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(continued
from previous page) Considering your consolidation
options
By Dana
Dratch • Bankrate.com
Last year, 44 percent of consumers taking out home
equity loans and 35 percent of those tapping home equity lines of
credit used the proceeds to consolidate debt, according to figures
from the Consumer Bankers Association. And the amount consumers
accessed with cash-out refinancing shot from $26 billion in 2000
to $138 billion in 2003, according to figures from Freddie Mac.
But consumers may be making a big mistake in tying their debts to
their homes, according to several money experts.
If you're already in financial hot water, you've got
to be more careful in choosing a method to consolidate your debt.
When you're already having problems making your payments, you never
want to take out a loan or line of credit against your home. "That's
playing with fire," says Howard.
Edelman agrees. "You're in debt because you bought
too many sweaters with your Visa card," he says. "There's
nothing Visa can do about that. But once you tie your house to that,
you can lose your house."
And too many people return to their old spending habits.
"You're likely to build the debt back up again, only this time
you won't have the equity to bail you out," Edelman says.
Look at your situation and protect what's most important
for you and your family. Sometimes making some cutbacks (cable,
shopping, etc.) and putting the extra money toward bills will be
enough. You may decide to tap savings or investment accounts, rather
than add more debt with a loan. And you might want to get some advice
from a financial planner or debt counselor.
When it comes to debt counselors, "there are
two kinds: nice ones and bad ones," says Hampel. "As long
as you pick a good one, you're OK." His advice: stay away from
the ones who advertise on late night TV.
Going on a debt management program at a credit counseling
center "almost always has a negative effect on the consumer's
[credit] score," says Watts. Just how much "is a crap-shoot,"
he says. But if your score is already bad, it's not going to make
that much of a difference.
If you're deciding between consolidation options,
rank your financial priorities. Which assets are vital to your survival
and untouchable? Which can you live without? If the house is more
important than the retirement account, you might decide that if
you go for a loan, that's what you'll tap. But if your job is iffy,
your health is good and that old life insurance policy is just gathering
dust, selling or borrowing against it might be the best option for
you.
If your consolidation is an attempt to stave off bankruptcy,
you don't want to do anything that would make things worse if you
do have to file later. In most cases, certain assets, like homes
and 401(k) accounts, are protected in bankruptcy. If your creditors
can't touch them in a situation as dire as bankruptcy, do you really
want to hand them over now?
Whichever solution you choose is likely to cost you
something somewhere. So if you decide on a consolidation option,
shop carefully. With loans and credit, get at least three quotes.
Look at a variety of venders. Banks, credit unions and finance companies
may see you differently. With a bank, you could have an ongoing
relationship, which could help you. Credit unions tend to give a
better break on rates and fees. And finance companies sometimes
market themselves to consumers with flawed credit.
But too many times, consumers are grasping at options
that will only make things worse. "A lot of debt consolidation
loans are really home equity loans or second mortgages," Plunkett
says. And even borrowers who don't own a home have to be savvy so
they don't get lulled into a bad consolidation deal, he says.
And don't act out of fear or stress. A couple of late
payments on credit cards might screw up your credit for a while,
but it won't kill you. Keep a roof over your head, food on the table,
the power on and the health insurance paid. Everything else is negotiable.
"A lot of times, when you're offered these debt
consolidation loans, oftentimes you're so anxious to get instant
relief that you're not even being a savvy consumer and considering
what would be the best terms for you," says Mark.
Some of the options consumers will see "don't
even pass the smell test," says Bogosian. "Use your common
sense."
Dana Dratch is a freelance writer
based in Atlanta.
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