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Debt Consolidation – Discipline Is Required If Consolidating With Home Equity
By: Charles Essmeier
Debt consolidation is a popular topic these days. The average American carries
nearly $10,000 in credit card debt and credit card debt of $100,000 is not all
that unusual. New legislation that takes effect in October 2005 is going to make
it harder for those with problem debt to file for bankruptcy, so many people are
trying to find ways to consolidate their debt instead. One of the most popular
ways to do that is through a home equity loan, but borrowers need to be careful,
as there are potential problems with borrowing against your home to pay other
debts.
The concept of debt consolidation is simple. You transfer the debt from one or
more high interest loans to a single, larger loan at a lower interest rate. The
most popular way of accomplishing this is to transfer debt from a credit card,
which often carries an interest rate of 20% or more, to a home equity loan with
an interest rate of less than 10%. By doing so, you can reduce your debt
payments by as much as several hundred dollars a month. Those taking out home
equity loans for such purposes should be careful and be aware of the following
potential problems.
Consolidating through a home equity loan trades unsecured debt for secured debt.
Credit card debt is unsecured by collateral. Should you fail to pay, the credit
card companies can send a collection agency after you to collect their money,
but that’s about all they can do. If you transfer the debt to a home equity
loan, the debt becomes secured by your home. If you fail to pay that debt, you
could have your home repossessed. For those who have problems paying their
bills, this could represent a substantial risk.
Consolidating debt requires discipline. Some spenders cease spending only when
their credit cards are at their limit. Transferring debt to a home equity loan
clears the credit card balance and reduces it to zero. The debt still exists;
the bill just comes from a different company. Once the bill is back to zero,
compulsive spenders may not be able to resist the urge to spend more. This will
leave them with both a home equity debt and additional credit card debt, making
a bad situation even worse.
Debt consolidation through home equity loans is a great way to reduce debt.
Debtors just need to be aware that they are risking their home when they do so
and that additional spending discipline is required. Many debtors may benefit
from simply canceling their credit card accounts once the debt is transferred to
the home equity loan. Reducing debt is always a good idea. Debtors just need to
make sure that they don’t run up more debt or lose their home in trying to do
so.
About the Author:
©Copyright 2005 by Retro Marketing. Charles Essmeier is the owner of Retro
Marketing, a firm devoted to informational Websites, including
http://www.End-Your-Debt.com ,
a Website devoted to debt consolidation information and
http://www.HomeEquityHelp.net ,
a site devoted to information on home equity loans.
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