Should Debt Consolidation Loans Be Considered

A multitude of small monthly payments can add up to very big trouble. Before you know how it happened, you can suddenly have more payments going out than you have income coming in every month.

You aren't alone. It happens to a lot of people.

On the upside of debt consolidation loans, all debt is included. In debt management agreements, only unsecured debt is considered (credit cards). But in a debt consolidation loan, all debt is considered…secured debt as well as unsecured debt.

On the downside of debt consolidation loans, these loans are almost always second mortgages. In a nutshell…you really are betting the farm (the house) that you can meet the monthly payments every month until the consolidation loan is paid off.

With debt management agreements, even if it comes to the point where you must declare bankruptcy, this is still unsecured debt. Courts can set it aside. When you make a debt consolidation loan in the form of a second mortgage, this debt that was once unsecured now becomes secured. If it comes to the point where you must declare bankruptcy, your home can be foreclosed upon to satisfy debtors.

This point should not be taken lightly. Your home and the equity that you are establishing in it is your largest single asset. The mortgage on your home is usually also your largest monthly payment.

The low monthly payment that is promised with a debt consolidation loan is not always because the interest rate is lower. Sometimes it is because the debt payments have been extended for many additional years instead. Second mortgages can be as long as 30 years, and remember that you have bet the house that you could make every single one of those payments in full and on time.

Tags: being foreclosed on, debt relief, personal debt, , credit card debt, personal finance, good debt management