Should you consolidate high-interest rate debt?
Blog Date 4/8/2022 3:00:00 PM
Debt payments can put the squeeze on your financial goals. They often shoehorn themselves into your monthly budget, leaving little cash to put toward savings. Multiple sources of high-interest rate debt can make it seem impossible to gain control of your finances.
But don't despair! Whether your cash squeeze is due to a job loss, unexpected expenses, or the pandemic, it's possible to relieve the financial pressure in a few simple steps. And if you're a homeowner, you have even more options than you think.
Step 1: List your debts.
Gather your account statements. This includes credit cards, loans, and any other debt that's in repayment. Record the debt balance listed on the statement, along with the required minimum payment, interest rate, and total balance owed. List the debts in order of highest to lowest monthly payment.
Step 2: Contact your creditors.
Your first call should be to the creditor with the highest minimum monthly payment. Reducing this payment could have the biggest impact on your budget. Ask creditors about hardship repayment plan options. Some credit card companies and lenders will temporarily reduce your interest rate or waive over-the-limit fees if you explain your situation. Other creditors might be willing to revise your repayment plan. Be aware that taking part in a hardship program could affect your credit health.
Step 3: Explore your consolidation options.
If you don't qualify for a hardship program or choose not to pursue that option, explore the benefits of debt consolidation. Instead of paying multiple high-interest rate debts every month, you could make a single payment that fits your budget. You can use a debt consolidation loan to pay off multiple debts with one new, lower-interest rate loan. The new loan simplifies bill payment, could lower your monthly debt payment, and help eliminate debt faster.
Here are several low-interest rate funding options to explore:
401(k) Loans or Hardship Withdrawals
If you're younger than 59 1/2 years, it may be possible to secure a loan against your retirement account balance or withdraw a portion of those funds early. Retirement loans or hardship withdrawals should only be considered if you're unable to secure alternate funding sources. Be cautious and consult with a qualified tax advisor before selecting this option. The associated taxes, penalties, fees, and loss of compound interest earnings may eat away at any expected debt consolidation savings you receive in the short term. This is why we recommend avoiding this type of borrowing, if possible.
Not all retirement plans allow you to borrow against your balance. If your plan does, keep in mind that the Internal Revenue Service also places limits on the amount you can withdraw. Plus, dipping into your nest egg could put you at risk of not having enough money to retire when the time comes. Speak with your retirement plan administrator for details.
Home Equity Lines of Credit (HELOCs)
Owning your own home opens the doors to another option. If the market value of the property exceeds all mortgages and liens, you may have equity that you can borrow against to consolidate debt. Borrowing limits are based on the equity in your home, household income, credit scores, and other lender requirements.
With a HELOC, the home serves as collateral for the loan allowing you to receive a lower interest rate compared to other loan options. If the homeowner cannot repay the HELOC as agreed, they risk losing their home.
Personal Loans or Personal Lines of Credit
Your good credit could help you qualify for a personal loan or line of credit. A personal loan requires the applicant to declare a requested loan amount upfront. If approved, this amount is disbursed in one lump sum.
A personal line of credit, on the other hand, is approved for a pre-set amount from which the borrower may draw down as little or as much as needed. Similar to a credit card, repayment is only made on the borrowed amount. There is typically no collateral requirement for either type of loan. Borrowing limits are based on income, credit scores, and other lender requirements.
Reduce financial anxiety by consolidating high-interest rate debt with a HELOC or personal loan. You can lower your monthly payments and stress levels by using one new loan with a lower rate to pay off multiple higher interest rate debts.
HawaiiUSA offers affordable loans with flexible repayment terms to help you borrow wisely. Learn more about low-interest rate, minimal-fee loans when you visit our HELOC and Personal Loans pages today!