Generally speaking, you should strive to have as little debt as possible. In a perfect world, you/we wouldn’t have any debt to deal with, but that’s not the world most of us live in.
So we do take loans and use credit cards to buy just about anything. Which, sometimes, can put us in trouble.
And it’s the “trouble” we’re going to discuss in today’s article. Specifically, we’re talking about 6 stupid ways to pay down your debt. Let’s get started…
1. Borrowing from your retirement account
Your 401(k) account has a clear purpose — to provide you with income in retirement. That’s it. It should NOT be used to pay down your current debt(s). Period.
If you do take a loan against your 401(k) account, your employer may not allow you to make new contributions until the loan is repaid in full. Like that’s not enough, you’ll be hit with early withdrawal fees and also be responsible for income tax on the balance. Plus, if you happen to leave your job in this period, the outstanding loan amount will had to be repaid immediately.
And let’s not forget that doing this once could lead to similar situations down the line, potentially turning your household budgets upside down.
2. Consolidating debt with a high-interest loan
If you have multiple debts, you may opt to consolidate them into a single loan. Nothing wrong with that as long as the new loan you’re taking comes with good terms. Otherwise, you may end up in a worse situation than you were before taking this step.
Therefore, you should read the fine print to understand the details of the loan. The monthly payment may sound low, but it could turn to carry a higher-than-expected APR with it.
3. Borrowing against your home
I guess there are some situations when you may have to borrow against your home, but this should be the very last resort to take. Cause you know what happens if you don’t pay off that debt — you end up on the street.
So by all means check all options before making this move. This could easily end up as one of the worst moves ever.
4. Using money from your emergency fund
We have written extensively about emergency funds, how and why they should be used — for emergencies only. Hence the name.
They are made to help you get past some unexpected events the life throws at you, like a medical bill or those situations when your car or computer stops working. You need those for work, and you need to act quickly.
In contrast, using money from your emergency fund to repay your debt — which you knew was coming — could easily jeopardize your financial security and could leave you exposed to even higher debt levels down the road.
5. Working with debt settlement experts
You should distinguish between debt repayment and debt settlement. The latter involves stop paying all your debts and talking to your creditors about the settlement plan. Unsurprisingly, such move will instantly crash your credit score, making it much harder to get any kind of loan in the future.
Instead, if you are struggling to repay what you owe, you may be much better off contacting a local nonprofit organization which provides assistance to people in dire financial situations. They may be able to help you out and structure a financial plan that you may be able to follow through on.
6. Borrowing from friends and family
Last but not the least comes borrowing from your friends and family. Perhaps we should’ve placed this first cause it tends to be one of the first moves people make to ultimately screw up their finances. And friendships.
If you need money, go to a bank. If one bank doesn’t want to lend you money, check another one. These days you can also check various online services providing loans. Just read the fine print to avoid predatory lenders. Cause there are quite a few of them out there.