How Debt Consolidation Works

By Jeanette Joy Fisher

Times are hard for many Americans, with interest rates going up, sky high gas prices, and overall inflation, so it's not surprising that many families find themselves in financial difficulty that's frightening enough to cause them to seek professional help.
When faced with mounting financial obligations, it's easy to fall prey to any number of the advertisements you see on television, in magazines and newspapers, on the radio, in your email box, or on the Internet, promising to either eliminate your debt altogether--or to "consolidate" your debt. In this article, we're going to look at how the debt consolidation process works.
It's a tempting thing to have a company take all your bills, roll them into one package, and then have you pay them off with one lump monthly payment, often less than the combined total of your individual bills. But let's look at what's really involved. The pitch is that debt consolidation companies will reduce your monthly payment on what's known in the industry as UNSECURED DEBT, which includes credit cards, utilities, or anything else you bought that wasn't secured by a piece of property that could be foreclosed upon by the lender. Your home mortgage, on the other hand, is a secured debt, which is the key to how debt consolidation companies function.
When you contact a debt consolidation company, the first thing you'll find yourself doing is answering a number of questions concerning your home--how much equity you have, your monthly payments, how long you've been in the home, and other things. Since your home mortgage can (and often is) the largest monthly payment you have, you might be lulled into thinking that they're merely asking in order to add your house payment into your monthly debt total.
However, there's something potentially ominous behind those seemingly innocent questions. The company is asking questions about what's generally the most valuable asset of a family--their home. Why? Because their plan is to combine all your unsecured debt and turning it into SECURED debt--by tying it to your home.
There are several potential dangers involved in that. First, if you find that you can't make the new, lower payments in the future, you'll find yourself not only continuing to have bad credit (which is something that you could ultimately live with, even as difficult as it would be). But you could actually find yourself losing your HOME, as well--a situation that could be life-threatening!
But debt consolidation companies say they can lower your monthly payments by a significant amount, and that's why you sought their help, right? Well, your must understand that the debt consolidation company won't lower either your overall debt load or interest rates. What they'll do is extend the life of your loans by transferring them from short-term (1-3 years) into long-term loans, which can take as long as 30 YEARS to pay off. You may lower your monthly payment, but you'll be paying up to THREE TIMES as much for those things you owe money on--for DECADES to come!
So, regardless of how much debt you're faced with, be smart, and before you sign with a debt consolidation company, ask them EXACTLY how they plan to help you, how long it will take to pay off your debt, and what they'll get out of it, since they're in business to make money, just like every other company in the world.