Discover 5 dangerous debt payoff strategies to avoid in 2024. Learn why draining retirement accounts, high-fee consolidation loans, payday loans, deferred interest balance transfers, and debt settlement can harm your finances and explore safer alternatives.
5 Dangerous Debt Payoff Strategies
Debt payoffs are often a burden, and people would love to eliminate or at the very least, reduce them as fast as they can.
Nevertheless, certain kinds of debt repayment plans are even dangerous, as they can negatively impact the long term.
In this article, we will demystify 5 dangerous debt payoff strategies that individuals should not embrace in 2024 as proposed by various researchers and studies.
1. Draining Retirement Accounts
Having navigated the stages of accumulation, such as transferring retirement savings to pay off debts is a dangerous decision that has implications on the future.
Ranking 5th in the list, Bankrate’s survey taken in 2023 revealed that one in five Americans tapped into their retirement fund to pay off debts.
Taking money out of your retirement accounts will cost you a pretty penny since it is a penalty and tax, besides endangering your future financial plans.
Another real-life survey conducted in May 2022 by Fidelity showcased that the typical one is $ 2,200. Instead, other practical approaches can be followed in the process of consolidating debts without hindering retirement plans.
This is because, when you divert your retirement accounts, you are likely to encounter financial hardships in your post-retirement years, and there is a need to explore other strategies for paying the debts.
2. Debt Consolidation Loans with High Fees
This is particularly true when seeking debt consolidation loans, as they can be quite helpful but bear some risks as well.
Consumer Financial Protection Bureau working in America conducted a study in 2023 where they realized that 40% of borrowers who had debt consolidation loans on the market ended up having more debts than they borrowed.
The first mistake that one should avoid is getting a consolidation loan with hefty charges on fees interest or both. From a November 2022 Experian study, the average APR of debt consolidation loans was noted to be at 23%. 43%.
To ensure that you do not fall into this trap, carry out detailed research on the lending companies available, compare their interest rates and other charges, and opt for consolidation only when the longer-term advantages will help you to shave off server costs.
In terms of its feasibility, it has to be noted that debt consolidation can be helpful but it does need proper planning, which hardly will not backfire.
Also read: The 5 Best Budgeting Apps Free 2024
3. Payday Loans
Payday loans are considered a kind of financial salvation for obtaining money for a short period without a credit check if necessary, but they can soon turn into one of the very dangerous types of debt management in 5 dangerous debt payoff strategies.
Pew Charitable Trusts conducted a study based on the data collected in 2023 and they found that the borrowers who use payday loan services spend five months in a year repaying the borrowings.
Again, it is clear that payday loans incur incredibly high interest rates that could go up to over 400% interest rate per annum.
According to the CFPB in a study conducted in 2022, the standard price for payday loans is $15 per $100 of the borrowed amount.
However, instead of applying for payday loans, it is suggested to turn to other effective methods including credit consolidation, contacting creditors, and seeking help from a non-profit credit agency or using a credit card with a better interest rate.
Payday loans trap the borrowers in a cycle of debt that is not easily soluble, which means that it is important to explore less risky forms.
4. Balance Transfers with Deferred Interest
Balance transfer credit cards can help with the debt of paying off credit card debts and this is quite useful but some cards have got something called deferred interest traps.
An even more shocking study from Experian in 2023, revealed that only 40% of people who requested the interest-free balance transfer ever again paid interest on their transferred balance.
The worst deal in cards comes in the form of deferred interest where one is charged interest on the full amount of the promotional period even if one pays the balance only a few days after the promotional period is up.
A NerdWallet’s consumer research was conducted in April 2022, revealing that the typical deferred interest rate is 24%. 99%.
To avoid this, you need to read the fine print of the balance transfer offers and understand the terms and conditions provided so that you can have a well-calculated plan on how to meet the balances before the period offered expires.
This means that a balance transfer can prove to be useful, provided that the consumer strictly pays attention to his/her plan to avoid the complicated pitfalls that come with it.
5. Debt Settlement
Debt settlement companies can help negotiate the exact amount that one has to pay when owning creditors, but it is not always good.
A recent Federal Trade Commission report on the effectiveness of debt settlement outlined that 94% of the consumers who sought debt settlement services accumulated more debt than before in 2023.
Debt settlement can still hurt a credit report and can lead to lawsuits by creditors, not to mention the rigorous taxation on the amount settled.
The CFPB found that based on data from 2022, the participants in debt settlement programs had a decline of 65 points in their average credit score.
Rather, one should approach the creditors for some bargaining in regards to the intended payment schedule or turn to non-propitious credit counseling agencies that may offer their services for debt management at more reasonable rates.
Debt settlement seems quite appealing, and while it can work well for the debtor, it is repletion with hidden charges that may sometimes end up being costly for the debtor.
Also read: Saving Money on Groceries Tips-Transform Your Budget Now
Bottomline
While the focus on achieving the goal of paying off debt should be encouraged, one should do it carefully and refrain from using these 5 dangerous debt payoff strategies in the year 2024.
Knowing your threats and building ways that are safer possible for you to regain control of your money and make a better future for you in the long run.
There is no foolproof way of dealing with debts, and thus it is always important to consult before selecting the proper path.
Not going for such risky options as using up retirement funds, high-cost debt, consolidation, payroll loans, and balance transfer that come with huge rates that are steeped in fees, pagar plans that can have a deferred interest rate, not to mention the debt settlement is one way of securing the financial future.
Concentrate on proper ways to live and start controlling your debts to be able to create a strong structure of further financial stability.
To summarize, it can be stated that payment of debts is always important but it always should be done effectively. That is why it is important to underline that there are many dangerous ways how to pay off the debts that take you back rather than bring you a step forward.
Thus, leaving the above-mentioned risky strategies, which otherwise are dangerous in the long run, and which instead opt for safer strategies you will be able to meet your financial goals just as you wish.
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