Chris Viale of Cambridge Credit Corporation states in a Bankrate report that 70 percent of Americans who take out a home equity loan or other type of loan to consolidate credit card debt end up with the same or higher debt load in two years. Debt consolidation does not always lead to debt solutions, because the habits that led to the debt problems are still present.
Not a Quick Solution
Debt consolidation is not a quick and easy solution to your debt problems. It may not hasten the process of escaping debt, and you may not save money either. Often, debt consolidation loans extend the terms of the loan to provide lower monthly payments, and these longer terms mask what may be higher interest rates on these loans to reflect the higher risk these loans can present to lenders. Consolidation to pay off debt will probably be a long-term plan.
Converting Unsecured Debt
You may consider refinancing your home to take cash out and pay off other debts. You can also borrow on a home equity loan to consolidate your bills. These may allow you to have a lower interest rate than what the debts charge individually or the rates you could find on an unsecured debt consolidation loan. However, refinancing and home equity loans are secured by your residence. If you cannot make the payments, you could lose your home to foreclosure. With an estimated 1.2 million foreclosures in 2010, according to Market Watch, this risk must be taken seriously.
Develop a Budget
By developing a personal budget, you may be able to pay off your debt quicker than if you use a debt consolidation loan. Many families can find about 10 percent more money that they were just wasting before they began budgeting regularly. One method is to list your debts, from smallest to largest, and allocate any extra money toward paying off the smallest balance. When you have that paid off, move on to addressing the next one. Others advocate paying off the debt with the highest interest rate first. With a budget, you will have more control over your finances and understand what is going on with your money.
Bankruptcy
Over 1 million people filed for federal bankruptcy protection in 2008, according to the Total Bankruptcy website. By filing a Chapter 7 bankruptcy, these people discharge most, if not all, of their consumer debt. With a Chapter 13 bankruptcy, they develop a court-supervised repayment plan. This is similar to a consolidation, although debtors have less control and may have to pay back only a portion of the debt over a five-year period before it is discharged. If you are deep in debt and having trouble paying your bills, bankruptcy may be your best solution, although it should be a last resort because bankruptcy does major damage to your credit rating.
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