The airwaves are awash today with advertisements for debt consolidation schemes. They are designed for those of us who wake up one day and find ourselves burdened with high levels of short term debt, accumulated (usually) on credit cards that have a very high interest rate attached to them. The notion behind a debt loan is that you take out a loan at a lower interest rate than that charged by the credit card companies, and pay off your short term debt. You are then making just one payment on a loan with a lower interest rate than you were paying on your multitude of monthly credit card bills. Thats the theory.



There are a few financial and human elements in this scheme that are required to make it work. The first is that the spending habits that got you into difficulty in the first place must stop. That may require a step as radical as destroying your credit cards, or all of them save the one you use to pay your bills online. That card you may want to leave in your desk drawer and hold it for budgetary uses only.





Home Equity Loans



The financial element involved in utilizing a debt loan is simply finding one that works for you. The tool that has been used by tens of thousands of homeowners is a home equity loan. Homeowners have taken advantage of low mortgage rates to secure a second mortgage and use the proceeds to pay down debt. Here again the human element comes into play: it is best to borrow only the amount you need to retire your overextended credit.



Stay away from home equity lines of credit: you are just creating another temptation if you have a credit line to draw down. Home equity loans are also usually eligible for the tax deduction on interest that you get with the original mortgage. If your home equity loan also becomes an unmanageable debt problem however, your home may be in jeopardy. Keep in mind that with a home equity debt loan, you are literally betting the farm.



Debt Consolidation Loans



Unsecured debt consolidation loans require some serious research and study. If you are already having credit problems, youre not going to be eligible for an unsecured loan with a sterling interest rate. It may be less than your credit card rates but it will, in all likelihood, be high. These loans also need to be carefully read to check for penalty clauses, late payment fees, prepayment penalties and the like. Debt consolidation loans also often have extremely high closing costs, or fees attached to them as the price of doing business.



If this is the type of loan you decide upon, incorporate all fees into your monthly payment schedule and compare it to the total of your monthly credit card bills. There are a number of debt consolidation loan brokers who prey on peoples desperation and posture their outrageously expensive loan as a last resort. This is called predatory lending and theres been enough of it to prompt federal legislation outlawing certain banking practices.



Credit Card Consolidation



There are also the zero interest credit card offers out there, advertising credit cards with no interest for six months as a way to consolidate your existing credit. Those cards usually jump rates up to commercial levels after a short period of perhaps six months. Once again, you have to calculate your payoff schedule and decide if the six month grace period makes it worthwhile.