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Debt Management

Borrow Against Your Own Assets

Assets that appear to be stale or inaccessible may actually be accessible, including your home, whole life insurance, a 401K plan, and savings accounts or certificates of deposit (CD's):

1. Your home
   One of your best assets to borrow against may be your home. Second mortgages, equity loans, and refinancing your home mortgage, are possibilities. It is easier to qualify for a secured loan than to find a lender willing to offer an unsecured loan.
   
   A home is the best collateral to use to secure a loan at lower interest rates compared to rates typically charged by credit card companies and other high-interest lenders. The equity in your home can, in some cases, substantially lower your monthly payments on excess obligations. If you bought your home some years ago, the chances are good that you have equity in your home to borrow.
   
   Home equity loans are second mortgages based on the value of your house. Your home equity value is calculated by subtracting the total amount of your mortgage from the total market value of your home. The difference is the equity you have to borrow. This type of loan can come either as a loan or a line of credit. Keep in mind, however, a home equity loan is a loan against your home, and a series of missed payments could result in foreclosure and loss of your home.
   
   A home equity loan allows you to consolidate your debt. Debt consolidation allows a borrower access to part of the equity in their home. They can access it through a loan refinance with cash out to clean the slate and pay off other debt without the stigma of bankruptcy.
   
   The most important part of a debt consolidation is maintaining the new debt-free status. Many people who consolidate feel the burden of debt has been removed and within a year or two fall into old habits and pile up new debt on fresh credit cards. Financial responsibility is the key to avoiding this potential pit fall. Debt consolidation should make your life easier by reducing the number of creditors you have to write checks to every month and eliminating unaffordable monthly payments. This advantage is erased if old habits continue, and a new cycle of debt occurs.
2. Life insurance
   If you have had the policy over a year, and it is a type of policy that has an investment component (whole life, universal life, variable universal life, etc.) it should be building cash value and you may borrow against it.
   
   You will pay interest on the loan, but at a lower rate than a bank or credit card would charge. However, keep in mind that the unpaid loan balance will reduce the life insurance proceeds until the loan is repaid.
   
   For instance, if you have a $10,000 cash value loan against your 100,000 life insurance policy upon death, approximately $90,000 would be paid, since the loan balance (plus interest charge), will be subtracted from the death benefit paid to beneficiaries.
3. 401K
   Often your employer allows you to borrow against your 401k, usually for an amount equal up to 50% of your account balance, with up to 5 years to pay it back, through payroll deduction. The majority of the time, the interest rate is much lower than if you borrowed from a credit card, plus you are paying yourself the interest. The downside is, if you quit your job, or are laid off before you have paid the loan back, many employers will require that the loan be paid in full within 30-60 days of job termination.
4. Loans secured by savings: Certificates of Deposit (CD's), savings accounts, etc.
   Some institutions allow you to borrow against your own savings. You may also be able to borrow against a CD to avoid an interest penalty for early withdrawal. The interest charged for this type of loan is slightly higher than what the financial institution pays you on your savings account or CD.