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Pros and cons of using a loan to pay off debt

On Behalf of | Jan 30, 2018 | Chapter 13 Bankruptcy |

Virginia residents and others who have debt are likely to be paying off car loans, student loans and credit card balances. They may also be paying down home mortgages. The typical American household that does carry debt averages $131,431 owed to creditors. Some believe that taking out a 401(k) loan is the best way to take care of those and other debts.

Before taking any steps, the person should consider the interest rates on their debts. Generally speaking, the interest rate on a credit card is higher than that of a mortgage. The interest rate on a 401(k) loan is the prime rate plus 1 percent. If the interest rate on the 401(k) loan is less than the interest rate on the existing debt, the loan may be a viable way to get out of debt.

However, individuals may be best served by saving for retirement and paying down debt at the same time. This is done by cutting back on eating at restaurants or other unnecessary expenses. Individuals may also want to consider what would happen if they take out a 401(k) loan and then leave the company that’s contributing to the account. Instead of five years to repay the loan, borrowers may only have 90 days to repay it without the loan being treated as a withdrawal.

Filing for Chapter 13 bankruptcy is one method of obtaining debt relief. Those who have secured debts such as a mortgage may give themselves time to renegotiate their current loan terms. Even if new terms cannot be reached, a creditor generally cannot foreclose on a home during the repayment period, which lasts for three or five years. After the repayment period ends, unsecured debts can be discharged even if there is still a balance.