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California debt consolidation

Debt Consolidation

Is Debt Consolidation right for you? In theory, debt consolidation or ‘interest rate reduction’ makes sense for people who need to reduce very high interest rates. But in practice, there are numerous negative consequences:


Home Equity Loan


Generally, the best way to consolidate debt is by getting a bank to approve you for a home equity loan or HELOC. In turn, you could lower your interest rates and enjoy the convenience of a lower monthly payment by stretching out the loan repayment term. But a major issue is that a home equity loan is a ‘secured’ loan. Watch out if you miss a payment because the bank can foreclose on your home.

The other challenge is being able to qualify for a home equity loan. First, you must be a homeowner and have enough equity on your home in order to guarantee the loan amount. Secondly, you must have good credit. Thirdly, you must show enough disposable income to qualify for the loan. Unfortunately, most financially-challenged consumers maxed out their credit lines and ruined their credit. Others hopelessly live paycheck to paycheck with no disposable income to cover a new loan.


Debt Management Plan


Due to the stringent lending requirements, the majority of consumers attempt to consolidate their credit card accounts and other consumer debts by enrolling in a Debt Management Plan offered by a non-profit consumer credit counseling agency. But, this can also pose some serious challenges.

A major problem associated with Debt Management Plans is their unfavorably high dropout rate. An average of 79 percent of consumers, never complete this path based on an extensive Consumer Reports survey (ref: Pushed off the financial cliff; 2001). One attributing factor is that the financial aid is mere interest rate reduction. They don’t remove late fees or over-limit fees. Plus, their average interest rate reduction is about 6 percent – a mere band-aid treatment for most folks with severe economic hardships.

The major lack of completion of Debt Management Plans is also attributed to their high monthly payments. Expect to pay as high as 3.2% of your total debt, which can parallel or exceed the minimum payment you may have previously struggled to make. So, the saga of the ‘minimum payment struggle’ frequently continues for a lot of people.

Compounding the problem, not all of your debts may be eligible for enrollment in a Debt Management Plan, such as collection accounts, medical accounts, a variety of credit union accounts and any account with an annual interest rate below 15 percent. Moreover, ensure you never miss a payment, or you’ll face termination and the resurgence of exorbitant interest rates.

The credit counseling path also has a high financial price tag. In comparison to other debt relief options, you can repay around 1 to 2 times your total debt! Additionally, the consequence of enrollment in Debt Management Plans is their labeling on consumer credit reports as a “Debt Management – Hardship Plan”, which causes people to be denied credit.


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