Looking for a loan to pay off debt? When facing a large amount of debt, many consumers consider borrowing money to pay it off. If you go this route, you’re essentially transferring your debt from one creditor, or multiple creditors, to another. You still owe just as much money, but if you play your cards right you can come out ahead.
The idea of getting a loan to pay off debt is common practice, but it is a bit controversial. Here are some pros and cons of borrowing money for debt relief to think about if you’re considering it.
Pros of a Loan to Pay Off Debt
If you can get a lower interest rate, borrowing a loan to pay off your debts could save you money. Some credit card companies offer 0% interest on their balance transfer credit cards for a limited time, and if you can pay it off during this promotional period, you can save big bucks. Those that don’t offer such programs still usually have lower interest rates for balance transfers than you would pay otherwise.
Transferring your debt can get you out of trouble. If you’re behind on credit card or loan payments, borrowing the money to pay them in full will allow you to make them current and keep them that way. It can even improve credit rating, because you’ll have a lower ratio of debt to available credit or credit utilization.
If you consolidate your debt, you will only have one monthly payment to make instead of multiple bills. This makes it easier to keep up with, and you’ll often end up with a lower minimum payment.
Cons of a Loan to Pay Off Debt
Borrowing money from certain sources comes with unique risks. If you borrow against the equity in your home, you risk foreclosure if you don’t keep the payments up. If you borrow against life insurance or a retirement plan, you run the risk of having lower payouts when you need them.
When you’ve paid off your credit cards, it’s tempting to start using them again. If you do, you could end up with much more debt than you started with. The easiest way to prevent this is to cut up your cards, but many people are unwilling to do so.
Your new loan or credit card could turn out to be less wonderful than you originally thought. If you don’t read the fine print, you could be subject to increased interest rates after a specified time period and not know it. If this happens, you might have to pay more in interest than you would have without consolidating.
Sometimes, getting a loan to pay off debt makes sense. Other times, you’re better off just paying extra on each account until they’re all zeroed out. Carefully weighing your options will help you decide which road you should take.
What to Do Next?
Find it difficult to pay off your monthly payments? Read this: Are debt consolidation programs a good idea?
Have more than $10,000 debts and bill collectors are calling? Go here: How to pay off debt in any financial situation