You have a lot of debt consolidation options to choose from. However, you need to be careful about the choice that you will use to get out of debt.
The truth is, all of your options to consolidate debt is effective. Each of them will bring a certain level of improvement in your personal finances. But if you want to maximize the improvement that your financial situation will get from the debt relief program, you need to choose the right one.
When we say the right one, it means finding the debt solution that fits your specific financial situation. Not only that, it should be the debt consolidation options that will lead you closer to your financial goals.
If you fail to scrutinize your options, you might end up with the wrong solution that is more risky than helpful.
3 debt consolidation options that are quite risky
There are three different debt consolidation strategies that are riskier compared to other options. Do not get this wrong. These options are still very effective. However, you need to exert some caution if you plan to use these. You have to make sure that you qualify and that you know how to pay it back. Otherwise, it will end up doing your finances more harm than good.
So what are these 3 debt consolidation options that pose a huge risk?
Using your home equity
Current housing reports reveal that Americans own the highest home equity to date – around $6 trillion. In the past year alone, it increased by $636 billion. These are all untapped resources that you can use for a lot of things. One of them is debt consolidation. What is great about this option is that it is a secured loan. So when you use it to consolidate debts, you can get it at a very low-interest rate. This is a great improvement especially if you are consolidating high-interest credit card debts.
However, this is one of the risky debt consolidation options so you need to know what you are risking before you proceed with this one. Since this is a secured loan, that means you are using your home as collateral for your consolidated debts. This is the guarantee of the lender in case you fail to pay back the loan. They have the right to take your house as payment instead. If you do not use debt consolidation properly, you might end up losing the most valuable asset that you have – your home.
Using your retirement fund
This is another one of the debt consolidation options that people can use to get out of debt. The money in their retirement fund is an untapped resource that you can also use. You can take out a loan from the money that you saved in your retirement and use it to pay off your other debts. When you repay the loan, it will be with interest. The great thing about this option is that the interest will be paid to you. So it is like a win-win situation, right?
Well, you will be risking something alright. You will be missing out on all the compound interest that the money could have been earning. If you borrowed $10,000 and it takes you 3 years to pay it off, you have lost the compound interest that that amount could have added to your retirement fund. And if you fail to pay it all back, then you are compromising your financial future. You will be retiring with less than what you planned and that can affect the quality of life that you can lead when you retire.
Using a new balance transfer card
Did you know that almost half of the American adults are not aware that balance transfer is an option to consolidate debt? The truth is, it is one of the risky debt consolidation options but it can be really effective in helping you get out of debt. This involves opening a new credit card account that you can use to transfer your other balances. Since this is offered with a very low interest rate (or even 0%), you can save a lot of money on your overall payments. However, this low interest is only temporary. And that is why it is very risky.
A balance transfer is only effective if you can pay off everything that you transferred within the low-interest period. After the promo period is done, the balance transfer card will have a higher interest – the usual rate for credit cards. This might compromise what you just saved during the promo period. Not only that, but you also have to factor in the balance transfer fee that you have to pay. It is usually 3% of the amount you will transfer. Make sure this is something that you can take back through the low-interest rate.
Tips to achieve debt freedom despite the risk
Although the debt consolidation options that were just discussed are risky, that does not mean it will not work. You just have to take the time to get to know how to use this properly so you can maximize the benefits. If you have a huge debt problem, you cannot afford to make a mistake in choosing your debt relief program.
To help you decide, here are tips on how you can make even the risky debt consolidation options successful.
Understand your other options
First of all, you have to know the other options that you have. There are ways to consolidate debt without putting your house in danger. You can use that asset to invest instead of using it to pay off debt. You can look into a debt management or even debt settlement. The latter is great for those who need a debt reduction. Or you can use debt consolidation or personal loan. Both can give you a low-interest rate as long as you have a good credit score.
Create a realistic repayment plan
In case you decide to use any of these risky options, that is okay. But make sure you have a realistic repayment plan that you can afford to pay until the very end. Analyze your current budget plan and see how much you can comfortably use to pay off your debts. Once you have this plan, commit to paying it off religiously.
Try to pay off the debt as fast as you can
Finally, you want to find a way to pay off your debt consolidation strategy as fast as you can. This will help you save a lot of money on your interest rate. Not only that, as soon as you finish paying off your debts, you can start working on other financial goals.