Debt Consolidation Loans Can Result In More Debt

Debt consolidation loans can be an appropriate option if you have existing consumer debt spread across multiple accounts and are interested in reducing your payment. If you do not adjust your spending habits and approach to debt management, however, you may wind up in a worse position.

Most consumers turn to debt consolidation with the hopes of reducing the amount of interest they are paying on their outstanding balances and the desire to simplify their finances by consolidating several bills into one payment.

The three most common debt consolidation options are:

Unsecured Debt Consolidation Loans are personal loans primarily offered by banks. These can often times be difficult to qualify for since there is no collateral offered in exchange for the loan. The loan is for a fixed amount and paid back over a specified term.

New credit cards with low-interest balance transfers offer excellent introductory terms and may allow you to consolidate several credit cards into one. They are revolving lines of credit and the terms will change at the expiration of the introductory period. They typically offer a lower start rate than an unsecured personal loan; however, the final rate tends to be much higher.

Home equity loans or lines of credit are secured revolving lines of credit or fixed loans that use your home as collateral. The terms tend to be the most favorable with this option since there is less risk for the creditor due to the collateral being used.

If you are consolidating credit card debt, using any of the three options above would allow you to potentially reduce your payment and simplify your bill paying. The risk results from the fact that you have now freed up the credit lines on those existing credit card accounts since the balances have been transferred.

Although your intentions may be good and you have told yourself that you will be financially responsible, if you begin to tap those available credit lines, the benefit of the consolidation goes out the window.

Unless you are committed to taking a serious look at your spending habits and eliminating your dependence on credit cards, consolidating your loans may turn a short-term fix to a longer-term problem. Out of the frying pan and into the fire.

About the Author:
Chris Rocks is the Founder and Executive Director of the Credit Advisory Alliance (CAA). CAA is a nationwide membership-based organization that assists consumers recovering from a financial difficulty and those who need a significant increase in their credit score.

Chris began his financial services career as a Financial Advisor helping young families with risk management and asset accumulation strategies. It was during that time that Chris realized that many of these young families also needed someone to guide their choices with regards to debt management.

He made the transition into the mortgage industry where he first worked as a loan originator and later the Vice President of a small mortgage company. As Chris came across clients who had suffered through financial challenges and saw the difficulty they had in re-entering our credit driven economy, he discovered there was a real opportunity to leverage his unique background and help others.