Secured Debt Consolidation

If you have equity in your home and you’re overextended with credit card debt with high interest rates, then it would be foolish for you not to consider taking out a home equity loan.  After all, it’s probably the only sensible financial product out there that can lower your debt without affecting your credit. In general, if it is available to you, then you may want to use a home equity loan to ease your debt burden before anything else, including debt settlement consolidation.  Like most things, however, there are downsides to getting a home equity loan or refinancing your mortgage that must be considered before choosing a solution that’s appropriate to your individual situation. 

1.  Bear in mind the possibility of foreclosure.  If it’s even a question whether you’ll be able to afford the monthly payment on your debt consolidation loan, then avoid it at all costs.  By securing the loan with your property, you could be risking your home when wide array of options are already available to you.  On a related note, if your basis for being able to afford the monthly payment rests on things like, “Once I close that big deal at work next month” or “I should get my promotion by then”, then you should definitely reconsider.  When it comes to debt, remember Murphy’s Law:   “Anything that can go wrong, will go wrong.” 

2.  With a debt consolidation loan you’re impacting your ability to discharge the debt in a bankruptcy.  That is, if something comes up down the road and your income is suddenly reduced, filing bankruptcy won’t even help since you converted all your unsecured debt into secured debt.  On the other hand, if you had just kept the debt on your credit cards and your income was suddenly reduced, you’d still have bankruptcy as a possible alternative for eliminating the debt and thus been able to protect your home.  This situation would matter if you could afford the payment on your first mortgage, but you had a home equity loan payment that pushed you over the edge.  More specifically, this applies to consumers from states like Texas, Massachusetts, Florida, Oklahoma, Iowa, and Arkansas because they offer large homestead exemptions for bankruptcy filers.  This doesn’t necessarily pertain to states that don’t offer much protection in the way of your home in a bankruptcy, such as Illinois. 

3.  Many consumers that get debt consolidation loans find that several years later they end up in the same situation----buried in high interest credit card debt and only able to afford the minimum payments.  The problem lies in the fact that debt consolidation does not address the root of the problem, and therefore, consumers continue to overspend and charge things to their credit cards instead of living on a cash basis.  In a lot of cases, debt settlement consolidation helps a consumer to learn to live within their means by forcing them to close all their credit card accounts.  If your problems lie mostly from overspending and poor budgeting, then a lot of times a debt consolidation settlement program is a more appropriate option. 

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