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Financial Goals

5 Smart Ways to Consolidate Growing Debt

4 min read
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picture of author, Hometap TeamBy Hometap Team on December 24, 2020

Debt can wreak havoc on your ability to achieve your financial goals. That’s why it’s critical to pay off debt quickly so you can get your finances—and life—back on track. While it may feel impossible to get out of debt, consolidation can help you chip away at the burden. Here are five ways to do it.

1. Tap Into Your Largest Asset

As a homeowner, you can access your equity through a HELOC, home equity loan, cash-out refinance, or home equity investment to help pay off debts. A home equity investment, like Hometap provides, allows you to get cash to pay for what’s most important to you without the hassle of monthly payments.

The option that will make the most sense for you depends on your debt and financial goals. Compare your options using our guide to find the best one for you.

2. Use a Balance Transfer Credit Card

Depending on the amount of debt you have, you may be able to transfer it all to one credit card. If you transfer it to a credit card with a 0% interest promotional period, you can avoid paying interest. You’d then have only one monthly payment while eliminating the high interest your other cards carried.

However, you’ll still need to qualify for these cards, which may require a good credit score. Plus, if you can’t pay off the debt by the end of the promotional period, you may end up paying more through higher interest. You’ll need to stick to a disciplined payment schedule if you want to avoid additional debt.

3. Take Out a Personal Loan

If you can secure a personal loan with a lower interest rate than the rate on your current debts, it may make sense to take out a loan.

Personal loans don’t require collateral. That means they don’t require you to back the loan with assets like your house or car in case of nonpayment. You’ll still need a good credit score, however, especially if you’re hoping for a low-interest rate.

4. Consider Debt Settlement

Debt settlement isn’t so much debt consolidation as it is payment consolidation. With debt settlement, a firm negotiates with your creditor(s) to lower the total amount of debt you owe. You then make one monthly payment to a settlement firm.

While that may sound ideal, you’ll want to look into the details. The process can take months, you’ll be racking up interest, in the meantime, and the firm will charge a fee. You may even have to pay taxes on the forgiven debt, and your credit score can be affected for seven years.

5. Borrow From Retirement

Consider this option with caution: If you have a retirement plan you may be able to take out a 401(k) loan. You’ll need to determine if your specific plan allows this and its terms. If you pay the loan back on time (usually five years), the cost to you is relatively low. The interest you pay on the loan actually goes back into your own account. You can also repay the loan without prepayment penalties and many plans may allow you to take payments out of your paycheck.

Over 50 and have $0 for retirement? Here’s your roadmap to get on track >>

But if you don’t pay your loan back on time, you’ll likely have some serious setbacks. At this point, it’s considered an early withdrawal, which means you’ll face a penalty and income tax. You’ll also want to consider your job status. If you leave your job, you’ll have to pay the loan back within 60 days.

The more you know about your home equity, the better decisions you can make about what to do with it. Do you know how much equity you have in your home? The Home Equity Dashboard makes it easy to find out.

You should know

We do our best to make sure that the information in this post is as accurate as possible as of the date it is published, but things change quickly sometimes. Hometap does not endorse or monitor any linked websites. Individual situations differ, so consult your own finance, tax or legal professional to determine what makes sense for you.

Hometap is made up of a collaborative team of underwriters, investment managers, financial analysts, and—most importantly—homeowners—in the home financing field that understand the challenges that come with owning a home.

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