The Three Big Mistakes of Getting a Debt Reduction Loan (and How Not to Make These Mistakes)

By Sean Payne

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.

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: 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 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: Trading lower interest rates for 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, 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. - 23200

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 excellent free course on how to rapidly pay off debt.