Consolidation loans are one of the first things most consumers think of when beginning the process of getting out of debt. In truth, a consolidation loan trades many loans, in the form of bills owed, for one larger one. A consolidation loan most often entails a second mortgage on a home or refinancing a primary mortgage. The good news is that consolidation loans usually carry a lower interest rate than credit cards and is tax deductible. Beyond that, there are issues that the consumer should be aware of before deciding that a consolidation loan is the answer to their financial woes.

Of great consideration should be the fact that the unsecured debts associated with credit card bills turn into secured debt with a consolidation loan. Once a home is used for collateral, it may be seized if the loan payments are not met. Also important to note is the fact that most mortgages are for thirty years, and by refinancing to include credit card pay-offs, it is going to cost far more over a longer period of time. The monthly payment may be lower, but if one considers the long term effects and cost, it can be very high indeed.

On the surface, consolidation loans look good. Interest rates are lower than they have been for many years so it is very tempting to trade high interest debts into ones with lower interest rates and monthly payments. That's on the surface. It looks like a quick fix, and it is, but not without hazards. It's tantamount to fighting fire with fire. The statistics about the success of consolidation loans are not good. If 70% of Americans, who take out consolidation loans, end up right back where they started in two years, then how good are they? Consolidation loans actually end up fueling the fire that started a consumers financial problems in the first place. They take on yet another creditor, and this time collateral is at stake. The fix isn't so great if the consumer ends up losing a home due to an inability to make payments. Home equity or consolidation loans are often tax deductible but then can also be limited. Many lenders will give the loans to homeowners who have little equity in their homes. They are gambling on the home increasing in value enough to cover the loan. Even a cursory look at today's real estate market show that this may not be true.

Consolidation loans are really personal loans, which are secured with collateral. It is disguised as home equity indebtedness, and as value increases so does the debt. There are many other options for debt resolution, and consolidation loans should be a very considered decision.