Debt Consolidation Blog

If you are looking into debt consolidation stop! The first thing you need to do is to get some credit counseling. Otherwise you are just going to perpetuate the problems and debt consolidation will make it harder for you to get out of debt not easier. Until you control your spending debt consolidation is a very dangerous play.

Some people think that if they make $3000 per month and spend $3000 per month they have controlled their spending. This simply isn’t true. Many people who are looking for debt consolidation loans are in trouble because they lived with this idea about controlling their spending. There are always going to be emergencies that come up. Unless your spending is well below your income, you simply are not balanced enough to work your way out of debt. If you spend every dollar you earn, what are you going to do when your refrigerator needs replaced, or you suddenly need health care or your car has a major expense.

By starting with credit counseling you can make sure your spending is under control first. For people who catch the problem early on, this may be enough to help them get out of debt without going through the hassle of a debt consolidation loan. Either way, once your spending is significantly lower than your income, you will have the flexibility you need to negotiate better rates, setup favorable payment plans, and possibly consolidate loans into lower interest debt. Having cash gives you options, having debt limits your options. The more cash you have free on a monthly basis, the more options you have for getting out of debt and avoiding consumer credit traps.

Generally the people who can get a consolidation loan are the people who don’t really need them in the first place. The people who are desperately looking for debt consolidation are probably the biggest risk for lenders. A few years back they could often consolidate into their home equity, but that is less of an option today as banks are concerned that the value placed on homes may drop significantly.

There are many non-profit resources to help you with credit counseling. Look for a reputable organization with a good track record of helping people get out of debt. If you find an organization that requires payment, keep looking. Most of the good organizations are setup to help people without money–not milk people in debt for even more cash.

The best type of debt consolidation is when you don’t need to use it at all. Being out of debt gives you options and opportunities that are not available to someone who is under heavy interest payments for depreciating items.

Your ability to curb your spending will determine how well you can avoid the debt consolidation trap. It is better to start a financial plan early one before you get into trouble instead of waiting until creditors are knocking on your door and you are about to have your home foreclosed on.

Debt consolidation isn’t a free lunch. You will pay dearly for the time it buys you to try to get out of debt. People who consolidate huge amounts of credit card debt without changing their financial practices will only find them in a bigger mess a few years down the road.

When the housing market was booming there were more options for debt consolidation. People looking for debt consolidation loans now days are going to have a tougher time finding institutions willing to lend them money. Generally it will be tough to find someone to lend you money unless you have some asset that is worth more than the amount of the loan. In the past many people used their homes as this asset.

As housing prices have dropped, there are fewer options for people desperately looking for a way to consolidate their debt. Most of these people are dealing with debt incurred buying items that depreciate rapidly. Vacations, consumer electronics, and furniture are all items that can’t be resold for the purchase price. Sometimes they can be sold again, but usually at a great loss. The $2000 couch you bought 2 years ago, is probably only worth $500 advertised in your local newspaper. (Antiques are sometimes an exception, but if you don’t have experience selling old items it is unlikely you’ll do very well in a pinch.)

There are a few options still available to people looking for debt consolidation. One is to consolidate to lower interest rate credit cards. This might work for a few people, but beware! The low interest rate is often a temporary gimmick that quickly inflates to the same high rate you are paying on other items. Another option is to borrow from relatives. With interest rates at such a low point for money in the bank, you may be able to find someone willing to take payments from you at a rate higher than what they can get with their money in the bank. Still it is likely that this person will want to make sure that their investment is safe, so if you don’t have anything to put up as collateral it may be a touch sell.

In the end, avoiding situations that require consolidation of debt is probably the best option. Debt consolidation is like a parachute in an airplane. You don’t want to ever have to use it. Consolidating can be a life saver when things go bad, but only if used correctly. If you don’t know what you are doing with a parachute or with consolidated debt, both can have serious consequences.

As home values go down, many people are seeing why consolidating consumer loans into a home equity loan is a bad idea. Lets say you bought a $5,000 television system on your credit card and later consolidated that debt into a loan backed by your $150,000 home. As the market has dropped, your home may only be able to sell for $120,000 now. So if you originally owed $150,000 on your home, you know owe $155,000.

If your job moves and you need to sell your house, you will have to take a loss of $35,000. Unless you have a way to come up with that money, you can’t sell your home. When you go to closing, the paperwork can’t be completed unless everyone gets paid what they are owed. Since there is a $35,000 difference between what you owe and what the buyers will pay, you have to make up the shortfall. There aren’t a lot of options available to you. Your television is probably worth considerably less, so selling it isn’t an option–or at least isn’t an option that is likely to give you any reasonable amount of equity.

As you can see it is best to not owe money on things that depreciate. Homes can go down in value. In the long run they will probably appreciated, but don’t stake your financial future on an assumption that your home will appreciate over a short period of time.