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 putting a band-aid on the symptom, not solving the problem.
You may think that you're curing the problem of being in debt, but debt reduction loans actually only treat the "symptom" of being in debt. These loans just put a band-aid on the problem, but don't address the behaviors that caused you to be in debt in the first place. And, once you've lumped all your debts into one huge loan, you'll eventually start to accumulate new debts when you, once again, spend more money than you make.
Statistically speaking, people who get loans to pay off their debts end up with the same amount of debt (if not more) in as little as two years. And remember, this is in addition to the consolidation loan that they now have to pay.
Trap #2: Transforming unsecured debts into secured debts.
Credit card debt is commonly known as "unsecured debt". What this means is that the loan is not "secured", or backed up by collateral (i.e. your home). Most debt reduction loans are "secured debt", meaning debt that is backed up by collateral. Most often, this means the house 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.
So what you've done by getting a secured loan (AKA home equity loan) is to put your home at risk of being taken from you. Doesn't sound so smart after all, does it?
Trap #3: Trading lower interest rates for higher interest rates.
Even if you opt for an unsecured loan instead of a "high risk" secured loan, you're still going to get smacked with higher interest rates on your loan. The reason for this is that your high load of debt, along with the fact that you're having difficulties keeping up with your debt payments, makes you a credit risk. Anyone who may be willing to grant you a loan will only do it at a higher interest rate in order to make up for their additional risk.
They may use some tricky mathematics, such as a longer loan repayment term, so that they can offer you lower payments than you're currently making. What this means for you, though, is that you end up paying even more in the long term for your debts. This is something that most people who are in debt can ill afford.
So, what's the number one way to avoid these insidious traps?
You can avoid each of these traps by taking the bold step of managing your own debt. Unless you're on the brink of bankruptcy, you do have the ability to get out of debt without the assistance of some lender or credit counselor. It may take some radical changes in your lifestyle, but once you make those changes you'll be curing the behaviors that got you into debt in the first place. - 23223
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 putting a band-aid on the symptom, not solving the problem.
You may think that you're curing the problem of being in debt, but debt reduction loans actually only treat the "symptom" of being in debt. These loans just put a band-aid on the problem, but don't address the behaviors that caused you to be in debt in the first place. And, once you've lumped all your debts into one huge loan, you'll eventually start to accumulate new debts when you, once again, spend more money than you make.
Statistically speaking, people who get loans to pay off their debts end up with the same amount of debt (if not more) in as little as two years. And remember, this is in addition to the consolidation loan that they now have to pay.
Trap #2: Transforming unsecured debts into secured debts.
Credit card debt is commonly known as "unsecured debt". What this means is that the loan is not "secured", or backed up by collateral (i.e. your home). Most debt reduction loans are "secured debt", meaning debt that is backed up by collateral. Most often, this means the house 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.
So what you've done by getting a secured loan (AKA home equity loan) is to put your home at risk of being taken from you. Doesn't sound so smart after all, does it?
Trap #3: Trading lower interest rates for higher interest rates.
Even if you opt for an unsecured loan instead of a "high risk" secured loan, you're still going to get smacked with higher interest rates on your loan. The reason for this is that your high load of debt, along with the fact that you're having difficulties keeping up with your debt payments, makes you a credit risk. Anyone who may be willing to grant you a loan will only do it at a higher interest rate in order to make up for their additional risk.
They may use some tricky mathematics, such as a longer loan repayment term, so that they can offer you lower payments than you're currently making. What this means for you, though, is that you end up paying even more in the long term for your debts. This is something that most people who are in debt can ill afford.
So, what's the number one way to avoid these insidious traps?
You can avoid each of these traps by taking the bold step of managing your own debt. Unless you're on the brink of bankruptcy, you do have the ability to get out of debt without the assistance of some lender or credit counselor. It may take some radical changes in your lifestyle, but once you make those changes you'll be curing the behaviors that got you into debt in the first place. - 23223
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 consolidation loan, check out Sean's excellent free course on paying off debt fast.
posted by X - Men @ 8:16 AM
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