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Have you ever been to a military installation that didn’t have payday lenders nearby? Probably not.
According to the Department of Defense (DOD), payday lenders are heavily concentrated around military bases in states that allow such loans. Specific bases include Camp Pendleton (California), McChord/Lewis (Washington), Newport News/Norfolk (Virginia) and Fort Campbell (Kentucky). Lenders often target military members due to their financial experience, steady paycheck and secure employment, as notes the DOD. As such, payday loans and others with interest rates as high as 790 percent are issued to unsuspecting military personnel.
If you have become trapped in debt due to payday loans or other forms of debt, you can consolidate it into one payment. Doing so may also result in a lower interest rate. Let’s take a look at debt consolidation loans for military personnel.
Debt Consolidation Loans
A debt consolidation loan is just like it sounds; a loan that consolidates your debt. A lender will assess your financial situation and, if approved, you’ll now have one loan instead of many debts.
If you choose this solution, be sure to get a rate that is lower than your average current interest rate.
Home Equity Loan (HELOC)
A home equity loan or home equity line of credit (HELOC) is a loan against the value of your home. If you own a house, you may be able to take out such a loan and use it as a debt consolidation loan.
To illustrate, suppose you have $15,000 in debt spread across 5 creditors. Now, let’s say you have $80,000 in equity vested in your home. You could take out a $15,000 HELOC, pay your debts off and just focus on repaying the HELOC.
It is important to note that your home will be used as collateral in a home equity loan or HELOC. Thus, if you choose this form of military debt consolidation, you could lose your home.
Borrow from a Retirement Plan
If you have a retirement plan, you may be able to take out a loan. So, if you’ve signed up for the Military Thrift Savings Plan (TSP), you can borrow from it to pay off your debts.
Basically, you’d take a loan from your future self. For example, if you have $15,000 in credit card debt and $30,000 in your TSP, you could borrow $15,000 from the TSP and pay off your credit card debt. Then, you would have to pay your loan with interest over time, but the interest would go right back into your account.
Note that you may only withdraw contributions that you made and earnings from those contributions. So, if you are enrolled in the Military TSP, any Government contributions are off limits.
Consider, however, the possibility of losing money by going this route. This could occur because, when you take a loan from your retirement account, you take money out of the stock market. If the market rallies during this period, you won’t benefit from it. On the other hand, you could win out if the market tanks, as you would not lose anything on the money you borrowed.
Borrow from Friends and Family
Friends and family should be used as a last resort for debt consolidation for military personnel. Think about it: if you borrow $10,000 from your brother and can’t pay him back, you may as well delete his number from your phone.
Still, you may be able to borrow from a trusted friend or family member to get out of this mess. Doing so would take away the pressure of being behind on several bills. You’d also be a real person to the lender, not a name and address on a computer screen.
If you go this route, get everything in writing. Draw up a contract and stick to it.