Of These 3 Options for Consolidating Our Debt, Which Would You Choose?

by Travis Pizel · 14 comments

There’s a scene in one of my favorite movies where the lead character steps into a batting cage, then takes fastballs to the chest to toughen up. He takes them all, screaming and grunting with the thud of each ball against his body.

With the completion of our debt management program (DMP), through which my wife and I destroyed $109,000 of credit card debt, that’s exactly how I feel right now. Whatever life has to throw at us, we can handle it. With hard work and determination, we can overcome any challenge and achieve any goal.

Which is good, because we’re not done yet.

We have one line of credit managed by a creditor that wouldn’t work with our program, as well as two store credit cards that we intended to take care of ourselves. It took every ounce of effort we had to stay on course with our program, so we used the last 55 months to concentrate on those debts.

Now that the program is complete, it’s time to concentrate on the remaining lines of credit. 

Each of these lines of credit have a high interest rate ranging from 19.9% to 29.9%. They’re your typical lines of credit, meaning that if we paid just the minimum payment, they would take us years to eliminate. We all know how tempting it can be to just make that monthly minimum payment and pocket the rest.

So we’d like to consolidate our remaining debts.

By consolidating these lines of credit, we could lower the interest rate. Not only that, but we’d get a finite date that the debt would be gone — even if we only paid exactly what we had to each month. Here are the three options we could pursue:

Bank Consolidation Loan

Our bank currently offers unsecured consolidation loans with a 5.99% interest rate, with terms ranging from 36 to 60 months. This would greatly reduce our interest rate and give us that end date we’re looking for. The downside is, given our recent completion of a credit counseling program, we may not be approved.

Peer-to-Peer Loan

We actually received a promotional mailing from a well known P2P lender last week. I filled out some basic information on their website and discovered that, if funded, our loan would be at a 14% interest rate. This would lower our interest rate, as well as give us our finite finish line. The interest rate is still pretty high, however, and there’s no guarantee our loan would be fully funded.

401K Loan

We could borrow from our 401K at an interest rate of 4.75%. The interest is actually paid back to ourselves, and we could choose a term from one to three years. The downside of this is our retirement accounts may not grow as fast as they would if we hadn’t borrowed from it.

Clearly, my wife and I have some thinking to do, as each of these paths has their positives and negatives.

Which of these options would you choose?

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{ read the comments below or add one }

  • Jason says:

    I can’t imagine any financial planner (even a shady one) recommending the 401(k) loan. It’s true that you’re paying the interest back to yourself, but it amounts to a $19k bet on the short-term direction of the market. That’s not the way to handle your retirement. Plus, if you have a job change, you have to repay the loan on short notice. Retirement saving is best handled as a methodical process where you invest consistently every month and never withdraw except by force.

    Bank loan is easily the best choice, assuming there’s no early pay-off penalty. Then you continue with the same payment plan and save $1,000+ in interest. I guess Peer-to-peer loan is a decent backup, but it’ll probably knock your interest savings down to about $500. Is that worth the trouble?

    If you don’t get the bank loan, be sure to calculate the difference between paying high interest first or lowest balance first. We’ve been trained to think you pay off the smallest balance first only for psychological reasons, but you might actually pay less interest doing it that way. Reason is you’re not allowing enough time for interest to compound against you, so the priority is shifted to freeing up those minimum required payments.

  • I personally would chose to go with a bank backed line of credit if at all possible. It’s harder to get approved but the lower interest rate helps out a great deal. I have 1500 left in credit card debt and I plan to use my tax return to eliminate that…Can’t wait!

    Shawn

    • Thanks Shawn, that’s likely our first course of action….if we’re not approved we’ll have to try something else. You’re getting SO CLOSE to having your credit card debt gone, Shawn – hope you’ll stop back and let us know when you make that final payment with your tax return!

  • Cooper says:

    During the program, you were knocking out about $2,000 per month. So you should be able to knock out the $19,000 in under 10 months. So why even worry about consolidating and about interest? Just get intense and pay them off! Pay them highest to lowest interest rate if you are that concerned about the interest rate. Consolidating them into a loan of any fashion only gives the misconception of progress and is only going to encourage you to slow down your true progress.

    • That’s true, Cooper, I could do that….but I’m gonna be honest with you, I’m suffering from a huge case of debt fatigue. After 55 months of scrimping and saving and paying a huge amount of my monthly income to debt, I want to have a little more control over how much I pay each month. Maybe I pay a little less than I was to my DMP some months and it takes a few more than 10 months to pay it all off – I think my sanity is worth it. At the same time, it’s that attitude that is scaring me into thinking if I just left things the way it is I wouldn’t just not pay the same amount as I was to my DMP, but I’d just pay the minimums and take FOREVER to pay the debt off. So, I’m looking to put it in a state where there is a definite end date at a lower interest rate.

  • Cooper says:

    How much debt is left?

  • With such high interest rate of 19.9% to 29.9%, I’d do anything do pay it off ASAP to avoid paying all those interest charges. If I were you, I’d borrow as much as I could from my 401k to pay off the line of credit, unless your 401k is generating 19.9%-29.9% return, which I doubt.

    • It’s definitely not performing in that range….the question is, is it better to take a 4.75% gain over the life of the loan on what I borrowed, or to take the market advancement and pay a slightly higher interest rate to the bank?

  • Steve says:

    How in the world did you get so much credit card debt, and at such high interest rates? I’d just put every available penny into paying them off and slice up all your credit cards!

    • That’s a long story, Steve, but it boils down to massive overspending for about 14 years. The credit cards have been cut up for years, and we are throwing as much as we can against the debt – as mentioned, we just got done paying off 109K of debt in 55 months. I’m just looking to reduce the interest rate as much as possible on what’s left. Thanks for reading!

  • That’s a tough one Travis, though I completely understand the desire to consolidate them to get that finite date and lower interest. The one I’d pursue last would be the 401k loan. I’ve seen too many people do it and they almost always regret it due to the impact on growth. That said, I think the bank loan is the ideal one with it’s lower rate and fixed term but understand the risk of not being approved. Do you think you could piggy back a bank loan on a P2P loan by any chance?

    • I’d have to run some of the numbers, but I’m not sure if leaving the 401K alone would outperform the higher interest rate of a p2p loan, the bank interest rate vs. me just paying 4.75% back to myself. I think I have to run more math…

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