Why Popular Debt Solutions Could Make Your Financial Problems Worse
Household debt in America continues to reach record levels, with total debt including mortgages, student loans, and credit cards hitting $13.54 trillion in late 2018. Credit card balances have returned to their 2008 peak levels, with serious delinquencies on the rise.
While debt consolidation loans appear attractive, they often come with hidden risks and don't address the root causes of debt. Personal loans, now the fastest-growing debt category, are held by one in ten American adults, totaling $291 billion in 2018.
Cash-out mortgage refinancing has also surged, with 83% of conventional refinance loans being cash-out borrowers - the highest since 2007. Of these, 40% used the money to pay existing debts.
Common debt consolidation methods and their risks:
Cash-Out Mortgage Refinancing:
- Drains home equity that could be used for emergencies
- Converts unsecured debt into secured debt
- Puts your home at risk of foreclosure
- Often leads to recurring debt problems
Retirement Plan Loans:
- Triggers penalties and taxes if not repaid on time
- Loses potential tax-deferred investment returns
- 86% default rate when borrowers leave their jobs
- Can significantly impact retirement savings
Better alternatives for managing debt:
- Contact credit card companies about hardship programs
- Work with nonprofit credit counselors for debt management plans
- Reduce expenses and increase income through side jobs
- Consider bankruptcy consultation before missing payments
- Seek help from the National Foundation for Credit Counseling
While unsecured personal loans might work for some borrowers who qualify for lower interest rates, the best solution often involves lifestyle changes and proper financial management rather than taking on new loans.
Remember that debt consolidation creates a false sense of financial relief, potentially leading to repeated debt cycles if spending habits remain unchanged. Focus on addressing the underlying financial behaviors while exploring debt management options.