Repayment Methods To Avoid
Getting out from under and eliminating credit card debt is a great goal that takes commitment and a balanced plan of action. However, when many of us decide to take on this goal we look to methods that could risk our whole financial wellbeing. In reviewing your options do not fall into either of the below repayment traps.
Home Equity Loan or Line of Credit
There are an alarming number of offers today on the Internet referring to getting out of debt. These experts want you to believe that a Home Equity Loan or Line of Credit is your best option to get out of debt. This is the furthest thing from the truth.
The interesting thing about credit card debt is that it is an unsecured debt, meaning there are no assets to back the debt with. This is a high-risk investment for the lender, and if you fail to pay what you owe they lose what they loaned you.
However, a mortgage, Home Equity Line of Credit, or Home Equity Loan is a secured debt. Your home is the collateral backing the loan. Which means if you default on the loan you could lose your home to the lender.
By using a Home Equity Loan or Line of Credit you are trading an unsecured debt for a secured one. If a life changing event such as death, loss of job, sickness, etc. happens you could fall behind or worse not be able to make payments. In this circumstance your lender may force you to sell your home in order to pay the note. Many times what happens is that your home is sold for less than what you have in loan amount, but you are still required to pay the difference.
401(k) Loan
The second repayment trap is taking a loan against your 401(k). This is an extremely risky proposition that comes with tax penalties.
When making contributions to your 401(k) the funds have not been taxed, but when you repay your 401(k) you are using money that has been taxed. Finally, when you are of retirement age and ready to use your 401(k), the funds are taxed one more time. So, by taking a loan against your 401(k) you are being taxed twice on your money.
In Closing
Do not use your home to pay for your bad decisions and choices that you have made. Statistics show that when people use their home to pay off their debt they end up taking on additional debt, and put themselves at risk of losing their home.
Better Ways to Address Repayment
Instead of using a Home Equity Loan, Home Equity Line of Credit, or your 401(k) to pay off your debt try one of the below debt relief methods:
* Budgeting and money management
* Live below your means
* Pay more than the minimum on credit cards
* Debt settlement
* Debt consolidation
* Consumer credit counseling
* Bankruptcy, as a last resort
