Having a monthly debt payment can disrupt your budget, no doubt about that. How about multiple debt payments in a month? It could really throw your financial planning out the window. However there are options that some financial counselors or institutions suggest you take to keep your budget in check. Some of these suggestions might be good on paper, but in reality they may even worsen your finances. You need to be aware of the drawbacks popular strategies bring to your doorstep.
Using Home Equity
You already have trouble maintaining your finances so a lending company would suggest that you use your house and property as collateral. It is safe they said, your house and property have high value, they said. Though it might be true and you can get a high loan amount, it can be dangerous for you in the long run. Once your debts are consolidated and you are only worrying about monthly payments, it makes it easier at the beginning of the payment term. However on a long term basis, it might be harder for you to make your payments on time. When this happens then the lending company will have the right to seize your collateral; namely your house and property. Not only will you be broke, but you will also be homeless.
Another thing that you should be aware of when you take out a home equity loan is that it will show up on your credit history. For this type of loan, creditors are not very fond of this since they view it as your inability to handle your finances. In turn, it might make things difficult for you when you try to sell your house in the future. You might even be forced to sell it at a lower price than what you had hoped for.
Using Your Retirement Funds
If you have saved a good deal of money then you might be given the option to use some of those savings in a form of a loan. This plan is often presented as ideal since you are just borrowing some of your money anyway, it would not hurt. With attractive interest rates, it is often advertised that you can pay back your retirement funds in a matter of years.
What some lending companies do not tell you is that a retirement fund relies heavily on interest to grow. You need to let it stay in that bank account for a good number of years so that you can reap the benefits when you retire. That’s the whole point of a retirement fund after all. If you take money from that fund, it reduces the duration it can grow, and can therefore limit your budget when you are without a job. Considering the fact that by that time you will require a lot of medical treatment and medicine expenses, having a hefty retirement fund will definitely work in your favor.
Another thing to consider is in the event that you lose your job. After termination, you need to repay your loans within 60 to 90 days. If you are under the retirement age, and if you are not able to pay it back then, it could be treated as an early withdrawal. This means that penalties will be imposed and you might actually owe more than what you took out. We’re talking in the thousands of dollars here for just penalties alone.
Using a Debt Settlement
A debt settlement involves a lending company which will act as a middleman and negotiate a deal with your creditors. However this is after you stop paying your creditors for 30 to 60 days. After that duration, debt settlement companies would then step in and try to strike up a deal with your creditors to get a lower interest rate or a lower total amount owed.
If you noticed in the overview, this method is already inviting trouble. When you stop paying, each of your creditors will unleash their debt collectors on you. These debt collectors are not famous for their etiquette. They will harass you and bombard you with phone calls or even worse – lawsuits. You have to endure this for 2 months while you try to save up enough for a settlement. Not to mention that during this time your credit score will be taking hit after hit. Each month all of your creditors will send their negative credit report for you to the credit bureau. To make it short, your credit score will be badly damaged during this duration. The worst part is that after 2 months, some of your creditors might not agree to the debt settlement company’s terms. This would result in you owing more money, and an even lower credit score.
Using Other Credit Cards
Credit card companies often advertise that their credit card has a zero interest rate in the first year of usage. For some people, they take advantage of this and transfer all of their debts into this single credit card. During that first year, they try to pay off as much as they can while the interest rate is zero. After that first year, the interest rate will shoot up again so they transfer it to another new credit card. This is commonly known as credit shuffling.
Although this might seem like a good method since you are evading that pesky interest rate, it could mean a lower credit score for you. In addition, you could get burdened with transfer fees that are stellar. Lastly, if you cannot transfer the amount then you are left to deal with a high interest rate.
Using a Debt Consolidation Loan
Another common option that is suggested by financial companies is to take out a loan to pay off all your debts. After this, you just pay off that single loan. You are left with single monthly payments and a single interest rate so it might seem very attractive to you. As a bonus, debt consolidation loans have a long payment term and low interest rates so it is really hard to resist these factors when you have mounting debts.
For one thing, a debt consolidation loan’s interest rate and long payment term means that you will be paying a higher total amount than your original loans would have cost you. For example, your current loan would have had a 5% interest rate for 6 months so the total interest would be 30%. Here comes a debt consolidation loan with a 3.5% interest rate for 12 months. It might seem feasible, but the total interest would come out 42%. In the long run, this method will be very costly and you will lose your debt payment savings instead.
Paying off your debt might be too overwhelming for you, but if you do not prepare yourself you might be making your situation worse. There are many other alternative strategies of paying off your debts. Being aware of the them could mean that you are able to select the best one and take control of your finances.