Think twice before you consolidate your unsecured debt

Maybe you have consolidated your loan in the past to pay off debt. Let us understand the drawbacks of the same.

When you get a consolidation loan several things happen. First the equity in your home gets "cashed out" meaning the homeowner now owes that much more on their home than they did before. This increases the overall payments as the closing cost and other fees get added into the loan. The homeowner would typically have an additional debt to pay (second mortgage) or at least have a significantly higher monthly payment than he did before. This may be cost effective depending on what rates of interest were being changed on the debts and is being charged on the mortgage. If the numbers work really well then in some cases debt consolidation can be a good thing.

Your unsecured debt is converted to secured debt. That means that previous credit card debt that had no security now is secured by the home owner's home! How many people would take out a credit card if they knew that if they didn't pay then their house can be seized? How many people think that getting a lien on one's property is not a bad thing? Honestly, securing unsecured debt is a person paying to have lien on their house. Also with unsecured debt there is hope of bankrupting the debt if all goes wrong but with a "consolidation loan" the only way to escape the new debt is to foreclose/surrender one's house if payments can't be made.

Instead of considering a debt consolidation loan one might also consider debt settlement. Debt settlement does not secure your unsecured debt. Also, instead of paying the whole debt (plus closing costs) the client pays a fraction of the debt over time. The monthly payments are much more affordable. Debt settlement program helps customers come out of debt in 3 to 5 years. The tenure of the program and the single monthly payment is decided by the client. Debt settlement facilitates being debt free without taking the risk of securing unsecured debt. The only downside is that credit can be affected negatively by this program; If you think that you can take a hit on your credit scores to save thousands of dollars, debt settlement would be a good option for you.