HOW IS DEBT CONSOLIDATION DIFFERENT THAN A LOAN?

You have seen debt consolidation loans advertised and they may look like a good idea. The way these loans work is that you are given a bank loan against your property and you use this money to pay off high interest credit cards. Typically, you are required to use the equity in your house as collateral. The problem is that most people who are in deep debt do not have equity in their homes and the ones that do are concerned (rightfully so) about taking on more debt.

In order to reduce your debt, you need less credit not more. Increasing debt by mortgaging your house is typically financial suicide. Many people report that Re-Financing with a consolidation loan or a second mortgage pushed them over the financial brink. Under these circumstances, the loan or mortgage you do obtain (if you qualify) will be at a very high interest, and though you will appear to be making progress, you will only be digging yourself in deeper in debt.

A common myth is that debt consolidation loans are tax deductible. This is only partially true. Interest paid on mortgages that exceed the value of the house, used to repay credit cards or personal loans (called unsecured consumer debt) is not tax deductible.

Why is getting a loan a bad move?

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