Get Out of Debt
If you have high interest debt, have quit using charge cards irresponsibly and have started working the debt snowball, but want to see even faster results toward being debt free, here are some less common suggestions for ways to deal with the high interest debt. Some of these just exchange one kind of debt for another, but there are big differences between them and can still be advantageous.
Can you get a better deal?
Contacting your existing lenders may not be a great choice these days, since many of them are using any contact as an opportunity to cut limits or raise rates instead of the opposite. But credit card companies are still marketing for new business anyway, and you may be able to find a better deal from another company, and then transfer the debt with better terms. Just watch out for transfer fees and escalation terms.
Do you have cash in your savings account?
How much is it paying you, especially compared with how much you are paying on your debt? I am not recommending leaving yourself without any cash cushion, but if you have high interest debt and low interest savings, you should introduce those two. It is kind of like putting matter and anti-matter together – the only thing left is a lot of energy. In this case, what is left is the money you would have to be spending to service the debt, which you can use to snowball other debt payments, or put back into savings.
Do you have cash value in your life insurance?
I use life insurance cash value as a savings cushion and a way to deal with unexpected expenses. I am just borrowing my own money and the interest rate is the lowest loan rate I can get. Although there is no rush for repaying the loan, it is a really good idea to do so, since the outstanding policy loan (plus interest) reduces the death benefit.
Do you have relatives who care about you?
About the time I went through personal bankruptcy, I also needed to replace my wife’s car. Although Ford Motor Credit was willing to finance our new (to us) vehicle, the rate was not pretty. I understood that, but didn’t like it. Before the first monthly payment was due, we were visiting my Mother-in-law and I mentioned that I didn’t particularly like the rate I was paying on the car loan, but I didn’t see another choice. She asked what the rate was and said she wasn’t getting nearly that much on her money at the bank. She asked if I would split the difference between the rate she was getting and the rate I was paying, if she paid off the car note and I made payments to her? Since we would both be better off with the rate she suggested, I quickly agreed. I set up a new payment schedule and, although she indicated she could be flexible about late payments, we did our best to stay strictly with the schedule until it was paid off. At that point she asked what else I need to borrow, because she was back to getting bank rates and had liked our deal!
Do you have equity in your home?
Real estate values have taken a hit in the last few years, and loan requirements are more strict than they used to be, but if you have been in your house many years or made a significant down payment when you bought it, you may still have equity you could tap. When our daughter was getting ready to enter college, I knew I was going to need some funds to help with that. I also had a car note (at a reasonable rate this time, but still, the interest wasn’t deductible), wanted to take my wife on a trip, and wanted to be ready to do some home improvements. Oh, and I had already pretty much tapped out my life insurance cash value at the time. Since we had been in our house for 20 years, I knew we had equity there. I went to our credit union and got a good rate on a 10 year 2nd mortgage (so that mortgage will end about the same time our original 30-year mortgage). I didn’t need all of the money right away, and since I had outstanding policy loans on the life insurance, I was able to put the money there and draw it down as I needed it. The rates were about a wash, except the mortgage payments had deductible interest, since I itemize deductions on my tax return.
Are you invested in a 401(k)?
While many folks show recent losses in their 401(k) plans, they still have some money there. I am not suggesting you take money out early and incur tax penalties on top of your losses, but you may be able to borrow up to 50% of your balance (up to a cap). Usually this is available at a favorable interest rate (again, you owe it to yourself), but you do forego the potential for investing the borrowed amount for gains in the plan while you have the loan, and there will be a time limit requiring you to repay (usually 5 years), and there may be other requirements, too, so check out all the details before pulling the trigger on these.
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