The Three Hidden Traps of Getting a Debt Reduction Loan (and How You Can Avoid Them)
If you've got a large amount of debt, then you've probably received a lot of phone calls from telemarketers offering you a debt reduction loan. At first glance, this type of loan sounds great. After all, who wouldn't want to consolidate all of their debts into one loan with a lower interest rate?
Any wise man will tell you that you can't get something for nothing. This is absolutely true when it comes to debt consolidation loans. Although they look good, these loans can be full of traps to snare the unsuspecting person, getting you in more trouble than you already were in. Here are the worst of the traps of getting a debt reduction loan:
Trap #1: You're putting a band-aid on the symptom, not solving 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.
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: 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 problem with this is that if you fail to pay off your debt reduction loan, the creditor can now foreclose on your home. With the original debt, the only recourse the creditor had was to sue you in court. They couldn't come after your home.
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: Trading lower interest rates for 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, 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. - 23305
Any wise man will tell you that you can't get something for nothing. This is absolutely true when it comes to debt consolidation loans. Although they look good, these loans can be full of traps to snare the unsuspecting person, getting you in more trouble than you already were in. Here are the worst of the traps of getting a debt reduction loan:
Trap #1: You're putting a band-aid on the symptom, not solving 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.
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: 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 problem with this is that if you fail to pay off your debt reduction loan, the creditor can now foreclose on your home. With the original debt, the only recourse the creditor had was to sue you in court. They couldn't come after your home.
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: Trading lower interest rates for 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, 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. - 23305
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 consolidation loan, check out Sean's excellent free course on getting rid of your debt.
posted by Mr. Forex at
6:16 AM
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