Debt Free

You've heard them, the ads with the sickly sweet pitchman, usually the owner of the mortgage or finance company, offering to end all your problems with a debt consolidation loan or cash out refinance. It sounds so tempting when they say “eliminate debt”. I'm still trying to figure out how the hell taking out yet another loan meets the definition of eliminate debt. Well I guess that's something those with sharper minds than mine have already determined. After all, they're in marketing.

Given that a debt consolidation loan actually can be a valid solution for some, however, here are some problems you should avoid when pursuing the debt consolidation loan option. It actually does have some advantages, such as the convenience of only making one payment. This alone can be worth it to some, especially if it keeps you from having a late payment on one of your credit cards. You may also throw away substantially less money on interest than you would if you tried to pay off all your credit cards with minimum or close to minimum payments. Be advised however that the debt consolidation loan approach can also be fraught with peril for the unaware or undisciplined. As with many solutions, it's perfect for some, and perfectly wrong for others.

1 – You can't really get the loan you thought. Because many people who need a debt consolidation loan are deep in debt, and possibly have a late payment or three in their not too distant past, they may not qualify for the low, teaser interest rates that are being promoted in the ads. Once that is discovered it is tough for many folks to back out, even if it's still technically possible. It's like walking out of the F&I office in your car dealership, and turning your back on the car of your dreams, when you find out you didn't qualify for quite the payment terms you thought you would.

2 – Ending up in just as much, or more, debt. By some estimates about three quarters of those who get a debt consolidation loan with the intention of eliminating debt end up deeper in debt within two years. This is because of the tendency to do two things; get too large of a loan and/or fail to reform your spending habits. If you are deep in debt due to uncontrollable circumstances such as medical bills or job loss, that's a different story, but many just got there from overspending on cool, new stuff.

3 – You can actually end up paying more total interest. Because the term of the debt consolidation loan is so long, you can actually end up paying even more interest. That of course depends upon many factors, such as your total consumer debt and the interest rate on that debt. If your total payment is lower because you're getting a very favorable interest rate, that's great. However some debt consolidation loans have an interest rate that's only slightly lower than you're probably paying now. The decrease in the total payment comes because the term of the loan is so long. You need to check this out thoroughly. If the interest rate is only slightly lower and you stretch the loan out longer, you'll end up paying more interest. This is especially true if you succumb to the temptation to take out a loan that exceeds the total of your debts.

4 – You could get stuck with excessive fees . Something that can contribute to numbers 3 and 4 above are the fees that some lenders add to your loan. Watch for this. It's no use getting an interest rate that's 8 points lower than you're paying now if they are going to raise your indebtedness a substantial amount.

5 – You could lose your home. Here's the elephant in the freakin' closet. It's like your brother with a heroin addiction or your sister who's in prison because she chopped off her husband's head with an ax. Nobody wants to bring it up. As far as the loan companies go, the less the mention this fact the better. You, however, had better be damned well aware of it. The main reason you're able to get such a favorable interest rate on a debt consolidation loan is the fact that it's a secured loan. In the vast majority of the cases, the security just happens to be your treasured domicile. This where you can end up in foreclosure if you're not extremely careful. If you're in financial trouble due to chronic overspending and you fail to reform your fiscally irresponsible ways, you could be giving some foreclosure investor his kid's college fund.

A debt consolidation loan may be the perfect solution to get you back on the path to financial nirvana. It could actually help you get debt free, in time. Just go into it with both eyes open, nay, with your lids pinned to your forehead.