Debt Consolidation Overview

In our tough economic times, many people in America are getting weighed down by their debt. Credit card bills, student loans, home mortgages and other financial responsibilities weigh heavily on the shoulders of most taxpayers. As the economic crunch continues to tighten, many wonder if debt consolidation is the way to go.

Debt consolidation can refer to various programs like credit counseling, debt settlement and bankruptcy, but the majority of advertisers are trying to offer debt consolidation loans that target switching your debt from unsecured loans to secured loans.

On the Internet and television, many companies promise to help your reduce your debt whether it is through credit cards or even IRS levies. As far as these businesses go, most just want to know the answer to simple questions concerning consolidating debt.

 Do these programs really work?

 How easy are they to get?

A quick analogy of the system of debt consolidation is when you go get some furniture at a rent-to-own store. While your weekly payment is cheap, in the end you end up paying two to three times what the furniture is worth and if you miss a few payments they come to the stuff back. It is this same formula that is applied to debt consolidation.

For those who want to get out of their current debt, there are other alternatives that might be better than consolidation like bankruptcy, a second mortgage, or seeking out help with debt management. Many states now offer state or federal controlled debt consolidation programs and free debt management seminars.

Lately, there has been a lot of concern about the ethical issues involved in debt consolidation. Some companies try to get consumers to consolidate their unsecured debt like those for their credit cards and place it on the back of secured debt like that of a house or property. This may seem like a good idea as now the payments are lower, but in the long run, as the loan gains interest, which usually has a higher annual percentage rate than the original debt, you will end up paying a substantial amount more than the original debt and now the debt consolidators have security that they can place liens on if you falter on your new payments.

Another issue with debt consolidation is that it never addresses the root cause of debt, never offers any real solid solutions and just keeps the whole process rolling along without any effective strategy to get people out of debt.

In general, the current psychology of debt relief is like putting a band-aid on a gunshot.

While debt consolidations may make attractive offers stating that they can erase your problems in one easy payment, that they can cut your monthly payments in half and slash your interest rates down, the truth is most debt consolidation interest rates are 20 to 22% and they tack on a 10% fee per payment for themselves.

Another problem is that these companies have been known to even be late making your payments further placing jeopardy on your financial problems.

A typical debt consolidation program is just a cover for getting home equity loans based off of a debt repayment program. These debt consolidators gather information from you on all the unsecured debt that you choose when you enroll in the program. Then, they will contact your creditors and work out a different repayment plan on your accounts which will usually lower both your payments and interest rates. Then, every month you send one big payment to the debt consolidator and they disperse this money to your creditors. The problem is that most of these companies use the equity from your home to repay your unsecured debt.

So, after a hefty application fee and an extended time frame added to your debt with a new annual percentage rate that can now be as higher than your mortgage rate, you now have a an extended debt that takes longer to pay off and in the end costs more than your original debts. Also, as I stated earlier, this new debt is secured against your home and now if you fall behind in payments, you could lose your property.

People want relief from their current burden of debt and they want it to just disappear by some simple solution. The words “consolidate debt” and “debt consolidation” seem to have a magical tone to them were those in debt feel that these companies can just whisk away their financial burdens. They also believe that debt settlement programs will erase their bills.

But the money you owe is like a rubber band and no matter how you try to stretch it; it still is a rubber band. The truth is there is no fast quick way to get out of your financial problems.

The best solution in the long run is taking out your own home equity loan to pay off some of your debt. Most of these loans have interest rates that are below 10% and the interest on these loans is tax deductible.

Another solution that most people don’t think about is taking out a secured loan their car. If your automobile is paid off, then you can use it as collateral on a loan that can be used to help pay off your other debt.

Some may feel that taking out another loan to pay off existing credit is a bad idea, but you really have to look at your APR on your credit versus the interest rates on the loans. Most credit card companies today are raising their annual percentage rates to double digit numbers, even for customers who are not behind, just to cover losses in today’s economic downturn. If you borrow against your property to pay off these debts, you will save a lot in interest and also be able to have some of that interest deducted on your taxes.

There are free and confidential debt management services that are run by non-profit organizations that can help you with trying to figure out all the confusing business when it comes to finding debt solutions..

Contact the National Foundation for Credit Counseling to see if they have a branch near you.

Also, if have included a video below that explains a little about debt consolidation.