How To Pay Debt

Many people have gotten carried away with debt, and now find that the interest charges on that debt are becoming a huge expense. For many, it feels like they are stuck in a hole and the hole just keeps getting deeper even as the try to climb out.

Credit card vendors and payday loan outfits charge exorbitant interest rates that make matters even more difficult. However, there are ways to get out of debt. You will likely have to make some sacrifices though in order to boost your savings rate.

The first thing you need to do is to pay more than the minimum. This way you will start to eat away at the debt. If you can't afford to pay more than the minimum, you need to tighten your belt. Brown bag your lunch instead of eating out. Get a regular coffee instead of a latte mocachino. You'll be surprised at how much you can save just by making those changes alone.

Snowballing your payments by maxing out your lowest interest rate card to pay off bills on the higher interest rate cards. If the whole balance is too big to fit on one low interest card, then the best strategy is to pay the minimum on each card, and then devote all remaining cash to paying off one card. Once that card is paid off, then repeat the strategy with another card. You can also move your credit card debt to a low interest line of credit with a bank. However, you need to carefully read the fine print of the agreement, otherwise you may end up with a higher interest rate.

You should also consider cashing out any savings. If you are paying high interest, chances are that your investment returns will not counteract that. Paying off the debt is like a guaranteed return. This may be painful, and difficult for you to do, but no pain, no gain.

If you have a life insurance policy with a cash value, then borrow against it. This is essentially borrowing money from yourself, but the rates are much lower than most loans. It's important to pay it back though if you want your loved ones to receive full payment in the event of your death.

It may be possible to borrow from family or friends. Just be sure you can pay it back, and offer some sort of interest rate that is at least consistent with the rate of inflation. Just be aware that if you fail to pay it back in a reasonable time, you may be risking the health of the relationship.

If you have equity in your home, then you can get a home equity loan, and borrow against that equity at a low interest rate in order to pay off your higher interest rate debts. Also, if you take advantage of the fact that interest paid on this type of loan is usually deductible, then the effective rate is extremely low. There is no lower interest rate for consumer debt out there, so this is a great way to pay off debt. Just be mindful of the fact that you'll be losing equity in your home.

Another way to borrow is from a 401k plan. If you participate in a 401k, you can borrow up to $50,000 at rates a little above prime. This is a lot lower than credit card rates, but the best part is, you're paying the interest to yourself! Unfortunately, this results in double taxation of the interest, and you may be penalized if you fail to repay the amount before leaving your job. There may also be an additional tax for early withdrawal of retirement funds.

If you are out of options and simply can't pay back the debt, then you may be able to renegotiate the terms of the loans with your creditors. If you explain that you will have to declare bankruptcy if the terms aren't improved that may be enough incentive for them to lower the interest rates.

As a last resort, there is always bankruptcy. You should do your best to avoid this option, because it may mean losing property and having a terrible credit rating for 10 years. This would make it very difficult to get a loan for anything.

Getting out of debt isn't easy, but it is usually possible if you are willing to spend some time and energy, as well as make some sacrifices. Eventually, not having to pay interest and make the lenders rich at your expense will improve your standard of living. These measures are truly short term pain for long term gain.