The 5 Best Ways to Pay Down Debt
Don’t Play Your Creditor’s Game, Fight Back!
We all have debt whether it’s $35,000 in credit cards, $52,000 in student loans, $375,000 in a home mortgage, or a combination of all of the above. We all think about it, annual rates, compounding month-in and month-out; we all think about paying down our debt too, however, most don’t even know where to start. Here are the five best ways to get yourself out of debt.
1. Pay in Addition to the Minimum Payment
If you’re only paying the minimum payment on each of your bills, your definitely playing into the lender’s game. Banks and credit card companies would prefer you only pay the minimum payment so that they earn more money in interest from you in the long run.
Take a minute to do the math and calculate how long it will take to pay down the balances of your credit cards when paying the minimum payment and figure out how much you will pay in interest during that time. Then double your minimum payment and do the math again. You should see a significant savings. You don’t have to double all of your payment, but try to manage to pay at least 20 percent on top of what you owe and you’ll save more money over time.
Lower Your Bills through a Home Equity Loan from LowerMyBills.com
2. Apply for a Home Equity Loan
This clearly only applies to homeowners. If you have equity in your home, you can most likely get approved for a home equity loan (HEL). A HEL loan can save you a considerable amount of money that you otherwise would pay in interest by consolidating your debt into one, easy to manage, low-interest-rate loan. For example, you can pay down your credit cards that probably have 18 to 24 percent interest rates using the funds acquired in your HEL, only to pay that money back at an interest rate from around 6 to 8 percent.
Be careful though. More often than not, people will begin to charge up their credit cards again as soon as they’re paid down; mounting even more debt than before the HEL. If you have four or more credit cards, you might consider canceling one or two that have high interest rates or offer the least in regards to rewards.
3. Borrow Funds from Your 401k Plan
If you participate in a 401k retirement plan, you may be eligible to borrow up to 50 percent or $50,000, whichever is smaller, of the funds in your account. When borrowing from this account you are asked to repay the money with interest. Fortunately, interest rates are usually only a point or two above the prime rate. Therefore, you may find this to be a good way to pay down those high-interest-rate credit card to a line of credit with half the rate.
The downside to borrowing money from your 401k is that you get taxed on the money twice. As of today’s tax laws, you are to repay the loan and interest with after-tax dollars, then when you go to withdraw the money in your golden years, you are taxed again. Another drawback to this type of loan is that you have to repay the loan within five years, or it will be viewed as a distribution payment to you.
4. Contact Your Creditors and Renegotiate Your Terms
This works more often than you may think, especially as of late. With more and more people slipping into debt, many creditors are willing to work with their debtors to adjust repayment schedules. But not every company is willing to do this for you. There’s no harm in asking though.
You can also consider hiring a debt relief company, which will perform these services on your behalf, for a fee of course. Buyer beware. The so-called debt relief industry is full of unscrupulous firms that will gladly take your money and do nothing on your behalf, except get you further into debt and in worse standing with your creditors. Before hiring a debt relief firm, check for complaints with the Better Business Bureau and by conducting search engine queries.
5. If All Else Fails, File for Bankruptcy
Believe it or not, but bankruptcy is not always a sin. In fact, bankruptcy for some is the only option they have left. If you do file for Chapter 7 Bankruptcy, you can expect to have a record of this on your credit report for at least 10 years. So don’t expect to receive any loans or lines of credit with a half-decent interest rate during that time.
Know that you cannot include federal student loans in your bankruptcy. You will likely be asked to pay attorney and court fees during this process. Each state has their own bankruptcy laws, however, some states will allow their residents to keep a primary vehicle and surrender all other property to be used to satisfy the debt.
Related Information
9 Ways to Pay Off Debt
The Correct Way to Pay Off Personal Debt: The Debt Avalanche
Best Ways to Pay Off Debt
How I Paid Off $35,000 in Debt, and How You Can Too
10 Ways to Pay Off Debt
No related posts. Click here for personal finance information.
Tags: 401k Plan, Chapter 7 Bankruptcy, Creditors, HEL, Home Equity Loans, Minimum Payments, Pay Down Debt, Payment Calculator, Tax Laws
 Money Market Savings℠ Chase Manhattan Bank |
 Citi Chairman® Citibank |