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 treating the symptom, not curing the problem.
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.
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.
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.
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: Higher interest rates, not lower.
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.
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 steer clear of all of these traps by deciding to manage your own debt. Unless you're already filing bankruptcy, you still have the capability of getting out of debt without resorting to the help of some new lender or a so-called credit counselor. You'll have to make some drastic changes to your lifestyle, but after you change your lifestyle, you'll be well on your way to changing the behaviors that got you into debt in the first place.
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 treating the symptom, not curing the problem.
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.
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.
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.
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: Higher interest rates, not lower.
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.
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 steer clear of all of these traps by deciding to manage your own debt. Unless you're already filing bankruptcy, you still have the capability of getting out of debt without resorting to the help of some new lender or a so-called credit counselor. You'll have to make some drastic changes to your lifestyle, but after you change your lifestyle, you'll be well on your way to changing the behaviors that got you into debt in the first place.
About the Author:
Sean Payne has been learning about 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 consolidation loan, check out Sean's free mini-course on getting rid of your debt.
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