Avoid mistakes when repaying debt

If you pay your debts down, then you know it’s a difficult undertaking. And if you have a lot of debt to work through, it can also be a lengthy one, which is why it’s tempting to look for ways to speed up the process. Yet in doing so you encounter options that seem to be a link to dumping your debts, but in the end, they could cost you money and time.

As you make your way to debt freedom, beware of these four mistakes that you might set again:

 

1. Not with an emergency fund

1. Not with an emergency fund

In an attempt to put as much money on your debts as possible, you may be inclined to forego an emergency fund.

This decision could hurt you. An emergency of some kind – whether repairing or unexpected car medical expenses – is likely to occur while your debt is paying off. If you are not ready, you can end up in deeper debt. A bank rate survey found that 36 percent of Americans would either borrow from friends or family, take out a loan, or use credit cards to treat a $ 1,000 emergency.

Avoid this mistake by keeping a small cash cushion while you pay your debts down.

 

2. Taking out a home equity loan

2. Taking out a home equity loan

The temptation of taking a home equity loan or line of credit to pay off your consumer debt can be quite appealing – you can “wipe out” your credit card debt and other payments in one fell swoop, in exchange for a one-time payment at an interest rate. This can make your debt situation feel organized and less overwhelming.

But that can turn out to be a mistake on many levels. For starters, clear out your unsecured debt but increase what you owe to your secured debt. Should you have trouble paying your home equity loan, your home could be at risk.

 

In addition, one could increase what you pay in interest if you use the home equity loan to pay off medical and other bills that had zero interest, or a lower rate than the new loan.

Most importantly, it is a mistake because you are not actually reducing your debt – you are just moving it around. If you pay off your credit card debt and other payments without addressing what is causing you to go into debt, it is probably only a matter of time before you reboot those balances.

 

3. Borrowing from your 401 (k)

3. Borrowing from your 401 (k)

Another tempting debt solution is to borrow from the 401 (k). It goes without saying that doing this goes against the very reason you wore your 401 (k) in the first place: To take care of a secure financial future for yourself. Leaned on the unplugs of money from this goal and will bring you to miss on the benefits of compound interest.

Even if you will have to pay the loan back with interest, the interest comes from you so that there is no current reinforcement. Also, use the money the interest is subject to double taxation since you are paying the loan back with after-tax dollars and will be taxed again if you take distributions.

 

In addition, should you be fired from your job or resign, you will have to pay the loan back within a certain period of time, usually 60 to 90 days; otherwise, the loan balance becomes a taxable payout and will be subject to a 10 percent penalty if you are under the age of 59 1/2. This scenario will only worsen your debt situation.

 

4. Fall for fraud debt relief

4. Fall for fraud debt relief

Many companies tout their ability to reduce their debt. And the promises they can make like the answer you seem to be looking for.

But beware. While some reputable companies offer credit counseling and related services, there are several companies whose main purpose is to take your money. Others try to reduce your debts, but use questionable practices on how to keep your payments aside for several months so you can put where you are behind on your bills so your creditors are ready to negotiate. This can ultimately reduce the amount you pay on your bills, but may jeopardize your credit.

One way to detect a scam is to see if they ask you to pay: if a company requires payment in advance, you are likely to be scammed. Another red flag is when they promise a certain outcome, since no one can guarantee what concessions your creditors will be willing to make. Let conventional wisdom guide you here – if it sounds too good to be true, it is likely.

When you are overwhelmed with debt, it is understandable to want a quick or immediate solution. But keep in mind that you didn’t go into debt overnight, so it’s not likely that you’ll be able to get it out of it so quickly, either. If you want to make sure that you are out of debt for good, you can skip the links.

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