In part 1 of this article, we discussed some ways of paying off debt fast. These include paying more than the minimum amount every month, consolidating your credit card debt onto one card with a low interest rate, cashing out your savings and investments to pay off your debt, and borrowing against your life insurance policy. While some of these measures may sound extreme, they might make sense depending on the interest you are paying on your debt. All in all, it is better to pay off your debt as fast as you can, rather than holding on to assets which yield less than the interest you are paying on your debt. In this article, we will discuss some additional options for paying off your debt fast.
Paying off debt fast â€“ other options
It might be worth asking family and friends for a low-interest loan, which you can then use to pay off your high-interest debt. Although whether you can get a loan from your friends or family is something that will vary from person to person, if there is someone who is willing to make you the loan, you could save a bundle on interest. Also, people may be willing to give you a longer time to repay the loan. However, in this case you have to be careful to abide by the terms of the loan repayment schedule if you want to maintain your relationships. It is best to have the loan terms in writing to avoid any misunderstandings later on.
Another option is to get home equity loans to pay off debt. If you hold a mortgage that you have been paying off, you have a home equity line of credit against which you can borrow. One advantage of taking out a home equity loan is that the interest rate tends to be in the 6 to 7 percent range, which is typically quite a bit lower than your standard debt interest rate of 18% or higher. Secondly, by itemizing deductions on your tax return, you can deduct the interest on your home equity loan. One thing to be careful about is to avoid racking up more credit card debt after you've paid off your debt using your home equity loan. Then you will be stuck with your new credit card debt in addition to needing to repay your home equity loan, which means you will be even deeper in the hole.
You might consider borrowing from your 401(k) plan. Retirement plans allow you to borrow up to the smaller of the following amounts: half of the money you have in the plan, or $50,000. The interest rate on a 401(k) loan is also typically much smaller than the interest rate on your credit card debt. Also, the interest on the 401(k) loan gets paid out to your own account! However, proceed down this path with caution. For one thing, you pay back the loan and interest with after-tax dollars, thus losing out on the tax-deferred advantages of a 401(k) plan. You will pay taxes again when you withdraw money from your 401(k) plan after retirement, so that's like being taxed twice on the same sum on money. In addition, a 401(k) loan must be repaid within 5 years. And if you change jobs prior to repayment, the entire balance of the loan becomes due immediately. Any outstanding part of the loan is then treated as an early distribution from your 401(k) and taxed. If that were not enough, early withdrawals from your 401(k), before you turn 59 1/2 year old, are charged an additional 10% tax as penalty. So, if you are going to borrow from your 401(k) to pay off your debt, make sure you can pay it back in full before you quit your current job, or you might end up worse than before.
There is no one size fits all when it comes to paying off debt fast â€“ however, there are a number of different options to explore, and chances are some of the ones described in these articles will fit your situation.