest rate of less than 10%. By doing so, you can reduce your debt payments by as much as several hundred dollars a month. Those taking out home equity loans for such purposes should be careful and be aware of the following potential problems.

Consolidating through a home equity loan trades unsecured debt for secured debt. Credit card debt is unsecured by collateral. Should you fail to pay, the credit card companies can send a collection agency after you to collect their money, but that’s about all they can do.

If you transfer the debt to a home equity loan, the debt becomes secured by your home. If you fail to pay that debt, you could have your home repossessed. For those who have problems paying their bills, this could represent a substantial risk.

Consolidating debt requires discipline. Some spenders cease spending only when their credit cards are at their limit. Transferring debt to a home equity loan clears the credit card balance and reduces it to zero. The debt still exists; the bill just comes from a different company. Once the bill is back to zero, compulsive spenders may not be able to resist the urge to spend more. This will leave them with both a home equity debt and additional credit card debtFind Article, making a bad situation even worse.

Debt consolidation through home equity loans is a great way to reduce debt. Debtors just need to be aware that they are risking their home when they do so and that additional spending discipline is required. Many debtors may benefit from simply canceling their credit card accounts once the debt is transferred to the home equity loan. Reducing debt is always a good idea. Debtors just need to make sure that they don’t run up more debt or lose their home in trying to do so.

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