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.

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.

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: Making your 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 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 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: 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.

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 best way to steer clear of 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. - 23159

About the Author:

Sean Payne has been learning about 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 how to pay off your debt quickly.