Debt consolidation starts with finding a source of money

The average American household has a ton of debt, most of it acquired through the use of credit cards. According to recent surveys, most of that debt is not incurred through careless spending; a lot of Americans are using their credit cards to buy necessities. Still, debt is debt, whether you spent the money on milk or on a new big screen television. And now that you have it, how can you make it go away?

If you have debt on a number of different credit cards, the new, higher minimum payments may be causing you some financial strain. It’s one thing to meet one credit card’s minimum payment, but meeting the minimum for three or four could be difficult. What you may need is a debt consolidation loan. With such a loan, you borrow money from a single source and use it to pay off multiple debts. That way, you only have a single loan on which to make payments each month.

Here are some possible sources to consider if you need to take out a debt consolidation loan:

• Home equity - If you are like nearly 70% of Americans, you own your own home. This is advantageous, as borrowing against the equity in your home can be a great advantage. The interest rates are favorable and the interest is tax deductible on loans of up to $100,000.  You can take out the loan in a fixed amount with regular payments, or you can take out a home equity line of credit if you think you may need money on a recurring basis. For debt consolidation purposes, the fixed loan would probably be best; you can have a fixed interest rate and a repayment schedule that involves the same payment each month.

• 401(K) or other retirement plan - If you have a retirement plan at work, such as a 401(K), you can borrow against it at reasonable interest rates. In a manner of speaking, you are borrowing from yourself. You will need to repay the money promptly; many employers require repayment within five years. The interest rates are more favorable than for other types of loans. Be aware that the money you borrow is not earning interest while you are repaying it; that loss of earning power can never be recovered. While you can borrow against your retirement savings, it is generally not a good idea.
• Life insurance policy - If you own whole, universal or variable life insurance, you may be able to borrow against the cash value of the policy. If you die before you repay, the amount you owe will be deducted from the death benefit. For more information about this, you should discuss it with your insurance provider.
• Friends and relatives - Borrowing from family or friends isn’t the best of ideas; many a friendship has been ruined that way. Still, you may have generous and trusting friends and relatives and if you can repay on time, you may wish to consider this source of funds.

Problem debt is a growing problem, but it is possible to reduce it. It just take discipline and time.

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