Dangerous Debt Consolidation Loans

On the surface, debt consolidation loans offer cash-strapped consumers some relief from high interest rates. Looking deeper, consumers should be wary of both the professionals and cons of this fast growth practice. In their simplest forms, debt consolidation loans are refinance agreements, second mortgages, or home equity loans.

All three loan options allow homeowners to cash out portion of the equity in their homes in order to pay off other debts. For borrowers who have got watched their homes appreciate in value, a debt consolidation loan can eliminate the load of multiple monthly payments without significantly affecting the amount of their monthly mortgage payment. On a mathematical level, debt consolidation loans can do much sense. A home proprietor who fights to do the monthly minimum payments on her 21% interest rate credit cards can revolve those balances into her 7% mortgage. The debt doesn't travel away, but the rate travels down by two thirds. In many cases, she would only go on to pay about the same amount per calendar month for her mortgage, freeing up her cash flow for other uses. As a side benefit, borrowers can subtract a part of their mortgage interest payments from their income taxes each year. Though not a huge savings, many taxpayers love the chance to look forward to a larger tax return.

The danger lies in the borrower's loss of security on two levels. First, if a home should suddenly depreciate, a debt consolidation loan client could quickly happen himself or herself "upside down" on the loan, owing more than than what the house is worth. As long as that borrower goes on to do payments, they'll survive. But, they will be not able to sell their home without absorbing a loss.

For households who need to travel in order to accept occupation transfers or prosecute educational opportunities, this tin be a annihilating blow. Second, although the lending bank manages paying off the customer's outstanding debt, the client must personally fold their old credit accounts. For many customers, the enticement to maintain those accounts unfastened is far too great, and they happen themselves deeper and deeper in debt. In effect, the debt consolidation improved their cash flow, but reversed their financial course.

Without contiguous intervention, these clients often happen themselves on the route to bankruptcy. When investigating debt consolidation loans, see your long-range plans. If you mean to remain in your current home for a long clip and can manage the possible hazard of depreciation, and if you can exercise the self-control to fold out your paid off charge accounts, then a debt consolidation loan may be a sensible option for you.