Debt Consolidation Loan Dangers
If youíre deep in debt, getting different debt, in the form of a debt
consolidation loan, may actually be part of the solution. But the most
important part is keeping your spending low enough that your earnings
outpace both your expenses and the growing interest on your debt.
Ironically, debt consolidation loans often make it harder for people to
Here are the three biggest debt consolidation dangers:
Debt Consolidation Loan Danger 1: Expensive surprisesHidden fees and high closing costs often make debt consolidation loans more expensive than their advertised rates might imply. If closing costs increase the APR by more than half a percentage point, the loan is too expensive.
Debt Consolidation Loan Danger 2: Losing your homeA frightening number of debt consolidation loans are either second mortgages or require putting your house up as collateral. While defaulting on unsecured debt such as credit cards might ruin your credit, it is unlikely the creditor will actually seize any of your property. If you take out a secured loan to pay unsecured debt, you're essentially wagering your house (or whatever other collateral you put up) on your financial future taking a turn for the better. If you are having to take out a debt consolidation loan at all, itís unlikely youíve been having a financial lucky streak.
Debt Consolidation Loan Danger 3: No real financial improvementAs hard as it is to admit, your spending and financial planning are what got you into debt. Of course, there may have been unexpected expenses along the way, but if you had adjusted your spending sufficiently, even if it had meant hard sacrifices, you would have been able to get out of debt quickly. Before you take out a debt consolidation loan, make sure you have already started following a budget that will get you out of debt. There are many credit counseling groups that can help.
Using Debt Consolidation Loans SafelyWhen debt consolidation loans are simply the last items in a solid budgeting plan, they can actually help people get out of debt. A reputable debt counseling service can help you put together just a plan. Of course, finding a truly reputable debt counseling service isnít always easy. If the service is pushing you to get a loan through them, or for you to pay your bills through them, the "service" may be just a front for selling loans or making commissions from your creditors for "salvaging" your debts. Make sure any debt counseling service allows you to manage your money and pay your bills yourself. If you do get a debt consolidation loan, watch out for these warning signs that a debt consolidation lender might be trying to sell you an expensive lemon of a loan:
- Interest rates, closing costs, and other fees higher than average.
- Promises that the loan will solve your debt problem for you--only you can do that--or that the process will be easy or painless--getting out of debt never is.
- Requirement that you borrow against your house or other collateral.