Loan Consolidation and Paying Off Debt

Loan consolidation to pay off credit card debt is something we discourage. Why? People often take out personal loans or Home Equity Loans (HELOC) to pay off their credit card debt. This effectively accomplishes two things:

1. It turns unsecured debt (credit cards, medical bills, etc.) into secured debt (a loan against your home).
2. It paid off the credit cards immediately, which often leaves a false sense of security, which often leads to more credit card use and leads to greater debt.

Is there an advantage to using a HELOC to pay off my debt?
In some instances the answer is yes, in that you could probably get a lower interest rate than what the credit card companies were charging you. In addition, this interest could be used as a write off on your personal taxes.

What are the biggest disadvantages?

• Once again, there is a false sense of security in paying off debt.
• Should you lose your job or have an unforeseen accident, your house is now on the line as secured debt and you could lose your home.
• Now you have two payments to make each month. Your initial mortgage payment and now the HELOC payment.

What if I simply got an unsecured loan, not against my house?
You could do this, however, most lenders charge a much higher interest rate on unsecured loans. In addition, it could be viewed on your credit scores as being overextended; you could be viewed as someone not able to handle his/her finances.