The Hidden Costs Of Cheap Debt Consolidation Loans Are Higher Than You Think

The hidden costs of cheap debt consolidation loans can be considerable. While often touted as a magical monetary cure, “cheap” debt consolidation is not always what it appears to be. There are three basic sources of procuring a cheap debt consolidation loans and each have their own unique drawbacks. Borrower beware.

Home Equity Loans

“Equity” is the difference between your home’s current value and any outstanding debt. If you currently owe $50,000 on an existing mortgage and your house is worth $100,000, you have $50,000 in equity. You may borrow against that amount to consolidate high-interest consumer debt into a single larger balance. Convenience and lower tax-deductible interest are the advantages of home equity loans that are highly touted by hungry lenders.

The obvious drawback, of course, is that default results in the loss of your home. Should you find yourself in dire financial straits before the loan is completely repaid, you cannot completely discharge home equity loans in bankruptcy. As these are secured debts, a court-ordered debt restructuring known as a “Chapter 13” Bankruptcy would be the only way to hold on to your house. A Chapter 13 Bankruptcy is not easy to get, however.

Credit Card Balance Transfers

“Zero percent” interest on amounts transferred from other cards look good at first glance. The catch is that the nonexistent interest is fragile and short-lived. One late payment instantly takes it into double-digit territory. In 6-12 months, it dies a natural death and decomposes into a much nastier number. Use these unsecured debt consolidation loans only if you plan to: 1) accelerate payments to retire your entire debt before the no-interest period expires; or, 2) switch it all to another interest-free card at that time. Still, used wisely these 0% balance transfer credit card offers can save you money.

Unsecured Debt Consolidation Loans

An unsecured debt consolidation loan is the only option for most financially strapped folks. Those burdened by excessive debt are probably so credit-impaired not to qualify for other low-interest options. Unsecured debt consolidation loans have no underlying collateral to secure them. Thus, they feature relatively high interest.

Much longer repayment is the main consumer motivation for these loans. Is it really worth it? Analyze your current situation carefully. Compare existing interest rates against those of a proposed unsecured debt consolidation loan. The longer time required for repayment may be more costly than your current credit contracts. Moreover, any debt reduction obtained via reduced credit balances may be treated as taxable income.

Exhaust all alternatives before assuming the hidden costs of cheap debt consolidation loans. You might be able to accomplish debt relief without excessive interest or encumbering your home. Consumer Credit Counseling Services offers free credit counseling and debt restructuring. Visit cccs.org, or consult your local Yellow Pages. New federal legislation also permits up to 50 percent forgiveness of credit card debt in excess of $10,000. For further details, visit ftc.org.