Up to Your Eyeballs in Debt? What about a Debt Consolidation Loan

A Credit Article Contributed by Mark Mcclelland

The Raw Facts about Debt Consolidation Loans

At it's most basic, debt consolidation, along with the loans they imply, is simply a process you go through to combine the many (smaller) debts owed to multiple creditors into a single (larger) debt owed to a single creditor. That's it. And, if you believe the hype, not only are you able to combine all your existing debts into one, you might actually lower your total payment amount as well.

"Lower my payment, wow, where do I sign up? " But not so fast. Have you ever wondered how these companies are actually able to offer a lower total monthly payment. Well, it pays to be an informed consumer... especially here.

Did you know that your credit card issuers provide you with what's known as "unsecured credit"? What this means is that the card issuers are willing to lend you money based on your signature alone; you simply promise to pay them back and they're happy. Your mortgage, on the other, is a "secured loan", meaning, in essence, that your house is being used as collateral for, or is securing, your mortgage loan.

The upshot of all this is that if you default on your credit card payments, the issuers can raise your interest rates, impose late fees, or take you to court, but they can't actually take your house away from you. However, the mortgage company can take your house if you default on your mortgage payments. Since your house is securing your mortgage loan, and you're not making your mortgage payments, the mortgage company might just want their "security deposit" (your house) back.

And guess which category - secured or unsecured - a debt consolidation loan falls under?

Are Debt Consolidation Loan Simply Scams in Disguise

But, the fact that most debt consolidation loans are secured loans and that sometimes they sound too good to be true, doesn't necessarily make them scams. Debt consolidation loans can, in fact, provide a significant benefit to those with specific types of needs; for example if you have a fairly heavy debt load but aren't actually experiencing long-term financial hardship - meaning you have a stable source of income, you might be able to derive some benefit from consolidating your debts.

But if your situation is different, like you don't currently have a job, or the one you have doesn't pay enough for you to cover your living expense, you're experiencing financial hardship that is unlikely to be eliminated, or even lightened, via debt consolidation.

Can You Handle a Debt Consolidation Loan

If you do have a stable source of income that provides for all your living expenses, you might be able to handle a debt consolidation loan. But it's really important to understand a few of the downside factors:

1) Your could end up loosing everything, since these are secured loans,

2) It might take significantly longer to pay off the loan, and

3) It's really easy to go further into debt because the debt consolidation loan pays off your unsecured debt (your credit cards), making it possible for you to continue the spending habits that probably got you into trouble to begin with.

Understand what you're doing before making any decisions here.