There are risky debt consolidation options that you need to be aware of. While they are effective in their own way, you need to be very careful when you decide to use them to achieve debt freedom. They can have a negative effect on your financial life if you are not careful. Instead of improving your financial future, it might end up destroying it.
This is why you need to get to know your chosen debt solution carefully. It is important to understand if it is the perfect debt relief strategy considering your financial situation. Not only that, but your debt situation is also to be considered. Once you have a firm understanding of your debt and financial position, you need to research everything that you can about your options. Making an informed decision about debt relief will help make it easier to achieve debt freedom.
3 risky debt consolidation options
So what are the risky debt consolidation options that you need to be careful with? Here are three that you need to understand completely before you decide if you want to use them to help you get out of debt.
Home equity loan
While there are several options to consolidate debt without collateral, some people think that it is okay to use the equity of their home. After all, this is your money already. You own this part of the house so you should be able to use it to pay off your multiple debts.
Although that is true, you should not take this lightly. You need to think carefully if the debt you will pay is worth your home. You see, if all of this fails, you do not just fail at paying off what you owe. The house that you used as collateral will also be gone. You will end up losing it because the lender will take it from you as a replacement for your unpaid debt. All those years you spent saving for the down payment and all the effort you made in finding it, getting financing, and fixing the house to your liking – all that will be wasted. Instead of having an asset, you would have lost it.
That is the risk that you have to face if you decide to use your home equity to consolidate debts.
Another one of the risky debt consolidation options is borrowing from your retirement fund. According to reports, 1 out of 5 individuals who have a 401(k) account has an outstanding balance. Apparently, people usually borrow up to 50% of what they have in their balance. The report revealed that it is usually taken out to pay for medical emergencies or even as the down payment of a new home.
When you borrow from your retirement fund, you will be given 10 years to pay it back – and it will be with interest. The reason why some people like to do this is that even the interest payment will be added as a contribution.
While it may seem like this is beneficial after all, this type of debt consolidation strategy can be dangerous. First of all, you are putting your financial future in danger. If you fail to pay it all back, you might end up retiring with less money than you expected. Not only that, you will not be maximizing the compound interest that your retirement fund should have been enjoying. That will take you back in terms of the growth of your retirement money.
Balance transfer card
The last of the risky debt consolidation options is using a balance transfer card. This is a new credit card that you can use to transfer all your debts. The appeal of this debt consolidation strategy is the 0% interest rate that is applicable for 6 months to more than a year. You can take advantage of this to pay off a significant amount of your debts without having any of it going to the interest rate. If you do this correctly, you can enjoy a huge amount of savings. Not only that, paying on the principal amount means you will finish your debt payments faster.
But what is the risk? This is still a credit card. If you fail to pay off your full balance by the end of the 0% interest promo period, it will assume a high-interest rate. This is why you need to aim to pay down your debt before the promo ends. And if you use the card for new purchases, it will be affected by the high-interest rate of the card. This is why it is not encouraged to use balance transfer cards for new purchases.
How to succeed when using risky debt consolidation strategies
Risky debt consolidation options, while they pose a threat to your finances, is still effective. You just have to make know how to use it properly. Here are some tips that you can use to ensure that these debt consolidation strategies will only be effective.
Exhaust other options first
There are other debt consolidation options that you can use to get out of debt. You have debt consolidation loans or debt management that will not put your house, future, or card balance at risk. If you have some savings in your account, you might opt to use it. As long as it is not your emergency fund, it might be best to get your savings to pay off debts. According to one report, people are opting to skip home equity loans and just use their savings to pay for renovations. This may be something that you can also do. Your savings will only earn a very small interest while your debts are making you pay high-interest rates. You will save more if you just prioritize your debt payments.
Have a repayment plan and stick to it
Another tip that you can use is to make sure you have a repayment plan and to commit to it. This is actually true for all the types of debt solutions that you can do. Never start something if you are not sure how you can end it. If you have chosen any of the options above, create a fail-safe repayment plan. Considering all the risks that you have to make, you need to guarantee that you will be successful in using it to get out of debt.
Pay the debt as fast as you can
Finally, if you decide to use risky debt consolidation options, you have to try to pay it as fast as you can. When something is risky, you should breeze through it as quickly as possible. The longer you stay in that situation, the higher the chance of making a mistake and having the risk become a reality. Try to make your debt payments as high as you can. That way, you can get out of debt faster and the risk that your finances are in will be eliminated.