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Are You Ready for a Debt Consolidation Loan?

By Francine L. Huff
Mortgage Credit Problems Columnist

A debt consolidation loan can help you clean up your finances. But make sure your debt consolidation plan will actually help you pay down your debts, not make your bad credit even worse.

About 70% of Americans who use home equity or other types of loans for debt consolidation end up with the same amount or more debt within two years, according to Bankrate.com. Here are some things to keep in mind when you're looking at different loans to pay off debt.

Use Home Equity Loans Cautiously

A home equity loan or home equity line of credit (HELOC) allows you to borrow against the equity in your home. Using such a loan for debt consolidation can help you fix your poor credit, but if you fall behind on your monthly payments you could end up losing your home. Avoid borrowing more money than you can afford to pay back even if your lender approves a large loan.

Credit-Card Teaser Rates Expire

If you're like many people, your regularly receive offers in your mailbox for credit cards with no- to low-interest rates for an introductory period. In face, credit-card offers via mail to subprime customers in the U.S. rose 41% in the first half of 2007 from a year earlier, according to Mintel International Group. You can these teaser rates to pay off credit-card balances, but read the fine print on these offers for the terms of when the teaser rate expires and how the interest rate will change if payments are late.

Crunch All the Numbers

A debt consolidation loan can allow you to use one big loan to pay off all your creditors and just make one payment each month. Just make sure that you understand all the fees involved with a debt consolidation loan to make sure you don't end up paying more than you already are to each of your creditors. Go through all of the interest rates and fees on your credit cards and loans to make sure you're really getting a good deal with a debt consolidation loan.

The goal of debt consolidation is to pay down debt and help you find breathing room with your monthly bill payments. Debt consolidation won't work if you continue to make new purchases on credit cards after they've been paid off.

Sources
"Debt consolidation: cure or continued credit problems?" by Jenny McCune, www.bankrate.com.
"Credit card companies woo struggling mortgage-holders," by Robert Gavin, www.boston.com.

About the Author
Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.

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