The Three Hidden Traps of Getting a Debt Reduction Loan (and How You Can Avoid Them)
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?
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.
The problem with debt reduction loans is that they treat the symptom of being in debt, rather than curing the problem of spending more money than you have. What you end up with after getting one of these loans is a large loan that you're making payments on, as well as new debts that will pop up when you inevitably spend more money than you have.
Statistics will tell you that people who use these loans to pay off their debts will likely end up with the same level of debt, and probably more, in two years or less. This is on top of the consolidation loan that they're making payments on.
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 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.
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, what's the best way to steer clear of 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. - 23218
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.
The problem with debt reduction loans is that they treat the symptom of being in debt, rather than curing the problem of spending more money than you have. What you end up with after getting one of these loans is a large loan that you're making payments on, as well as new debts that will pop up when you inevitably spend more money than you have.
Statistics will tell you that people who use these loans to pay off their debts will likely end up with the same level of debt, and probably more, in two years or less. This is on top of the consolidation loan that they're making payments on.
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 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.
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, what's the best way to steer clear of 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. - 23218
About the Author:
Sean Payne has been studying personal finance and how to pay off debt for over 10 years. To get more information about how to pay off debt without a debt reduction loan, check out Sean's excellent free course on how to pay off your debt quickly.
posted by X - Men @ 4:42 AM
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