What Is Debt Consolidation and How Can it Give Relief from Debt?
The phrase debt consolidation means a couple of different things to people. Some think that debt consolidation is when you hire a credit counseling agency to negotiate lower interest rates with all of your creditors and then they disburse a single monthly payment you pay to each creditor. Others think of debt consolidation when you take out a loan to pay off a loan and use the equity in your home as security. The first definition is actually a debt management plan and the latter definition is a debt consolidation. It is a basically a single low-interest loan taken out to pay off all of your high-interest unsecured consumer loans. And, it most always uses the equity in a home to secure the debt. Let’s look at some other characteristics of a debt consolidation loan:
It converts unsecured debt into secured debt. One basic fact of lending over time is that in order to get a low-interest loan, there usually must be collateral. So in order to get a low-interest debt consolidation loan to pay off your high-interest credit card loans, you use the equity in your home as the security in the event of default. Some smaller consolidation loans might take an automobile as collateral however more money than that is needed most of the time. The bottom line is that your debt takes on a whole new dynamic and that is it is now secured.
Secured debt now means they can get something from you easily. When you fall behind in credit card payments and they get so out of hand that you can do nothing about them then only a few things can happen. Collectors will call you. You might get sued and a default judgment will get placed on you. Your credit report will be damaged. But if you make the payments on your house, you keep it. When you pay off your credit cards with a home equity debt consolidation loan, it is like having another mortgage on your house and if you fall arrears you can now lose your home.
A debt consolidation loan can be a good solution as long as you stay disciplined. You can pay off your debt at a lower-interest and fixed payment. As long as you keep up with the payments and don’t run the balances up on your credit cards, everything should be okay. The problem is that many see those refreshed credit cards and start spending on them again. If you believe you might have a problem with this, then it would be advisable for you to seek counseling from a reputable credit counseling service. Remember that life is never predictable and all it takes is a job loss or major medical disaster to send you into a high debt situation but this time your home would be at risk.