Fool.com offered nine time-tested times to get rid of your debt. It suffices to say patience is always a virtue in personal finance, no matter you are in debt or not.
1. Pay more than the minimum
First, break the habit of only paying the minimum required each month. Paying the minimum -- usually 2% to 3% of the outstanding balance -- only prolongs the agony. Besides, it's precisely what the banks want you to do. The longer you take to repay the charges, the more interest they make, and the less cash you have in your pocket. Don't play their selfish game.
2. Snowball your debt payments
Take a long, hard look at all your credit cards. Pay particular attention to the one with the lowest interest rate. Have you reached the maximum limit on that card? If not, consider transferring a higher interest bill to that one. Many credit cards permit this, and it's positively Foolish to trade an 18% debt for one at 12% at any time.
3. Cash out your savings account
You could cash out your savings and investments and use the proceeds toward debt repayment. Yeah, no one wants to do that. But sometimes it's just Foolish to do so. Even when debt interest is at 12%, your investments would have to pay more than 18% before federal and state taxes to equal that outflow of dollars. We doubt the dollars in your savings account are earning anywhere near that rate of interest. Pay off the debt, and it's the same as getting that 18% return without any risk on your part. The higher the interest rate on your debt, the more attractive repayment versus investment becomes.
4. Borrow against your life insurance
Do you have life insurance with a cash value? If so, borrow against the policy. Yes, you're borrowing your own money. But the interest rate is typically well below commercial rates, and you can take your time repaying the loan. Do repay it, though. If you die before it's repaid, the outstanding balance plus interest will be deducted from the face value of the policy payable to the beneficiary. As a negative, that seems a small price to pay to get out of debt now, but it could be burdensome to your family or loved ones should you sleep the eternal sleep before paying it back.
5. Finagle family and friends
Perhaps your family or friends could help through a loan. Who else knows, trusts, and loves you like they do? Unless you're really the black sheep of the flock, chances are you'll get a very favorable interest rate. They may even tolerate a late payment or two. But if you want to maintain the relationship, it's best to keep things on the straight and narrow by using a written agreement. You should clearly establish the interest and repayment schedule in writing to avoid misunderstandings and hard feelings. And it goes without saying that you must be scrupulous about adhering to that schedule. Otherwise, you can forget the family reunions and birthday presents.
6. Get a home equity loan
Do you own your own home and have some equity that's accumulated through the years as you've paid off the mortgage? If so, now's the time to consider a home equity loan (HEL) line of credit for the maximum amount possible.
7. Borrow from your 401(k)
Do you participate in a 401(k) qualified retirement plan at work? Most 401(k) plans have a loan feature that lets you borrow up to 50% of the account's value, or $50,000, whichever is smaller. Interest rates are usually a point or two above prime, which makes them cheaper than that found on credit cards. Thus, 401(k) plan loans may be a Foolish option to debt repayment. Not only is the interest typically much lower than that on credit cards, the best part is you pay it to yourself. That's right, every dime in interest paid on a 401(k) loan goes directly into the borrower's 401(k) account, not the lender's. That lessens the bite even more.
8. Renegotiate terms with your creditors
OK, you've done all you can. Savings are gone; relatives have been tapped out; you don't have a home or 401(k) to borrow against. You feel like you're against that proverbial wall. The money just isn't there. Is bankruptcy the only way out? No way. Try pulling that ace out of your sleeve prior to taking that step. What ace? The threat of bankruptcy ace, of course.
9. As a last resort, file bankruptcy
What if you decide you can't pay down your debt using any of the methods listed above? What should you do? The absolute last resort is bankruptcy. Within Fooldom, we firmly believe everyone has a moral obligation to repay their debts to the utmost of their ability. There are times, though, when repayment may be impossible. In those cases, bankruptcy may be the only available course of action. Nevertheless, be aware of the significant drawbacks.
