Learn How A Secured Debt Consolidation Loan Can Ruin Your Financial Future

First what is a typical debt consolidation loan? This is when you use the equity in your home, which is used as collateral to aquire a loan to help pay other debt usually credit cards and other unsecured debts. At first this could look like a very easy choice to manage a serious and potentially out of control debt situation. You simply get the secured debt consolidation loan enabling you to pay all your debts and then only have one monthly payment, instead of issuing out multiple payments to different creditors throughout the month.

Now let’s take this predicament and put it under the microscope. First, this should be called ‘debt transformation’ a way of transferring debt from one place to another. All you did was transform your low risk unsecured debts into higher risk secured debt. This is where the real problem occurs, because if you run into financial difficulties again they can foreclose on your house. Many people don’t even think about this nightmare scenario happening when they take this approach to their debt problem. Debtors think they resolved their debt situation by using the equity of their homes to pay off debts, but in reality are setting themselves up for a much greater problem.

People pay off their cards with the debt consolidation loan secured by their home and now have no balance on these cards. However people will not submit to giving the cards up, which at some point will lead to them being charged on. Using credit cards (plastic) for many people is a subconscious addiction, credit card junkies, and they live in denial. Statistics have revealed that after five years 80% of people who use this avenue of credit card debt relief find themselves right back in credit card debt all over again and now a higher mortgage payment.

What happens next is you sneak a look over your shoulder only to be shocked with a big mountain of credit card debt behind you only to speculate how in the world you got there again. Most of instances it started from that lone credit card you kept out just in case. Shortly thereafter the credit card companies see you as a higher credit risk and raise your interest rate up to 30% or more. Once the interest rate has been bumped up your monthy minimum payments double and sometimes even triple.

Now you find yourself stuck back in the middle of the merciless credit card treadmill, however you have a second mortgage that must take priority over the credit card debt or potentially risk your home being foreclosed. At this point you don’t have any equity to do it again and your debt to credit ratio is too high to get any type of loan, going bankrupt becomes the easiest route out of this mess. However filing for bankruptcy will leave a very damaging scare on your credit report.

I have spoke with thousands of debtors over the last 17 years who have done just what I described above. And every one of them said the same thing. They really did think they were going to be able to control the situation and did not have the foresight to see themselves ever getting back into debt with credit cards again and wished they had someone who would of campaigned against making the move towards a debt consolidation loan.

For most Americans who were cornered in this position the best choice at that time would have been to enter into debt settlement. Even though with settlement the credit score will be lowered 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 with the US Consumer Advocate, which practices debt relief.

- Steve Bis

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