Finance Articles

Lets start by identifying what a secured debt consolidation loan is. This is when you use something of value that can be used as collateral to aquire a loan, in most cases those in debt use the equity in their home. At first this could look like a very easy alternative to handle a serious and potentially out of control debt situation. You simply aquire the debt consolidation loan too pay off all your debts and then only have one monthly payment, instead of issuing out numerous monthly minimum payments to different creditors throughout the the course of the month.

But let's take a closer look at this situation. First, this should be called 'debt transformation' a method of transferring debt from one place to another. All you did was transfer your lower risk unsecured debts into high risk secured debt. This is where the major problem occurs, because if you experience financial difficulties again they can take your house away. Most people don't even think about this nightmare scenario happening when they take this approach to their debt problem. People think they resolved their debt problem by using the equity of their homes to pay off debts, but in reality are positioning themselves for a much devastating problem.

Debtors pay off their cards through the debt consolidation loan secured by their home and now carry a balance of zero on these cards. However people still leave one card open with the highest credit limit just in case. Using credit cards (plastic) for many people is a subconscious addiction, credit card junkies, and the sad fact is many debtors are in denial about this. Data has revealed that after five years 80% of people who use this avenue of debt relief end up with the same credit card debt problems and now a higher mortgage payment.

At this point you sneak a look over your shoulder only to discover a mind boggling mountain of credit card debt behind you only to speculate how in the world you got there again. Most of instances it began from that single credit card you kept around just for emergencies. Shortly thereafter the credit card companies envision you as a higher credit risk and increase your APR up to 28% or higher. Once the interest rate has been raised your monthy minimum payments double and sometimes even triple.

Now you find yourself trapped back in the middle of the merciless credit card treadmill, however you have a another secured payment that must take precedence over the credit card debt or you will lose your home. At this point you don't have any equity to get another debt consolidation loan and your debt to credit ratio is so bad making it impossible to get any type of loan, going bankrupt becomes the simplest road out of this mess. However bankruptcy will leave a very damaging scare on your credit report.

I have spoke with hundreds of people over the last 15 years who have done just what I described in the previous paragraphs. Everyone has the exact same thing to say. They thought they were going to be able to control the situation and did'nt have the foresight to see themselves ever getting back deep into credit card debt again and wished that somebody would have told them not to obtain the debt consolidation loan.

For many who were cornered in this position the smartest decision at that time would have been to enter into debt settlement. Even though through settlement the credit history will take a hit it is by far the quickest method to becoming free of your debts while at the same time saving money.

Steve Bis is a debt analyst and research assistant with the US Consumer Advocate, which primarily practices in credit card debt relief.