This is a guest post from my fellow finance blogger, Jonny. While I don’t agree with some of the tactics within this article, I thought it might spark some interesting conversation. Is there anything within this post that you don’t agree with?
Sometimes people take out a loan like a line of credit or a home equity loan to pay off their personal unsecured debts. At times, they are unavoidable options to get rid of huge debt burdens, but borrowing money for paying off debts can’t be a considerable solution. Unless one can stop borrowing money to pay off debts, he can never get out of his debt obligations.
How to stop borrowing money to repay debts
There are number of effective ways following which you can avoid owing debts as well as borrowing money to pay off debts. Some of them are discussed here.
- Pay upfront – Don’t get tempted to owe debts for buying depreciating assets like appliances, furniture and home refashioning. These things don’t add any value to your home. Moreover, retail shops often charge higher interest rates. Even if they offer no-payment facility for some months on a purchase, you should pay for the item in full with higher interest rate, once the period is over. Therefore, it would be better if you can pay upfront in cash instead of using the notorious plastic card, or grab the no-payment facility.
- Take short-term loan– If a home modification or improvement (like, constructing a new room or renovating the toilette) adds value to your home, then you may take out a loan, but only on a short-term basis. Short term loans generally come up with lower interest rate.
- Take out home equity loan – If you’re deeply down in high interest unsecured debts, you may think about taking out a home equity loan. A home equity loan generally charges lower interest than that of most credit cards. Moreover, you can deduct the interest on first 100,000 USD you pay towards the loan taken out for non-housing expenses. When it comes to taking out a home equity loan, make sure you can pay it back in time. If you fail to pay back the loan, you may lose your house.
- Avoid borrowing from 401(k) plans – Once you borrow from your 401(k) plan, you may lose the opportunity of tax-free compounding of your savings. You’ll also lose tax-deductible savings. In addition, if you quit the job, you employer may require you to pay back the total borrowed amount within a span of three months. Otherwise, you’ll be penalized or owe income tax on that amount.
- Don’t accumulate a balance – Even if you take out a loan to pay off credit card or any other unsecured debts, make sure you don’t run up the balance once the debts are paid off.
If the debt problem is chronic and severe, you must get professional help. You should consult a debt counseling agency that can help you get out of debt burden and manage your personal finance efficiently in the future.
Jonny: My experience, knowledge and network of financial professionals makes me a more valuable resource for individuals and small businesses, I am trying to improve their current financial position as well as their future prospects. Check out my blog on personal finance and budgeting.
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.