After consolidating a loan, a lot of things happen. First the equity in your home gets "cashed out" meaning the homeowner now owes that much more on their home than they did before. It is that much more than before because of closing costs and other fees that get rolled into the loan. The homeowner would typically have an additional debt to pay (second mortgage) or at least have a significantly higher monthly payment than he did before. This may be cost effective depending on what rates of interest were being changed on the debts and is being charged on the mortgage. If things work out well, then in certain cases debt consolidation can be a good option.

What also happens is that previously unsecured debt such as credit card debt is replaced by new secured debt. That means that previous credit card debt that had no security now is secured by the home owner's home! Would you even prefer spending a single dollar on your credit card if you knew it would mean losing your house if you can't pay? How many people think that getting a lien on one's property is not a bad thing? Well, believe it or not, securing unsecured debt is effectively a person paying to have a lien placed on their home. Also with unsecured debt there is hope of bankrupting the debt if all goes wrong but with a "consolidation loan" the only way to escape the new debt is to foreclose/surrender one's house if payments can't be made.

Instead of considering a debt consolidation loan one might also consider debt settlement. Debt settlement does not secure your unsecured debt. Also, instead of paying the whole debt (plus closing costs) the client pays a fraction of the debt over time. The monthly payments are much more affordable. Debt settlement program helps customers come out of debt in 3 to 5 years. The client decides the tenure and monthly payments. Debt settlement facilitates being debt free without taking the risk of securing unsecured debt. The only downside is that credit can be affected negatively by this program; If you think that you can take a hit on your credit scores to save thousands of dollars, debt settlement would be a good option for you.

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