Liz Weston: How debt’Options’ could dig you

Americans are slipping deeper into hock. Lots of people turn to debt consolidation loans, retirement program loans and cash-out mortgage refinancing that guarantee relief but could make them worse off to cope.

Paying off debt such as credit cards with lower-rate loans may look like a no-brainer. Many of these loans come with hidden costs and pitfalls. And consolidation alone can not fix the issues that led to the debt in the first location. In actuality, these loans can make matters worse if borrowers feel freed up to spend more.

“Consolidating debt appears to create the psychological impact of making you feel as if you’ve out it,” says Moira Somers, fiscal psychologist and author of”Advice That Sticks.” “Then (debtors ) just begin spending up again, until there’s not any more wiggle room”


Statistics reveal U.S. households are taking on record levels of debt. In general household debt, such as mortgages, student loans and credit cards, also hit a new high of $13.54 trillion at the end of 2018, according to the Federal Reserve Bank of New York. Credit card balances have returned for their 2008 summit, and serious delinquencies — accounts 90 days delinquent — are all on the upswing.

Meanwhile, private loans, that are utilised to consolidate other debt, have come to be the fastest-growing kind of debt, based on credit agency Experian. One in 10 American adults has a loan, along with the outstanding loan debt hit a record $291 billion.

Mortgage refinancing also has made a comeback. With this type of loan, debtors pay off their current mortgage and find the difference in money. Mortgage buyer Freddie Mac reports that borrowers represented 83 percent of all refinance loans made in last year’s fourth quarter, the highest share since the third quarter of 2007. Forty percent of people who cashed their equity used the money to pay debts or bills.

The loans drain off. Since many continue to stand up debt relief is often temporary. And debt, which could be wiped out in bankruptcy, into debt that does not just can not be erased but can cost borrowers their homes is turned by the loans.

“This is extremely dangerous,” Standaert says. “It puts your house at risk of foreclosure”

Retirement plan loans pose dangers. In the event you do not pay the cash back on time, the equilibrium turns into a withdrawal which triggers taxes and penalties — plus you lose all the future tax-deferred returns that money could have earned.

An unsecured personal loan could be a better option if borrowers have been offered lower rates of interest and can escape debt. Unfortunately, scams and deceptive advertising abound, Standaert states. Unwary borrowers end up owing more and could wind up paying fees or interest rates.

Often, the best solution isn’t a loan says literacy specialist Barbara O’Neill. Cutting costs and boosting earnings, maybe with a negative job, can help individuals make extra payments to reduce their debts.

Standaert suggests calling your credit card businesses to ask whether they give hardship programs that could reduce your payments if that isn’t possible. Nonprofit credit advisers, like those have debt management plans that can reduce interest rates on credit card credit card that is burdensome. Truly overwhelmed borrowers should talk to a bankruptcy attorney until they begin skipping payments, O’Neill states.

“That’s a sign of distress, and you will need to take actions before you get to there,” O’Neill says.


The finance website NerdWallet provided to The Associated Press this column. Liz Weston is a columnist in NerdWallet, a certified financial planner and author of”Your Credit score” Mail: [email protected]


What’s debt consolidation?