If you are like most Americans, you have a car loan or lease. You may have a mortgage, and you probably have a credit card or two. What about outstanding personal loans? If you have one, pay it off. If you don’t have one, think twice before you get one.
Personal loans can seem awfully attractive. After all, you can use them to finance just about anything. A personal loan can finance that European trip you have always dreamed of. It could fund the man cave, or she shed your spouse wants. You can even use personal loans to consolidate a bunch of other debts. But so many possibilities do not prove that personal loans are a good financial tool.
Personal Loans and Vulnerable Consumers
The interesting thing about personal loans is that they are especially attractive to the most vulnerable consumers. Vulnerable consumers are defined as those who struggle to pay their regular bills. And unfortunately, recent data shows that some 38% of America’s vulnerable consumers use personal loans to manage their debt.
Here are the top three reasons vulnerable consumers turn to personal loans:
- Debt Consolidation – Consumers consolidate more expensive debt into single personal loans.
- Lower Rates – Consumers take out personal loans with lower rates to pay off more expensive loans.
- Lower Monthly Payments – Consumers pay off other debt with personal loans in order to reduce their monthly payments.
At first glance, all three strategies seem reasonable. Here is the problem: using one form of debt to manage another makes it exceedingly difficult to get fully out of debt altogether. Personal loans become a financial crutch that prevent people from adopting better money management strategies. They often lead to an endless cycle that permanently enslaves consumers to their debt.
When Loans Go Bad
There is something else consumers should consider before getting personal loans: what could potentially happen if they find themselves unable to pay. Remember that personal loans are unsecured credit instruments. That means there is no collateral behind them, like there is for mortgages and auto loans.
Lenders are usually willing to exercise limited patience when borrowers fell behind on their payments. They may hold off on collection for a few months, but that’s about it. Before too long, sending the debt to collection or seeking a civil judgment waits just around the corner.
Judgment Collectors, a judgment collection agency based in Utah, says that both type of collection efforts is not in the best interests of the borrower. Standard collection efforts involve selling the debt to a collection agency who then seeks to collect payment through phone calls, notices sent in the mail, etc.
A judgment is the next step up. It is a court action that recognizes the validity of an outstanding debt and the borrower’s legal responsibility to pay it. It isn’t unusual for a lender to forgo standard collection on a personal loan in favor of a judgment. Lenders are more likely to go straight to court on personal loans of a higher value.
You Could Lose Big
Here’s the deal: you could lose big if you fail to pay off a personal loan. The lender or its representative could file a lien on your property. Some of your assets could be seized and sold. Even your wages could be garnished in some states.
Personal loans may look attractive, but they are risky. If you are considered a vulnerable consumer, think twice before attempting get a personal loan. The risks you face are as big as those faced by the bank. Neither of you need to take that chance.