Debt Consolidation Loans are unfortunately one of the most common solutions people think of when they fall victim to financial problems. It is a depressing fact that about 75% of people who get a debt consolidation loan find themselves in much deeper financial trouble than they were in to begin with. The reason is simple:

You cannot borrow your way out of debt!

All that consolidation arrangements accomplish is bundle several debts together, and increase the total balance, often by 50%. Debt consolidation arrangements will increase, not dispute the amount you owe. This will not get you out of trouble and most of the time will only make matters worse. The IRS is advising consumers that they are cracking down on these types of loans (as well as non-profit credit counseling agencies).

Debt consolidation loans are normally secured against some form of asset. Once you have taken out this loan, you have just gone from an unsecured debt to a secured debt and have put your personal assets at risk. Many loans are spread out over a 15 - 30 year period, leaving you open to loss of any assets over this period. If you run into further difficulty in the future you stand to lose the assets that secured the loan - normally your home. Debt consolidation organizations get paid big commissions for signing you up. The more they lend you the more money they make. All these companies are thinking about is getting you to take the maximum amount they can lend you! The higher your debt, the more money they make. You will probably end up bound by a carefully worded contract that can cost you all your legal rights provided by federal law and hold the loan company harmless from any legal claims.

One reason that people take out home equity loans is to get a tax break on the amount borrowed. Let's take a look at how beneficial this is. With a mortgage, you are only getting a tax break on the interest you are paying. This means that you have to be paying out money that you would not have to pay, if you had no debt, to get this tax break.

The IRS is advising consumers that they are cracking down on these types of loans and that the interest paid on home equity loans for more than the market value of your home is not deductible.

With credit cards, and other types of unsecured loans, there is less that a creditor can do if you fall behind on your payments. With consolidation loans, if you cannot make the payments or are even late on making your payments, you can very easily lose your home. Why would you want to go from an unsecured to a secured debt over a longer period of time?

The main problem that people run into is that once the debts are paid off, they discover they have a whole new line of spending power: empty credit cards. It is not normally long before these accounts are once again run up to the max. This will leave you with both the consolidation loan and these maxed out cards to repay. If you are financially unable to pay the previous debt, how are you going to repay the loan and the newly run up credit cards? This sometimes leaves you running back for a second consolidation loan which makes the problem even worse.

Remember, being in any kind of debt leaves you less spendable income than you probably need to buy life's necessities. Although a consolidation loan may give you a lower payment and a little more breathing room, is that really going to leave you with enough spendable income to get you through the next 10 to 30 years?