Debt Consolidation Loans are Most Effective When Financial Behavior is Addressed

The most common form of debt consolidation loan in use today is the home equity loan. These loans are also called second mortgages, and like a primary mortgage, the house is used as a form of security. Many lenders will allow home owners to borrow up to 100% of the equity that is in their home. Equity is the difference between the value of the home and the amount that is owed. If a house is valued at $125,000 and there is a $100,000 mortgage then the equity would be $25,000. These loans are wonderful vehicles to use for the purpose of debt consolidation. In fact, these loans have become synonymous with "debt consolidation loans" because this is one of their primary uses. It typically allows an individual to wrap all of his payments into one which offers a lower monthly total, and tax advantages. (check with your tax advisor to determine whether you qualify) However, in some cases home equity loans have been known to result in higher levels of debt. How is this possible? Let‘s examine how this may happen.

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Before a lender approves your consolidation loan they take a look at the amount of debts that you carry in relation to the amount of income that you are receiving. This creates a percentage called the debt to income ratio. If the ratio is too high then the loan request will be denied. Unfortunately, the lenders do not require individuals to close their credit accounts in order for the loan to be approved. Therefore, if an individual receives a 2^nd mortgage and then proceeds to run his up his credit cards (or other loans) this places the person in a dangerous financial situation. Not only do they jeopardize their credit if they struggle to make the payments, but in addition they risk loosing their house. It is not wise for a person to place himself in this situation until they have closely examined their financial behavior. Often times people find themselves in trouble with debt due to poor financial habits. These habits must be addressed before obtaining a debt consolidation loan or they could end up in a far more precarious position than when they started.

Mark Carney is a professional consultant with First American Debt Consolidation and Loans, a debt consolidation service specializing in financial education, credit counseling, and debt management services nationwide.