For starters let us identify what a secured debt consolidation loan is. This is when you use the equity in your home, which is used as collateral to attain a loan to help pay other debt usually credit cards and other unsecured debts. At first this may look like a simple and easy alternative to deal with a serious and potentially out of control debt situation. You simply aquire the debt consolidation loan too pay off all your debts and then only have one monthly payment, instead of issuing out multiple monthly payments to all your various creditors throughout the the course of the month.
But let’s take a closer look at this situation. First, this is known as ‘debt transformation’ a method of moving debt from one place to another. In reality what you did was transform your lower risk unsecured debts into high risk secured debt. This is where the real problem occurs, because if you encounter any financial problems again that could make you start to miss payments you run the risk of having the bank foreclose on your house. Many debtors do not even think about this nightmare scenario happening when they take this approach to their debt problem. People think they solved their debt problem by using the equity in their homes to pay off debts, but in reality are setting themselves up for a much greater problem.
Debtors pay off their cards through the debt consolidation loan secured courtesy of their home and now have no balance on these cards. However people will not refuse to give the cards up, which in the long run will lead to them being charged on. Using credit cards (plastic) for many people is a subconscious addiction, credit card junkies, and they live in denial. Stats have revealed that after five years 80% of debtors who use this route of debt relief find themselves stuck back in credit card debt all over again but this time around they have an extra secured payment against their home and run the risk of filing for bankruptcy or possibly getting their home foreclosed.
What happens next is you sneak a look over your shoulder only to discover a unbearable mountain of credit card debt behind you only to speculate how in the world this happened all over again. Most of instances it started from that single credit card you kept around just in case. Shortly thereafter the credit card companies see you as a high credit risk and increase your interest rate up to 30% or more. Once the interest is bumped up your monthy minimum payments double and potentially even triple.
Now you find yourself caught back in the middle of the ruthless credit card treadmill, however you have a second secured payment that must take precedence over the credit card debt or you will lose your home. In this situation now you do not have any equity to get another debt consolidation loan and your debt to credit ratio is far too high to get any type of loan, going bankrupt becomes the simplest road out of this mess. However filing for bankruptcy will leave a very serious scare on your credit report.
I have spoken with hundreds of debtors over the last 16 years who did just what I described above. And every one of them said the same thing. They really did think they were going to be able to handle it and did’nt have the foresight to see themselves ever getting back deep into credit card debt again and wished that somebody would have told them not to obtain the debt consolidation loan.
For many who were stuck in this predicament the smartest decision at that time would have been to consider debt settlement. Even though through settlement the credit score will be lowered it is by far the timeliest way to become debt free while at the same time saving a tremendous amount of money on what the current balance is.
Steve Bis is a debt analyst and research assistant with the US Consumer Advocate, which primarily practices in credit card debt relief.
- Steve Bis
Highlights 
January 17th, 2008 