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		Home Page Mortgage News You Can Use Are debt-consolidation loans a good idea? By Michael P. Regan, AP Business Writer, 1/27/2004 Q. I owe money to several different credit card companies and other lenders. Lately, I've been getting a lot of offers for loans that will consolidate my debt and supposedly help my credit rating. Is this a good idea? A. There is a certain appeal to fighting one big fire, rather than trying to put out several smaller blazes. But before you hoist the hose, experts warn there are serious risks involved with debt consolidation loans that should be considered. Most important, if you are taking out a second mortgage or a home equity loan to pay off bills from Visa or Sears, you are essentially swapping unsecured debt for secured debt. The danger is that you could lose your home if you default on a secured loan, whereas you only risk a loss of credit and a bad credit rating if you fall behind on credit card bills. Homeowners are consolidating debt in huge numbers without necessarily planning for family emergencies or job losses that might force them into default, according to David C. Jones, president of the Association of Independent Consumer Credit Counseling Agencies, based in Richmond, Va. "I'm concerned that we'll see some consumers in the next six or eight months have some sort of family emergency and lose their homes," says Jones. Another concern is that the new loan -- whether tied to a home or an unsecured signature loan -- might not even have a better interest rate than the debt you are consolidating. Suzanne Boas, president of the Consumer Credit Counseling Service of Greater Atlanta, says it's not uncommon for those deep in debt to consolidate with a loan at a higher rate. That's because borrowers may misunderstand the impact on their credit rating. "Some people believe creditors will think it looks better on my credit report because I only have one balance," Boas says. Instead, your rating may suffer because credit scores reward consumers who keep credit lines open for long periods of time. Another thing to consider: The Federal Trade Commission has warned that unscrupulous lenders sometimes fail to explain a loan's true costs -- or conveniently forget to mention that you're putting up your home as collateral. The FTC also advises consumers to stay away from companies that guarantee they'll provide loans if you pay an advance fee. Legitimate creditors may ask for an application fee in advance, but won't guarantee approval of a loan. All of these issues do not mean there is never a situation where a debt consolidation loan is appropriate. You very well may be able to lower your interest rates and monthly payments. But these loans should not be taken without doing the appropriate homework and crunching the numbers to make sure you can make the payments, even if disaster strikes. Experts also caution that consolidating debt sometimes fosters a false confidence that credit problems are over, causing some to once again hand cards over to the retailers, restaurants and others who got them in trouble in the first place. "Once it's sort of taken care of in their mind, they don't change the behavior that got them in trouble in the first place," said Boas of the CCCS.   Back to Original Article: Mortgage News You Can Use
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