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11 Terrible Mistakes Borrowers Make When Paying Off DebtMarch 28, 2017
Most people want to reduce their debt burden; however, they don’t know the correct way to go about it. As a result, they often end up increasing their liabilities instead of decreasing them. If you’re someone who’s facing this kind of a problem, chances are that you’re making one or more of the following mistakes.
Refinancing Your Mortgage
Refinancing bad debt into your mortgage is a terrible idea, especially if the loan is an unsecured one to begin with. If you are ever unable to make the payments, not only will you get a poor credit rating, but you may also end up losing your home.
Borrowing from Your 401(K)
This is dangerous for a number of reasons. Firstly, your employer may prohibit you from contributing further until you’ve paid off the loan. Secondly, your take-home pay will be reduced, as a portion of your salary goes towards paying off the loan. Thirdly, if you leave your job without paying off the entire loan, you’ll have to shell out income taxes as well as withdrawal fees.
Using a Debt Settlement Company
For this to work you have to first stop paying your bills, which in turn is likely to affect your credit score in a negative way. Moreover, debt settlement companies charge thousands of dollars as fees, and their proposals may not even be accepted by your creditors. In case you do reach a settlement, the IRS will probably hand you a big bill – the agency considers forgiven debts as income and expects you to pay taxes on them.
Transferring Balance to Other Credit Cards
This tactic is advisable only if you are sure that you’ll be able to pay off the entire loan before the card’s low introductory rate expires. Otherwise, as soon the introductory period is over, the credit card company may hit you with such high interest rates that it’ll make the balance transfer meaningless. Nevertheless, if you do decide to go for this option, make sure you don’t make these balance transfer mistakes.
Getting Payday Loans
While it may seem like a quick way to get cash, these loans carry notoriously high interest rates that may be as high as 400% on an annual basis.
Using Credit Cash Advances
These also entail significant costs, as the interest rate is often more than 10 percentage points higher than your standard rate. Add to this another 3% that you’ll have to shell out as transaction fees.
Obtaining a Pawn-Shop Loan
While this may seem like an easy solution to temporarily tide you over, it may result in you losing your prized possessions, such as jewelry or other valuables, forever.
Borrowing from a Family Member
Certain relatives may be willing to lend you money to repay a loan. However if you’re unable to settle this new debt in a timely manner, you could end up jeopardizing the relationship.
Filing Bankruptcy Unnecessarily
Filing bankruptcy makes sense only if you have insurmountable debt, such as astronomical medical bills that you know you’ll never be able to repay. It is unadvisable to use this method to get rid of small loans, as this means that the mark will stay on your credit report for at least ten years.
Issuing Post-dated Checks
Some individuals issue post-dated checks to issuers if they don’t have the required amount of funds at that point of time. This is risky – if their check bounces due to changed economic circumstances, they could land into further trouble.
Many individuals choose to pay off their existing debt by taking on another loan. Often, the new debt charges interest rates that are much higher than that of the original loan, making the entire exercise self-defeating.
Having said that, debt consolidation can make sense in cases where the individual is able to borrow money at reasonable rates. For example, at Fund&Grow, we provide our clients an easy way to get as much as $50,000 - $250,000 of unsecured credit at 0% interest. Many individuals use this money to grow their organization by paying off existing business loans that charge high rates of interest. Thus, not only do these clients save on exorbitant interest costs, but they are also able to reduce their debt. If you are someone who requires low cost business financing, call us at (800) 996-0270 and we’ll take care of your needs immediately.