The Three Big Mistakes of Getting a Debt Reduction Loan (and How Not to Make These Mistakes)
If you're in debt up to your eyeballs, you're probably on the telemarketers' list. They call, offering to give you a debt reduction loan. At first, this kind of loan sounds like a dream come true. After all, why wouldn't you want to lump all your smaller debts into one easy-to-pay loan with a low interest rate?
As the saying goes, there's no such thing as a free ride. This absolutely applies to getting a debt consolidation loan. These loans can be full of pitfalls that can easily get you in more trouble than you might think possible. Off the top of my head, here are the top three pitfalls that you will probably find when getting a debt reduction loan:
Trap #1: You're treating the symptom, not curing the problem.
The worst aspect of debt reduction loans is that they don't fix the problems that caused you to be in debt. Instead, they treat the "symptom" of having debt. When you get one of these loans, you just end up with a large loan that you have to make payments on...but you will also acquire new debts when you eventually start to, once again, spend more money than you have.
Any statistician can tell you that the likelihood is high that someone who gets a consolidation loan will wind up with the same amount of debt, or more, in two years or less. And remember, they're still making payments on their new debt consolidation loan.
Trap #2: Transforming unsecured debts into secured debts.
Most consumer debt is what is known as "unsecured debt". This means that the loan is not backed up by collateral. The majority of consolidation loans are "secured debt", which is debt that is backed up by collateral. Usually, the collateral takes the form of the home that you live in.
The main problem with this is that when you can't pay off your loan (and this is not uncommon), the creditor has the ability to foreclose on your home. On the original debt, the only thing the creditor could do was sue you in a court of law. They couldn't take your home from you.
What you've done to yourself by taking out a secured loan (also known as a "home equity loan") is to make your home vulnerable to foreclosure. Not too smart of you, was it?
Trap #3: Now you're paying higher interest rates.
Even if you choose not to take out a secured loan, and get an unsecured loan instead, you're probably still going to get smacked, this time with higher interest rates. Your high debt load, coupled with the fact that you're having trouble paying off your debts, means that you're a credit risk. This means that anybody who will give you credit is going to offset their additional risk by charging you a higher interest rate.
The use of tricky math, including a longer loan repayment term, can make these loans seem like a deal, since they may offer you a lower monthly payment than you're currently paying. But what this really means is that you will end up paying a lot more over the long run. People who are already in debt can't afford this.
So, how do you avoid these traps?
You can avoid these pitfalls by taking the daring step of managing your own debt. Unless you've already filed for bankruptcy, you can still get out of debt without the help of some shady loan shark or credit counseling. It may take some drastic modifications to your way of life, but once you've changed those behaviors that got you into debt in the first place, you'll be well on your way out of debt. - 23162
As the saying goes, there's no such thing as a free ride. This absolutely applies to getting a debt consolidation loan. These loans can be full of pitfalls that can easily get you in more trouble than you might think possible. Off the top of my head, here are the top three pitfalls that you will probably find when getting a debt reduction loan:
Trap #1: You're treating the symptom, not curing the problem.
The worst aspect of debt reduction loans is that they don't fix the problems that caused you to be in debt. Instead, they treat the "symptom" of having debt. When you get one of these loans, you just end up with a large loan that you have to make payments on...but you will also acquire new debts when you eventually start to, once again, spend more money than you have.
Any statistician can tell you that the likelihood is high that someone who gets a consolidation loan will wind up with the same amount of debt, or more, in two years or less. And remember, they're still making payments on their new debt consolidation loan.
Trap #2: Transforming unsecured debts into secured debts.
Most consumer debt is what is known as "unsecured debt". This means that the loan is not backed up by collateral. The majority of consolidation loans are "secured debt", which is debt that is backed up by collateral. Usually, the collateral takes the form of the home that you live in.
The main problem with this is that when you can't pay off your loan (and this is not uncommon), the creditor has the ability to foreclose on your home. On the original debt, the only thing the creditor could do was sue you in a court of law. They couldn't take your home from you.
What you've done to yourself by taking out a secured loan (also known as a "home equity loan") is to make your home vulnerable to foreclosure. Not too smart of you, was it?
Trap #3: Now you're paying higher interest rates.
Even if you choose not to take out a secured loan, and get an unsecured loan instead, you're probably still going to get smacked, this time with higher interest rates. Your high debt load, coupled with the fact that you're having trouble paying off your debts, means that you're a credit risk. This means that anybody who will give you credit is going to offset their additional risk by charging you a higher interest rate.
The use of tricky math, including a longer loan repayment term, can make these loans seem like a deal, since they may offer you a lower monthly payment than you're currently paying. But what this really means is that you will end up paying a lot more over the long run. People who are already in debt can't afford this.
So, how do you avoid these traps?
You can avoid these pitfalls by taking the daring step of managing your own debt. Unless you've already filed for bankruptcy, you can still get out of debt without the help of some shady loan shark or credit counseling. It may take some drastic modifications to your way of life, but once you've changed those behaviors that got you into debt in the first place, you'll be well on your way out of debt. - 23162
About the Author:
Sean Payne has been studying personal finance and how to get out of debt for over 10 years. To get more information about how to get out of debt without a debt consolidation loan, check out Sean's excellent free course on how to pay off your debt quickly.
posted by X - Men @ 6:15 AM
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