Debt Consolidation is a popular term thrown around quite a bit in the context of getting out of debt. According to google the term debt consolidation loan or some variation of the phrase is searched for over 10 million times a month. The ironic thing is that in this current economic climate, a secured debt consolidation loan is very difficult to get and an unsecured debt consolidation loan is all but impossible to obtain.
I have heard people use the term debt consolidation to talk about home equity loans, signature loans, balance transfers, consumer credit counseling, even debt settlement. For the purposes of this article, when I refer to debt consolidation or a debt consolidation loan, I am speaking specifically about borrowing money to pay off other debts and consolidate them into one new payment. Consumer credit counseling and debt settlement are not debt consolidation loans, even though people sometimes mistakenly use that term to describe them.
During the housing boom we couldn’t turn on the radio or the television without hearing or seeing an ad about the wonders of refinancing our houses to pay off credit cards. Everyone, including many mainstream financial planners were saying that it was “a smart thing to do.” Hurry, rates are at an all time low, consolidate your debt, pay off your high interest credit cards, become DEBT FREE. Smart, Smart, Smart, or so we were all told.
What most consumers where not told was about the huge potential drawbacks that have now become all too real for consumers across the country. Trading unsecured debt for secured debt is not always the most advisable move. Sure it can make a lot of sense on paper by lowering your overall interest rate and rolling 5 or 10 credit card payments into one more manageable monthly payment. However, the reality for many consumers was after the debt was rolled into the new mortgage or loan, either out of a lack of discipline or necessity, many consumers found themselves back in as much if not more credit card debt within a few years.
Now that the housing market has taken a dive and the atm machine in the kitchen is broken, consumers are scrambling for a solution to deal with mounting debts. Getting a debt consolidation loan in order to pay off high interest credit card debt is flat out impossible for most consumers in this current economic climate. If you have good credit, and a ton of equity in a piece of property, then a secured debt consolidation loan may be possible, however most people that are in need of some type of low interest loan are not in a position to qualify for one.
There is a lot of deceptive advertising out there promising debt consolidation loans to consumers. The reality is that many of these ads are for credit counseling companies, or what I would consider Loan Shark interest rate loans. Many consumers upside down in their houses, with no assets are searching in vain for unsecured debt consolidation loans.
For the most part these loans either don’t exist or are unobtainable to someone that would be in desperate need of one. In this current economy, lenders are not keen on taking unnecessary risks. If you are a consumer that is up to your eyeballs in debt, and struggling to keep up, it is a pretty tall order to ask someone to step in and pay off all of your debt and then allow you to pay them back at a lower interest rate than you were paying before.
The bottom line is that if you do not have perfect credit and at least 30% equity in a home or some other asset, you should not waste your time looking for a lender to provide you with an unsecured debt consolidation loan at a nice low interest rate because it is not available. However, if you happen to have a 401K with your current employer and it has a provision that allows you to borrow a certain percentage, then you can actually provide yourself with a consolidation loan to get your creditors paid off.
A word of caution though, it is often times ill advised to drain your 401K to pay off high interest debts. If you are considering borrowing or withdrawing from your 401k or IRA accounts you should consult with a financial professional before doing so. There could also be potential tax ramifications depending on your age and whether or not you are going to borrow or withdraw the money.
If you are in debt and it is clear that an unsecured debt consolidation loan is not an option, then you will need to research other strategies such as Consumer Credit Counseling, Debt Settlement or possibly even Bankruptcy. Again, be sure to first consult with a knowledgeable financial professional before making a final decision on any strategy.
UPDATE – Jan 7th 2010
After publishing this article, my fellow consumer advocate Steve Rhode over at getoutofdebt.org mentioned that I should check out Lending Club . After doing so, I can say that I am impressed with what they are doing over there. Lending Club is a peer to peer lending network. Essentially they match up investors with borrowers and cut the bank out of the equation. If you are in need of a debt consolidation loan of $25,000 or less, and have good credit (above 660 Fico) then I recommend that you head over to Lending Club and check them out.
If you could take out another loan on your house to pay off your credit card debt would you do it? Please share your thoughts HERE
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