125 Loans Can Be A Disaster

125 loans can cause you to lose your home. They can be useful but, you need to be very careful.

125 loans are named for the amount of equity you can pull out of your home, usually 125%. Because of the way this loan is secured you have a mixed loan. A portion of it will be secured by some equity in your home and some of it will be unsecured. The portion that is unsecured will always cause the interest rate to be much higher than a fully secured home equity loan.

The selling points on 125 loans are the convenience of making one payment rather than several and this single payment being lower than the total of the payments it replaces. While the rate will look more attractive than the rates you are probably paying on your credit cards, other types of debt rolled into the loan may actually have lower interest rates.

An Example

A car loan for $11,000 with an 8.5% rate and 4 years remaining on the note gets rolled into a 125 loan with a rate of 11.5%. If you toss in your credit card debt of say $12,000 with an interest rate of 19% it looks better, but now you are looking at ten years of payments.

The biggest problem is if you are like many borrowers, instead of getting rid of your credit cards, you will run up your card balances again. This is called reloading. Then you would have your 125 loan to repay along with new credit card balances. You would really be worse off then. This type of loan requires a tremendous amount of resolve. If you have that resolve you can make this work. Without it a 125 loan can be a disaster.

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