May. With personal debt high and personal bankruptcies at a record 1.4 million filings last year, lending companies have been jumping at the opportunity to consolidate various debts into one payment. The loan companies buy unsecured debt, like money owed to credit card companies, and replace it with one loan payment. They make their money from the interest on the loan, and have the collateral of the house if the borrower isn't able to come through with the loan payments. But Merrill says many consolidation loans do little to tackle the underlying problem of overspending. Counselors with the National Foundation for Consumer Credit, who helped 1.5 million people last year, work with creditors to set up debt repayment plans, which may include waived fees, interest and penalties.
Clients deposit money each month with the counseling service, which pays the creditors.
The rules usually require clients to cut up their credit cards and refrain from applying for new plastic. While debt repayment plans don't erase credit history, they can demonstrate that a client has learned to budget better. However, lenders maintain debt consolidation could be the answer for certain borrowers, particularly homeowners or those who have equity in real estate, since property is often used as collateral. It can be a good idea for those who already know how to manage money and are looking for lower interest on debts or for a tax advantage, they say. The interest paid on most home-equity loans is tax deductible.