Debt consolidation refers to obtaining a loan and rolling all outstanding debts into that loan. Instead of making monthly payments to various creditors, borrowers instead pay one monthly payment to one creditor.

Debt consolidation loans usually require borrowers to use the equity in their home to secure the note. Consolidation loans can be used to pay off credit cards and other unsecured debts such as personal or student loans, department store and gas cards, or medical bills.

Debt consolidation is a good way to reduce debt-load. By transferring outstanding debts into one loan, chances monthly expenses will be reduced. Debt consolidation loans provide borrowers with a lower interest rate than they are paying on credit card loans.

While consolidating debt can provide debtors with the opportunity to pay off outstanding balances and lower monthly payments there are a few key points which should be considered.

Most importantly, the accrued home equity will be depleted to pay unsecured loans. This alone can cause more problems than it solves. It is important to realize the repayment for home equity loans generally extend from 10 to 15 years. Repayment terms for unsecured loans are usually 3 to 5 years.

While debtors will pay a lower monthly payment using a consolidation loan, they will be paying on this note for an additional 7 to 10 years. The additional interest can add up to thousands of dollars over the long run.

Perhaps the biggest risk associated with debt consolidation loans stems from the fact they can place the borrower’s home in jeopardy of foreclosure. When homeowner’s use home equity as collateral for a second mortgage and become unable to make loan payments, the lender can initiate foreclosure proceedings even if the debtor has never missed a payment on their original mortgage note.

Before placing your home on the line in order to pay off unsecured debts, consider other available options. These might include debt settlement, credit counseling or budgeting.

Debt settlement is generally handled by a debt settlement company or attorney. Also referred to as debt arbitration, debt settlement can reduce outstanding debt by as much as 60-percent. Generally, debtors must pay the debt settlement company a percentage of their overall debt. This fee can range from 10- to 40-percent.

Keep in mind there is no guarantee that debt settlers will be successful in their negotiations with creditors. Before retaining the services of a professional debt settlement company, consider contacting creditors and negotiating a deal on your own. The worst thing that can happen is that creditors will say “No!”

Credit counseling offers debtors the opportunity to thoroughly review their finances. Professional credit counselors can review the debtor’s financial records and offer advice to get back on track. Many credit counseling agencies can initiate negotiations with creditors to reduce outstanding balances or obtain lower interest rates.

Before hiring any debt consolidation company it is important to conduct research to ensure you are working with a reputable organization in good standing with the Better Business Bureau. After all, you will be providing a tremendous amount of personal information including your social security number, credit cialis cheap card account numbers, and banking information. You don’t want to hand over your life to unscrupulous people.

Author Bio: Simon Volkov is a real estate investor who offers a comprehensive library focused on personal money management, debt consolidation, bankruptcy, debt elimination and investing. Learn more by visiting www.SimonVolkov.com.

Category: Finances
Keywords: debt consolidation, loans, outstanding debts, pay off credit cards, home equity loans, foreclosure