Saturday, August 4, 2012

How do Debt Consilidation Programs Work?

Basics

    Debt consolidation programs basically allow a consumer to take out one large loan that pays off several higher-interest loans or credit cards. These programs can have a number of advantages and disadvantages, and must be used as agreed to avoid making the person's debt situation even worse than before.

Advantages

    Using a debt consolidation program properly can save money and time off debt repayment. However, using these loans requires commitment to becoming debt-free and responsibility. Borrowing the money, paying off other loans and credit cards, and then canceling the credit cards involved is the best way to use a debt consolidation program.

Disadvantages

    Many debt consolidation programs, especially through credit unions, banks, or private finance companies require collateral to secure the loan. This can be extremely dangerous especially when home equity is placed to secure a debt consolidation loan. Failure to pay off a $20,000 debt when using a home worth $100,000 as collateral can still lead to the loss of a home through foreclosure.

    In addition, most debt consolidation programs do not compel the borrower to cancel their other credit cards or loans. If the high-interest, high-balance credit cards are not cancelled once paid off, the debt situation can escalate out of control once again. This time, there is much more at risk and could force the debtor into bankruptcy and even homelessness if their home was used to secure the debt consolidation loan.

    Those who are already in financial trouble and struggle with high balances and late payments may not be eligible to get any more credit, and thus unable to truly benefit from a debt consolidation program.

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