With an increasing number of Americans facing a growing amount of debt, it makes sense that so many people are seeking relief. But when it comes to getting rid of debt, some “solutions” actually end up creating more problems for consumers. And the last thing you want is to inadvertently make your financial situation worse by utilizing a solution with unforeseen negative consequences.
Pro tip: As you’re figuring out how to address your debt, make sure to steer clear of these five bad debt relief strategies.
Bad Strategy #1: Taking Out a Predatory Payday Loan
Payday loans lure people in with the promise of immediate cash just for having a job. The problem here is that payday loans can carry annual percentage rates (APRs) of 400 percent on average; in some states, the interest is even higher. So, if you’re not prepared to pay back what you borrow by the time your next paycheck rolls around, you’ll start racking up more debt fast.
As CNBC outlines, if you take out a $500 payday loan with an APR of 391 percent, in two weeks you’ll owe approximately $575. Every time one of these loans rolls over, you’ll owe more. It’s a dangerous cycle that’s hard to break once it’s started.
Bad Strategy #2: Get a Personal/Consolidation Loan You Can’t Repay
One strategy called debt consolidation involves taking out a personal or consolidation loan to pay off other high-interest debts. The upside here is that you’ll only have to focus on repaying a single loan. Plus, if you get a favorable interest rate, you’ll end up paying less over time.
The biggest risk here is that at some point in the future you’ll miss payments or default on this loan. If this happens, you’ll start accumulating late fees and higher interest, which defeats the purpose of taking out the loan in the first place.
Bad Strategy #3: Jump Straight to Bankruptcy
People in serious debt may panic, feeling they have no choice but to declare bankruptcy and start over with a blank slate. But bankruptcy is serious—it stays on your credit report for up to 10 years, and you may lose some or all of your assets. You’ll also have to pay fees to file and work with an attorney.
It’s worth at least exploring other options first. There’s consolidation, which can work with a long-term commitment to repaying the loan. There’s also debt settlement to consider; according to many Freedom Debt Relief reviews, enrollees were able to stave off bankruptcy by adhering to a settlement program. This tactic involves making monthly deposits into an account, oftentimes instead of paying creditors, until you’ve stockpiled enough to start negotiating with creditors for a hopefully lower agreement than your original debts.
Homeowners facing down lots of unsecured debts—like credit card balances or medical bills—may decide to refinance their mortgage, taking out the difference in cash to repay their most pressing bills. Of course, your mortgage will last longer this way, so you must be ready for that trade-off.
Bad Strategy #4: Pulling Money from Your Retirement Account
When you’re in dire straits, pulling money from your retirement account may be tempting. After all, it’s just sitting there, right? Not exactly. You’ll face a penalty for taking out money before retirement time. You’ll also lose out on the opportunity to amass compound interest, meaning you’ll have much less to live on when you’re finished working.
Do anything you can to avoid “kicking the can further down the road” and messing with your future financial security.
Bad Strategy #5: Stretching Out Your Student Loans
It may be an option to refinance your student loans. While lower monthly payments may look extremely tempting—especially because you could use those savings to pay off other debt—there’s a trade-off. You’ll generally be stuck paying off these loans for a longer period of time, possibly paying much more interest over the course of each loan’s lifetime.
These five debt relief strategies may at first glance look like the solution to your current debt problems, but upon the second glance, you’ll see the risks associated with each.