Debt Consolidation

Debt consolidation is a popular topic these days. The average American carries nearly $10,000 in credit card debts and having credit card debts of $100,000 is not all that unusual. New government legislation is going to make it harder for those with problem debts to file for bankruptcy, so many families are trying to find ways to consolidate debt instead. One of the most popular ways to consolidate debt is through a home equity debt consolidation loan, but borrowers need to be careful, as there are potential problems with borrowing against your home to consolidate other debts.

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

Consolidating through a home equity debt consolidation loan trades unsecured debts for secured debts. Credit card debts are unsecured by collateral. If you fail to pay, the credit card companies will send a collection agency after you, but that’s about all they can do. If you transfer your debts to a home equity debt consolidation loan, these debts becomes secured by your home. If you fail to pay these new secured debts, you could have your home repossessed. For those who have problems paying their bills, this could represent a substantial risk.

To consolidate debt requires discipline. Some people only cease spending when their credit cards have reached their limit. Transferring debts to a home equity debt consolidation loan clears the credit card balance and reduces it to zero. These debts 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 new home equity debts and additional new credit card debts, making a bad situation even worse.

For some, debt consolidation through home equity loans is a great way to reduce their debts. 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 these debts have been transferred to the home equity loan. Reducing your debts is always a good idea. Debtors just need to make sure that they don’t run up more debts or lose their home in trying to do so.