What is debt consolidation?
After denial is over and a person is able to understand that a real problem with credit card debt exists, debt consolidation may come to the forefront as an option for debt relief.
There are a couple of ways to get out of credit card debt. Two options are;
1. Debt consolidation loans.
2. Consumer credit counselling
1. Debt consolidation loans
To begin with, here are some details regarding obtaining a debt consolidation loan. If you get a loan for the purpose of paying off your credit cards, it is called a debt consolidation loan. The best thing about this is that you will only have to make one payment a month on your loan. This eliminates the hassle of paying multiple payments to your creditors every month. Secondly, this loan may provide a lower rate of interest.
Nonetheless, I believe this is the riskiest option for getting out of credit card debt. What is the reason for this? Most of the time, the only way you can get a debt consolidation loan is to use your home as security. This is essentially getting a secured second mortgage on your home for the purpose of paying off an unsecured debt. Understand that this actually means you will be converting your unsecured, low-risk credit card debt into a very high-risk debt. You will be putting your home up for security, meaning you could lose your home!
Sadly, the vast majority of people who use their home equity to pay off credit card debt end up right back in the same boat with credit card debts within a 5 year period.
This kind of debt relief can be summed up with the old saw, no pain, no gain. Using the money you have in equity to pay off your credit card balances and move forward seems like an attractive option. Firstly, you are still in debt. Secondly, it is the rare person who actually destroys all credit cards and goes debt free. It is all too easy to rack up the credit card debt again when you have a handful of cards with zero balances.
Eventually, when you have a second round of debt to credit card companies, you will find that you have 2 financial obligations dependent on the roof over your head; however, making that payment will have to take precedence over paying your credit card obligations. Additionally, you may have secured loans (e.g. car loans) that must be taken care of before credit card payments. However, now there won’t be any equity to enable you to get a loan. Lots of people end up choosing between losing their dwelling or filing for bankruptcy.
That’s why I believe that it is worst and most risky to use a debt consolidation loan for debt relief.