When the month continues to live on well after the money is spent, a very logical approach is to utilize the equity in your home to alleviate the pressure. But is this a good idea or a bad one? Take a look.
Consolidating may free up your dollars, but at what cost? Usually consolidating debt only prolongs the agony. Clearly it ends up creating a far greater cost because the time to pay a debt off is increase, which also means far greater compound interest applied to the debt.
But more than this, clients should be asking themselves what caused this problem in the first place. If no corrective action is taken, all that will have been accomplished is creating a set of circumstances destined to end in financial disaster as the client get further and further into debt.
When using the equity in your home to pay off high interest cards, the alluring feature is oft times a lower interest rate. If I am paying 19% interest on a credit card, a 12 % home equity is certainly appealing. But consider this. You are taking unsecured debt (i. e. credit card debt) and converting that unsecured debt into debt secured by your home… a very dubious financial maneuver. With a secured debt if you default on your payment, a higher interest rate may be the least of your problems. Now you could loose your home!
But there is another method worth considering. A Debt Management Program (DMP) through a proven debt-counseling agency could be a viable alternative especially if initiated at the first signs of trouble. Instead of taking out a new loan, a DMP sets up creditor a program that allows repayment at a lower rate. (See Results to see what your DMP program will look like. )
This should be a no-brainer though picking the right agency may take some investigation. Most agencies do not mention that they do not establish the payback formula as suggested at the above link. It is the same regardless of which agency you use. So there is simply no mystery involved as to what any agency can do for you.
The difference in agency is how flexible are they in meeting your needs, their track record and their procedural follow through. As a consumer, I would question or research each category beforehand.
1. Ask them specifically how flexible they are working with a client. Insure they offer very specific examples.
2. What is their success rate? Does the Better Business Bureau have numerous complaints about them? Has anyone you trust referenced them to you?
3. Ask the perspective agency about their procedures:
a. How often are checks dispersed? (It should be daily but routinely it is only every 2 weeks. )
b. If a creditor does not respond to a DMP proposal, how soon does the client follow-up?
c. Are billing dates adjusted so as not to create a late status?
One other area to be considered is simply how comfortable are you with the perspective agency? Does their proposal make sense to you? Are you more likely to come out further ahead with a home-equity loan or a debt management program?
Readers will probably be interested to know Mike, the author of this article, also offers a free debt elimination mini-course via e-mail. You can enroll at Debt Free In 7. 5 Years.
