Personal loans can be useful for a great number of purposes. You might be able to use a personal loan to make an important purchase, pay for a vacation, help a child pay their tuition for college, or even consolidate higher-interest debt like credit cards. Personal loans can sometimes be a real blessing.
At other times, you can feel like you’re stuck in personal loan hell. How does this happen? There are a couple of possibilities.
The Myth of Debt Consolidation
So, someone has talked you into consolidating all of your credit card bills into a lower-interest personal loan. While that may seem like a good idea, and while it may help you get a handle on your financial situation for a little while, the fact of the matter is that it can be dangerous.
Why is that?
Well, there is a reason you accrued all of that credit card debt in the first place. Chances are you like to buy stuff. You want to buy stuff. With your credit cards all paid off, there’s nothing at all to stop you from buying more and more stuff.
Within a few months, or maybe a year at the most, you find yourself twice as far in debt. You’ve maxed your credit cards out again, and you still are making payments on your personal loan.
Still think that personal loan was a blessing?
When Your Circumstances Change
So, let’s say you used a personal loan to buy a boat. Forget the credit cards for a few minutes. That’s great! Unfortuantely, the housing market collapses, which leads to the financial industry collapsing, which leads to the auto industry collapsing, which puts you out of a job.
If I’d have said that a few years ago, you’d have thought I was being a worry-wart. Yet, it’s the situation many folks find themselves in.
So, what happens? Well, you’re barely making your house payment, and you stop paying on your personal loan altogether. The bank comes to get their collateral, and they don’t give you anything in return for it. You’ve paid on that boat for 3 years, and only had a dozen payments left.
Too bad. You’re screwed. You’re in personal loan hell.
What’s the moral of the story here? Take out a personal loan if you need to, but recognize that, just like with any other kind of credit, you’re putting yourself at risk.
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