What does Debt Consolidation mean?
Debt consolidation allows debts to be consolidated into single a personal loan, potentially allowing the debtor to extend the repayment period and lower the interest payments. In many cases debt consolidation allows debtors to lower their interest payments by consolidating credit card debt and repaying their debts with a home equity loan. Under this arrangement the home is used as collateral. Unfortunately, if the debtor does not make debt payments the creditor could decide to put a lien on the home.
Is debt consolidation a good idea?
Debt consolidation may not be a viable solution for all debtors. For example, it is best for debtors who are disciplined, who have sufficient equity in property, and who have good credit. Experts warn against debt consolidation if the debtor is bankrupt, does not have the discipline to make the debt consolidation payments, and does not have good credit.
Experts also warn about converting unsecured debt to secured debt, making the debt impossible to discharge if the debtor eventually files for bankruptcy. Debt consolidation may lower the interest charged but actually increase the amount paid through the extended loan period.
Avoiding debt consolidation
Many debtors can avoid debt consolidation simply by making a realistic budget, keeping tabs on what they spend each day, eliminating credit card purchases, and setting up an automatic payment plan each month with their bank to pay more than the minimum amount on credit card debt.
The bottom line: Debt consolidation often treats only the symptom of the debtor's problem without eliminating the actual cause which often is overspending.