The stress of being deeply in debt can cause smart people to make foolish decisions – but you don’t have to. Are you feeling trapped by your financial struggles? Discover the five worst ways to pay off debt, and learn where to find real help towards a brighter future.
Depending on Sportpesa to pay off your debts is not a wise financial strategy. Hitting it big and paying off all your debts is an appealing fantasy. But in reality, the house always wins in the long run. The odds are stacked against you.
Using gambling as a strategy to pay off debt is likely to backfire, leaving you owing more than you did when you started.
2. Taking a Loan from Friends or Family
Borrowing money from people you care about has the potential to wreck your relationships. Getting a loan from relatives or close friends might seem like the perfect solution. It can be quick and easy. Interest rates are low to non-existent, and falling behind on payments won’t affect your credit score.
But nothing is free. Loans from friends and family come with special strings attached. The collateral you are putting up is your relationship with people that mean the most to you.
When someone is supporting you financially, they may feel like they have a say when it comes to your finances and life decisions. This can cause strain and resentments, especially if you struggle to pay back the loan. Your most important relationships could suffer permanent damage.
3. Working with a debt settlement company
Sure, convincing your creditors to accept a lump-sum payment of less than what’s owed sounds fantastic. But debtors beware: Sometimes debt settlement can make things worse. As part of the lengthy and fee-riddled settlement process, you must stop paying your debts — an act that triggers collection calls, late fees, and negative credit reporting. And even if all your creditors agree to the settlement terms (there are no guarantees), it’ll take years to rebuild your credit score.
4. Depleting your retirement account
Taking a loan from your retirement savings account is a trifecta of bad ideas. First, your employer may not allow you to make new contributions until the loan is repaid in full. Second, because of those loan payments, you’ll take home less money — a situation that can turn household budgets upside down and may tempt you to revert to bad credit habits. Third, if you leave your job, the outstanding loan amount must be repaid immediately. Not able to swing it? Then you’ll get hit with early withdrawal fees and be responsible for income tax on the balance.
5. Consolidating debt with a high-interest loan
Consolidating debt into a single loan only works if the interest rate is low (that is, significantly lower than your average credit card rate). Proceed with caution. Understand the terms of any loan that’s offered and don’t be seduced by low monthly payment amounts that actually keep you paying for a longer period of time.
6. Borrowing against your home
What’s worse than being in debt? Being homeless and in debt. If your current debt is unsecured (that is, not tied to any property as collateral), why secure it by folding it into your mortgage? If you don’t pay back an unsecured debt, you’ll end up with a bad credit score. But — and this is a big but — if you don’t repay a home-equity loan, you’ll end up with a bad credit score and a foreclosure.
7. Draining your emergency fund
An emergency fund serves a singular purpose: It’s a safety net that helps people cope with a job loss or unexpected expense without resorting to high-interest credit cards. Tapping your emergency fund to pay off unsecured debt today jeopardizes your financial security and can leave you exposed to even higher debt levels tomorrow.