Do you ever feel like you're getting misled every time you try to reduce or eliminate your debt? So many of our clients came to us for help after trying these ineffective methods that actually cause more problems than solutions. So take heed or you could end up throwing additional time and money at the problem.
1. Looking the other way
Unfortunately, this one is very common among people who can't seem to keep up with their monthly payments. As the bills roll, they stack up unopened. It's as if a miracle solution is going to pop up in time to make it all go away. It may feel less stressful, but the reality is the debts grow even faster due to penalties. The whole situation becomes even worse!
2. Asking your boss for an advance
The truth is getting a paycheck advance is like borrowing against your future. Although it may seem like a smart move at the time, it is likely you will never be able to catch up... much like the credit card debt that got you into this situation in the first place. It gives your employer too much information about your personal financial life. Think about it... would you trust an employee to make smart decisions on your company's behalf if they can't manage their own money?
3. Getting a payday or benefits loan
This is one of the most expensive methods to increase your cash flow. Companies that are in this business are basically attaching liens to your future income. Most will require access to your checking account so they can withdraw the owed amount on the day of your next paycheck. Worse of all, even when the finance charge sounds small ($10-30 for every $100) the annual percentage rate nets out at a whopping 300-400 percent, so if the loan is not paid back in time, you are basically increasing your total debt amount.
4. Beware of pawn shop loans
If you're thinking it's a no-brainer to trade in a few valuables in exchange for fast cash, think about this. The truth is if you ever want to see your valuables again, you'll have to come up with the cash in a very short period of time. Pawn shops are in the business to get their money one way or the other and aren't interested in a long term relationship!
5. Credit card advances are costly
Credit card companies look like they are giving away free money you are sent blank checks. Some of our clients were under the impression they would receive extra bonus points for using those as cash advances. That is not the case. Be smart and understand credit card companies are marketing experts that have developed different ways to fool you into getting more in debt. That means a payback interest rate that is much higher than the standard rate - often 10 percent or more!
6. Taking out or refinancing a home equity loan
Mortgage companies make equity loans look very attractive. They offer lower interest rates and lower monthly payments but did you realize the payments are extended over a longer period of time, so guess what? You end up paying more over the life of the loan. Add to that loan origination fees, prepayment penalties and the chance of a future foreclosure if you lose your job or come across periods of financial instability. Risky business.
7. Bankruptcy is rarely the right answer
Sure, there are times when bankruptcy is necessary, but this avenue should be reserved for exceptional situations. Did you know you will lose all of your credit cards and other unsecured avenues for credit once you file? Plus, the laws have gotten more stringent, so you may go through the whole process and ultimately be denied. If that isn't bad enough, the bankruptcy will stay on your record for ten long years, which means you won't get the time of day from a financial institution should you need extra money for medical expenses or emergencies.
8. Debt settlement - ouch!
Debt settlement companies are those that negotiate with your creditors on your behalf. The object of this process is to reduce the debt amount by paying a percentage of the total. Here are some of the horrors you would encounter: Not only does your credit rating wind up worse than it was when you started, but you are liable for income tax on the difference between what you would have paid and what you actually pay. The IRS counts the money you saved as income! Additionally, these companies charge as much as 25 percent of what you owe or 40 percent on what you've saved. On a $5,000 debt, you could be paying as much as $1,000.
At Lane Family Financial, we encourage you to be smart about your debt. It's not about getting out of paying that which you have borrowed, as those methods come with fees and penalties that make the situation worse. Our system was developed to make your repayment as painless as possible and without having to tighten your belt, move to the boondocks or eat cheese sandwiches for every meal.
The best way to get to financial freedom is by setting up a process that pays down your debt in a systematic way that is based on the most sophisticated, but not complicated, mathematical formula. It gives you the freedom to focus on the rest of your life. For more information on how to get there from here, set up a strategy session
or check out our online webinar