When unexpected life expenses pop up, taking on personal loan debt is sometimes the only way to make it through the financial challenges. While a loan can solve the immediate problems, other factors need to be considered regarding going into personal loan debt and the ongoing impact of interest costs and other expenses.
The Reasons Behind Personal Loan Debt
Why are so many Americans facing the need to take on personal loan debt? Here are some of the most common reasons that people turn to personal loans for their immediate financial needs.
Paying off Credit Card Debt
When debt adds up, it can be a challenge to keep up with the various bills that need to be paid. Maxed-out credit cards or cards with high balances need to be addressed immediately, so consumers turn to other loan options to solve these pressing problems.
Even though acquiring personal loan debt is relatively easy, it's often the wrong solution to paying off your credit cards as it just leads to a personal loan to consolidate debt instead of paying off debt completely. Because of this fact, it's essential to work with an experienced credit card debt repayment team to manage the payoffs and balances properly and avoid further debt.
Loans for Large Purchases
When it's necessary to make a big purchase, taking on a personal loan is sometimes the go-to solution to create funding for these purchases. Large purchases can include everything from furniture to household appliances, moving expenses, and travel. These purchases are necessary in the moment, but families don't always have the cash on hand to pay for the costs outright, which is why they turn to personal loan debt for an immediate resolution to their financial concerns.
When an unexpected situation occurs, the only option might be to take out an emergency loan. Emergencies can be related to medical expenses, unexpected home repairs, and tax bills, among other things. These emergency loans are often designed to take advantage of unexpected borrowers in their weakest moments. The loans have sky-high interest rates, making it a challenge to pay off the balance after the emergency is resolved.
Personal Milestone Events
Significant life events can be costly, and no one wants to scrimp on expenses when it's time to pay for a wedding or funeral. Taking on personal loan debt can help pay for big-ticket items related to the event, such as a burial site for a funeral, or photography, venue, and catering for a wedding.
Underinsured Motorist Debt
In a car accident, insurance coverage typically steps in to defray the costs associated with the resulting bills, whether medical or merely car repair bills. Sometimes, the insurance isn't sufficient to cover the full amount of the damages. That could leave a large balance that needs to be paid out-of-pocket. Those without a better option often turn to a personal loan of some sort.
Personal Loan Debt: The Downfalls
While personal loan debt can get consumers out of a pinch in a hurry, it's not without significant drawbacks. Take note of the following downfalls related to personal loan debt and look into utilizing a personal loan calculator to figure out how much you’ll actually be paying.
High APR Loans
Even though personal loan debt is often easy to access, the repayment terms can be a heavy burden. Many of these personal loan rates are excessively high making the overall payback amount unbearable. The monthly payment amount may seem manageable, but the terms are often stretched out for many years, perhaps costing several thousand dollars in interest fees alone.
Late Fees On Debt Payments
Personal loan debt is not to be taken lightly. Even one missed payment can start a domino effect that results in exorbitant late fees and other tacked-on loan costs. Too often, loan companies build in strict repayment terms that hurt the consumer when he or she is unable to make payments on the agreed-upon schedule. The combination of interest costs and late fees adds up over time, causing a bad debt situation to become even worse. On top of that, the consumer's credit is likely to take a further hit, making it harder to get credit in the future.
Too Many Loans
A small loan here or there might seem insignificant. However, when the monthly payments start to add up, it becomes hard to keep up with the ever-increasing debt load. At this point, consumers find themselves making merely the minimum payments rather than trying to accelerate the debt payoff. Eventually, a consumer may default on one or more loans, causing it to go to a collection agency. From there, things just spiral downward. The collection agency demands payment in full in a lump sum to avoid going to court. If the consumer couldn't make the minor monthly payment, then he or she surely doesn't have a lump sum to pay. Many consumers will then turn to an unsecured debt consolidation loan, but this is just adds more personal loan debt to what you already have.When consumers tack loan on top of loan on top of loan to meet obligations, it's a never-ending cycle that is hard to end.
Secured Loan Collateral
Those with less-than-stellar credit may have trouble getting an unsecured personal loan. Many will have to put up real property as insurance against loan default, such as a car or home. Doing so provides the immediate benefit of a lower interest rate and monthly payments that are more manageable. Unfortunately, many fail to realize that this scenario ups the ante tenfold.
The collateral placed against the loan is now at risk. Thus, the creditor has the right to seize the consumer's vehicle or put a lien on his or her home if payments aren't made as agreed. Being without a car to get to work is only going to exacerbate the problem.
Life often throws unexpected expenses at people, causing them to explore all manner of options to pay for these costs. If you've used personal loan debt in the past and it's a challenge to keep up with the payments, then know that help is available. The right debt solution will allow you to pay down the balances and get on the track to becoming debt-free. Explore debt consolidation or debt repayment services to see if one is the right option for your personal loan debt.