The Three Little-Known Pitfalls of Using Debt Reduction Loans (and How to Steer Clear of Them)
If you have a lot of debt, you've probably gotten several phone calls from telemarketers who offer to give you a debt reduction loan. On the surface, these loans sound great. You'd have to be crazy to not want to turn lots of small debts into one loan with a low interest rate, right?
My dad always said that there's no such thing as a free lunch, and this definitely applies to debt consolidation loans. Getting a debt consolidation loan can be full of hidden traps that can actually get you in more trouble than you were to start with. Here's a list of the top three hidden traps of getting a debt reduction loan:
Trap #1: You're not fixing the problem, just treating the symptom.
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: Turning an unsecured debt into a secured debt.
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 big problem with secured debt is that if you fail to pay off your loan, the creditor has the right to foreclose on your home. Compare this to the original debt, where the only option the creditor had was to "see you in court". They couldn't foreclose on the place where you live.
What taking out a secured loan does, in effect, is to put your home at risk of being foreclosed on. Not the brightest thing you've ever done, is it?
Trap #3: Now you're paying higher interest rates.
Even if you dodge the bullet of getting a secured loan by getting an unsecured loan, you're still gonna get smacked with higher interest rates. This is because your inability to pay off your current debts makes you a credit risk, meaning that anyone who is willing to give you credit is going to charge you a higher interest rate to offset the 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, how do you avoid these 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. - 23196
My dad always said that there's no such thing as a free lunch, and this definitely applies to debt consolidation loans. Getting a debt consolidation loan can be full of hidden traps that can actually get you in more trouble than you were to start with. Here's a list of the top three hidden traps of getting a debt reduction loan:
Trap #1: You're not fixing the problem, just treating the symptom.
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: Turning an unsecured debt into a secured debt.
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 big problem with secured debt is that if you fail to pay off your loan, the creditor has the right to foreclose on your home. Compare this to the original debt, where the only option the creditor had was to "see you in court". They couldn't foreclose on the place where you live.
What taking out a secured loan does, in effect, is to put your home at risk of being foreclosed on. Not the brightest thing you've ever done, is it?
Trap #3: Now you're paying higher interest rates.
Even if you dodge the bullet of getting a secured loan by getting an unsecured loan, you're still gonna get smacked with higher interest rates. This is because your inability to pay off your current debts makes you a credit risk, meaning that anyone who is willing to give you credit is going to charge you a higher interest rate to offset the 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, how do you avoid these 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. - 23196
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 free mini-course on getting rid of your debt.
posted by X - Men @ 6:41 AM
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