Four Dangerous Ways to Pay off Your Debt – And Better Alternatives

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Four Dangerous Ways to Pay off Your Debt – And Better Alternatives

Are you facing a large amount of debt that you are unsure of how to resolve? Although there are many ways to pay off debt, all are not equal. In fact, there are many common forms of debt repayment and debt relief that are actually detrimental to your long-term finances. Following some of these debt repayment methods can end up adding to your total debt amount, placing you in an even worse financial situation.

Below, we discuss four bad ways to pay off debt and highlight a few better alternatives to get you on the right track financially.   

#1: Using Retirement Funds to Pay off Debt

Hopefully, you’ve been contributing to a 401K or other retirement fund and have built up a healthy balance. If you find yourself in debt, you might think that dipping into your retirement account to pay that debt off is a great idea – after all, it is your money. While you’re allowed to do this, borrowing from your retirement fund to pay off current debts is a dangerous move. There are serious consequences for cashing out your retirement account early, such as:

  • paying taxes on the withdrawal;
  • paying a penalty for taking the money out too soon; and
  • giving up the opportunity for your funds to grow with time.

Most importantly, if you withdraw your funds now, you hurt your future self. Retirement may seem like a long way away, but even just a few months of stunted growth in your funds can seriously reduce your future wealth.

#2: Taking out a Payday Loan

Payday loans provide immediate cash flow and can be used to pay off your balances, but they come with exorbitant fees and high interest rates. In fact, some payday loans carry interest rates as high as 300% or 400%. While there are certain situations in which a payday loan may be necessary, taking one or more of these loans can easily get you into more debt than when you began – so tread carefully!.

#3: Borrowing against Your Home

Think a home equity loan might be the solution to your debt problem? Think again. Home equity loans should be used exclusively to finance things related to your home, such as required renovations or improvements, and if at all possible, shouldn’t be used for your daily expenses or to pay off credit card debt. If you choose to pay off your other debts with a home equity line, you are essentially turning that debt into a larger payment on your home equity loan. If you are ever unable to make that payment, you risk a foreclosure on your house, so it is always best to stay away from this type of loan to pay off debt if you can.

#4: Making only Minimum Payments

If you take this approach, you might feel as though you are treading water or are sitting in neutral, but in reality, you’re putting yourself in even more debt because of the interest you will be paying each month on your outstanding balance. While making the minimum payment is a better strategy than not paying anything towards your debt, it remains a challenging strategy for ultimately getting out of debt as it will lengthen your repayment timeline.

What are some Better Ways to Pay Off Debt?

While the above methods are not absolutely forbidden and may be necessary in a few rare cases, there are alternatives that can help you not only get out of debt faster, but stay out of it.

  • Generate extra income. Pick up a part-time job or side hustle, or scour your home for unused personal items you can sell. The extra cash may seem insignificant, but it can make a dent in your debt balance. 
  • Slash your expenses. Love eating dinner at a fancy cafe down the street? You should love it a little less – at least until you’ve paid off your debt! Learn to instead love cooking cost-effective dinners at home, shopping at discount stores, and saying no to fifteen-dollar cocktails with friends. But remember: This is only temporary. Your future (debt-free!) self will thank you for your restraint.
  • Set – and stick to – a family budget. Get your spouse and/or family members on board with a strict household budget. Make sure you include not only your fixed expenses like your rent, insurance premiums, and utilities, but also variable expenses like groceries and entertainment. See how much you can cut your variable expenses and play around with your fixed expenses to see if you can reduce them. For instance, negotiate with your cell phone company to see if you can lower your bill, and practice refraining from cranking up the thermostat when you’re cold (throw on a sweater instead!) to lower that gas bill.
  • Go on a cash-only diet. Try this trick: Each month, withdraw the exact amount of money you will need for that month, and refrain from using your credit cards. Sticking to the “cash only” method will reduce the temptation to swipe that card for extraneous, non-essential purchases.

If you need additional support, you can always reach out to a debt relief company to discuss your options and to create a debt relief plan tailored to fit your particular needs.