Taking out a loan these days is easy with so many different sources to avail it from and due to the liberal lending policy. Now you do not have to be at the mercy of the traditional banks and credit unions that had a high hand even a couple of years back while selecting who to lend and whom not to.

Debt Trap

Thing to know to avoid falling into a debt trap

This easy accessibility to loans has raised the demand of loans manifold and along with it, the number of people defaulting in payments has also risen. This is all due to the mismanagement of loans and improper handling of the money by an individual.

  • If you want to avoid such a situation and fall into a debt trap, you will have to be very selective, practical and careful right from the time you plan to take out a loan, whether it is an auto loan, home loan or even using your credit cards for making a purchase.
  • In addition to that, you will also have to manage your loans properly to avoid dealing with debt collectors and spend hours looking for the best debt relief option.

It is true that according to federal law, the debt collector has several restrictions and a specific guideline to follow while contacting any default consumer. However, the simple thought that the debt collector may call you might set the butterflies in your stomach free. The federal law dictates:

  • How a debt collector should contact you
  • They should not contact before 8 am and after 9 pm
  • They should not contact you in your workplace especially if your employer does not approve such calls
  • They should not harass, threat or abuse you
  • They should not lie or use any unfair practices while trying to collect a debt
  • They must abide by and respect any written request from you if you ask them to stop further contact.

However, all these things can be avoided only if you are prudent and strategic enough to manage your loans.

Types of debts

In order to manage your debt and avoid the debt trap or seeking any debt relief, first and foremost you will need to understand the types of loans that you can avail. This knowledge will help you to know the consequences of each in case you default and make your plans early so that you do not. Typically, your debts can be two types: unsecured or secured.

  • Secured debts are those that are usually tied to your asset of value such as your home if you take out a home loan or your car if you take out a car loan. Secured loans have a risk in them as you may lose your asset if you stop making payments as the lenders can repossess your asset.
  • Unsecured debts, on the other hand, do not have any assets as collateral and therefore the risk lies mainly on the lenders. A few typical examples of unsecured debts are credit card debt, signature loans and bills for medical care.

It is for this difference that most of the people opt for unsecured loans. However, the lenders too are wary of such risks of no payment wherein they might lose the entire amount loaned out. It is for this reason that most of the unsecured loans are offered in small amounts and with maximum interest rate in Pennsylvania so that they take the minimum hit, in case there is a default.

DIY debt relief

If you see that you are falling behind your payment schedule, it is better that you contact your creditor immediately and let them know about the situation. In case you have taken out a secured loan this will save you from foreclosure and in case it is an unsecured loan, it will save you from damaging your credit score unnecessarily.

In most of the times, it is seen that creditors are most willing to work with the debtor directly in such crucial times, provided that they believe that you are acting in good faith and that the current financial situation is temporary. There are different ways in which they can help such as:

  • They can reduce your monthly payments by lowering the interest rate or waiving a few specific fees
  • They may even suspend your payments for a short period of time till the situation is back under your control
  • They may stop adding penalties for that specific time so that your outstanding balance does not accumulate and
  • They may also come up with a better and revised payment plan and provide handsome tips and advice to manage your money and debt.

In short, they will be by your side always but when you recommence regular payments they may ask for an additional amount form you for the past due to the total.

Contact a counseling agency

When you cannot work out a suitable plan with your creditor yourself, you can always take the help of a professional and reputed counselor or a counseling agency. Many of these agencies will offer you free help to choose the best relief options depending on your current financial and debt condition.

However, there are several such agencies and debt settlement companies that may dupe you taking advantage of your dire situation. In order to avoid falling further into the debt trap, you should do your research well so that you partner with a reliable and reputable agency only. For this, you should work only with a government-approved credit counseling or debt relief service provider and avoid any company that:

  • Do not provide any information about their services provided for free
  • Asks for your credit card account number and balance
  • Asks you to get into a debt relief program without appraising your financial situation and explaining the consequences in case you fail
  • Asks you to enroll into a DMP without teaching you about budgeting and money management skills and
  • Demands that you make payments into a DMP even before the creditors have accepted the proposal.

Therefore, you should take every step very cautiously and consider your financial ability before you take out a loan to avoid a debt trap.

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