Debt Consolidation Requires discipline

Debt Consolidation alone won’t help; you must control spending, too!

Debt consolidation is a popular topic in the current economic downturn. The average household in America now carries a debt of nearly $10,000 in credit card debt in addition to a mortgage, a car payment and more. It is not unknown to hear of people with more than one hundred thousand dollars in credit card debt! Recently passed bankruptcy legislation will make it harder for the average debtor to file for bankruptcy in order to have their debts eliminated by the courts, so many people with problem debt are seeking ways to restructure their debt instead. One of the most popular ways to consolidate debt

is through a home equity loan or line of credit, but borrowers doing so must be careful. There are potential hazards associated with borrowing against your home’s equity to pay your debts.

Debt consolidation is a simple concept; the debtor transfers bills from one or more high-interest rate loans to a single loan at a lower interest rate. This reduces the number of payments that need to be made each month to one, and the amount of the payment is smaller, thanks to the lower interest rate. This makes it possible to pay the loan off sooner than if the higher interest rate loans had remained in place. Many people choose a home equity loan to do this; you can consolidate credit card debts with interest rates in excess of 20% per year to a single loan with an interest rate of less than 10%. There is one major problem with using your home to finance such a deal, however - you are placing your home at risk, and you could lose your house if you fail to make the payments.

Credit card loans are considered to be unsecured debt. You have placed no collateral against the loan, so there is nothing for your creditors to take from you if you fail to pay. Not so with a home loan, which is secured by your house. You have essentially told the bank that they may take your home if you fail to pay. For those who habitually have a problem controlling their spending or paying their bills, the risk could be great.

Establishing a debt restructuring plan requires discipline from the borrower. Some habitual spenders stop spending only when they have no more room on their credit cards. Taking out a consolidation loan reduces the credit card bill to zero, and many shoppers may see that as an OK to start spending again. The debt still exists; it has simply moved somewhere else and still needs to be repaid. Those people who cannot control their spending must take advantage of this opportunity to stop using their credit cards, or they could end up with both credit card debt and home equity debt on top of a mortgage.

Debt consolidation through a home equity loan is a great way to consolidate debt. An added bonus is the fact that the interest is tax deductible. But debtors must realize that they are putting their home at risk when they take out a consolidation loan and that additional discipline is required. Reducing your credit card debt is always a great idea. Just make sure that you do not run up even more debt in the process of doing so.