It sounds tempting to consumers in debt: Take out one big loan to consolidate various balances into one, easier-to-handle and less-costly package.
But be careful of what looks to be a quick fix. "You're
getting symptomatic relief, not a credit cure," says Chris Viale, president
of Cambridge Credit Corp., a nonprofit credit counseling agency based in Agawam,
Mass. This fighting-fire-with-fire approach can take several
forms. There are debt-consolidation loans, balance transfers to a zero-percent
credit card and home equity loans or lines of credit.
But,
says Viale, 70 percent of Americans who take out a home equity loan or other type
of loan to pay off credit cards end up with the same (if not higher) debt load
within two years. Viale's statistics underscore a major problem
with debt consolidation: It feeds upon the tendencies that got you in trouble
in the first place. By taking on yet another creditor, you're adding the proverbial
fuel to the fire. In this case, it's your money that's burning. Plus,
if you've taken on so much debt that you're looking for more as a solution, chances
are you won't qualify for the very low interest rates you see advertised. Those
generally go to people with stellar credit ratings. However,
if you're at the end of your credit rope or swear that this time you'll be more
disciplined, debt consolidation may be something to consider despite its risks.
Here are some popular forms of debt consolidation, how they work and a look at
their pros and cons. Home equity loan
or line of credit
Home equity lines or loans often are touted as a
quick and easy way to get out of debt. By leveraging your residence's value, the
pitch goes, you can get money to pay off other bills and a tax break, too. But
borrowing against your house can backfire. The biggest risk: You could lose your
home if you default on the loan. "Some hardship occurs
and now they have double the debt and if it's secured by their home, they could
lose it," says Diane Giarratano, director of education at Garden State Consumer
Credit Counseling in Freehold, N.J. And while equity loan interest
generally is tax deductible, it could
be limited in some situations. Even when it does provide a tax break, Cambridge's
Viale says "that doesn't mean it makes fiscal sense." Giarratano
agrees. "Banks will tell you how much you can borrow," she says. "That
doesn't mean you should borrow the total amount, but that's what people do." Still,
a home equity line of credit or loan to pay off creditors can work for some debt-burdened
homeowners. Just be sure to do your homework to guarantee that the home equity
dollars and cents make sense.This Bankrate
calculator can help your determine whether borrowing against your home's equity
is a wise move. Zero-percent credit card
What about people who don't own a house? In these cases, many turn to zero-percent
credit cards to reduce debt. Again, prudence and discipline are required. | 
