Debt Consolidation Loans – Pros and Cons

Every new thing loses its sheen with time. The same can be said for refinancing too. It hits the market with vehemence but now lenders are looking for alternative marketing methods. Banks are on a lookout for newer and better ways to make new people sign up for home equity based debt consolidation loans.

These come packaged as a much needed relief from the high interest rates for the cash strapped customers. But the real thing needs to be weighed and the pros and cons should be considered properly before signing up for it.

These debt consolidation loans boil down to refinance agreements, second mortgages or home equity loans. This permits the owner to cash out on a part of equity in their homes which makes it easier for him or her to pay off the debts. As far as the borrowers are concerned, who have seen the price of their home increase; this reduces the burden of monthly payments without making much of a difference to their monthly mortgage payment.

An owner, struggling to generate finances for her 21% interest credit cards, can roll the balance into 7% mortgages. Thus, these loans provide a much clearer view when seen in the mathematical light. The debt is not decreasing in any manner but the rate is slashed down to one third. Normally, the amount going in as monthly mortgages remains the same but an amount of money is freed up which can be utilized elsewhere.

Other benefits include deduction of a portion of borrower’s mortgage interest payments from their income taxes amount each year. It does not automatically translate into huge savings but the lure of a higher tax return entices most tax payers.

However, all is not rosy and golden. There are dangers associated with this practice also. The compromise is in borrower’s loss of security and that too, occurring at two levels. To begin with, if the price of the home suddenly falls, the owner would find himself or herself in a situation known as “upside down situation”. In this, the consolidation loan customer ends up owning more money than the house is worth. If the borrower continues to keep making payments, everything is fine. But, if they decide to sell the house, they will have to suffer losses.

Secondly, even though the bank that handles paying of the customer’s debts, yet it is the responsibility of the customer to close a credit account. Most people prefer not to do so, though in the long run, it hurts them only. They keep sinking more into the debt. Thus, even though their cash flow has increased, their financial course is reversed, which might even result in bankruptcy.

Thus, before going for this, one needs to consider all properly, weighing all the pros and cons in the question.