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Christian
Topic: Consolidation Loans
November 15, 2004 - by Crown Financial
Ministries
Consolidation loans can be beneficial at times.
However, the key to success with a consolidation
loan is financial discipline.
Is it wrong for a Christian to consolidate
debt by using a consolidation loan?
The answer is no, not necessarily. However,
there are some inherent problems that must be dealt
with before a consolidation loan is advisable.
Consolidation loans can make sense, but never as
a first step in resolving debt problems.
Consolidation loans are designed to help people
pay off bills and pay down debt. A typical consolidation
loan requires security or a cosigner.
Should I get a consolidation loan?
If a person is consolidating an unsecured
loan, this means that he or she is exchanging unsecured
debt for secured debt. Although consolidation loans
are usually simple interest loans (interest calculated
on an annual basis), the interest is often less
than the cumulated finance charges of the debts
that are being consolidated. These debts are usually
based on compounded interest (interest on the interest
that accumulates daily).
In addition, most consolidation loans offer lower
monthly payments spread out over a longer period
of time.
A consolidation loan can be a smart idea, if the
person consolidating does not borrow more than what
is actually needed to pay the outstanding bills.
For those who already have discipline problems,
borrowing more than what is needed could easily
become just one more way to splurge. Therefore,
if a consumer does decide to consolidate, it is
imperative that he or she not take on any more debt.
What tends to happen to most people who obtain consolidation
loans is that they no longer receive large monthly
bills from retailers and credit card companies.
They then begin to feel like they don’t owe
as much money as they did before and have a tendency
to stop worrying once the supposed solution has
been found. Therefore, they start to use one or
two credit cards, and before long they owe several
hundred (or thousand) dollars in addition to their
consolidation loan.
However, they must resist the urge to splurge. Unless
the problems that created the need for a consolidation
loan (usually overspending) are corrected, they
should not consider obtaining a consolidation loan.
Otherwise, a year or so later all the little bills
will be back again, and when they are combined with
the consolidation loan, the situation will be worse
than it was before the consolidation loan.
Before a consolidation loan is considered
No one should consider a consolidation
loan until they have been living for six months
on a budget that controls spending. During that
six months, they should abide by the five following
steps to eliminate as much debt as possible.
If these steps are faithfully executed, a consolidation
loan may not be necessary.
1. Transfer ownership of every possession to God
(Psalms 8:6; Deuteronomy 5:32-33)
2. Give the Lord His part first, the tithe, from
your gross salary (Malachi 3:10; Proverbs 3:9-10)
3. Allow no more debt, including bank and personal
loans, and cut up the credit cards if unable to
pay them off each month (Proverbs 24:3)
4. Develop a realistic balanced budget that will
allow every creditor to receive as much as possible
(Proverbs 16:9)
5. Start retiring the debt (Psalms 37:21; Proverbs
3:27-28), beginning with the high interest debt
first. If all of them are high interest, pay the
one with the smallest balance first. Once the smallest
is paid off, put all the money on the next, and
so on.
Generally speaking, if these steps are followed,
the average family will be debt free in less than
five years and the problem that caused the debt
in the first place could very well have been corrected.
Once the overspending has been brought under control,
if there is still unmanageable debt, it may make
sense to substitute one large loan with a reduced
interest rate for several smaller ones at higher
rates.
Home equity loans
The most common method of consolidating
is through home equity loans.
At first glance, it does appear to make sense to
consolidate higher interest debts into one lower
interest rate loan (especially if a fixed rate is
offered and not a floating rate), by using home
equity as collateral.
However, home equity loans may be one of the worst
ideas ever pushed on the average family. It encourages
them to put their homes in jeopardy and borrow to
buy things that they can easily do without, such
as cars, or to pay off things that were originally
purchased through overspending.
In addition, one of the primary disadvantages of
using a home as collateral for an equity or consolidation
loan is that most home equity consolidation loans
are demand loans. This means that the bank or lending
institution has the right to call the loan due at
any time.
If a borrower is not able to pay the total amount
at the time of the demand, foreclosure proceedings
can be implemented without further notice.
Alternatives to home equity loans
If people feel that they have resolved
their overspending problems and still feel that
they need to consider consolidation loans, there
are several places to obtain a consolidation loan
other than a home equity loan:
• The cash value of an insurance
policy
• Bank loans using in-bank deposits
as pledged collateral
• Credit union loans
using in-bank deposits in the credit union
•
Family loans or gifts
• Retirement account
withdrawals or loans (borrowing from an IRA is not
allowed).
Conclusion
Consolidation loans can be beneficial at
times. However, the key to success with a consolidation
loan is discipline. Once someone has consolidated
his or her debts, he or she must maintain the discipline
it takes to stop spending with credit.
If he or she cannot stop abusing credit, the result
often is deeper debt than before.
© Copyright 2004, Crown
Financial Ministries. All rights reserved.
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