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Debt Consolidation Loans

Every day, millions of Americans put millions of dollars of purchases on to their credit cards.  Unfortunately, in some cases, they find themselves biting off more than they can chew and rack up higher and higher balances.  These can be difficult to pay off, leaving the buyer paying the minimum monthly balance each month and piling on large amounts of extra debt from interest rates and fees.  To try and stop the cycle, some people turn to debt consolidation loans.  However, these loans may not be the easy way out that they appear, and can actual put borrowers in serious trouble.

Borrowers have to be careful of what looks like it will be quick and easy fix to credit problems.  Sometimes these can end up being worse than the credit problems you may already have.

Debt consolidation loans can take many forms.  They may be a simple loan to pay off the balances of other loans, they may involve balance transfers to a different credit card, or they may involve home equity loans or lines of credit.  However, the danger lies is that many people who take out these loans find that they have the same or higher amount of debt a few years later.

The problem lies in that the system feeds on the tendencies that got the consumer in trouble in the first place.  People get lured in by temporary low-interest rates that sky-rocket on them after the introductory period, or they find that because of their current credit rating they do not qualify for the advertised rate and all.  And some people start using the recently paid off card again right away, leaving themselves having to pay off not only the new lender but the old one as well.

Debt consolidation loans can be quite attractive with the lure of being able to pay off all of your debts with one easy monthly payment instead of several different ones.  However, you have to be careful to make sure that this equals real savings.  If the interest rate is an introductory one, you will want to consider what your repayment costs will be once it expires.  To compare the difference between what you are spending now and a possible debt consolidation loan, add up the interest and fees of everything you currently pay, and compare that to the numbers of the new loan.

Often, the danger comes from a loss of security.  Many debt consolidation loans involve using a borrower’s home as collateral.  If the house should depreciate, the borrower could find that they now owe more than what the house is worth.  As long as payments continue to be made, there is no problem, but if they should need to sell their house to move they will end up taking a loss.  The second risk occurs when the old credit accounts are not closed and continue to be used.  Without intervention, these customers often find themselves on the road to bankruptcy.

When looking into debt consolidation loans, make sure that you have the willpower and the financial ability to change your spending habits.  That way you can make the loan work for you and actually be able to get out of debt.

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