Debt is a key aspect of how the world works financially. But getting deep into debt can be a big danger to consumers. Oftentimes, taking on more and more debt is an endless cycle. There are a few situations, however, where it can make sense to borrow money in order to pay off debt.
Why Interest Rates Are Crucial
When thinking about debt, you need to understand the relevance of interest. This is the amount you’ll pay annually beyond the balance you borrowed. A high or low-interest rate can make all the difference in whether it makes sense to borrow money.
This concept is particularly true when it comes to paying off existing debt. On one hand, borrowing money with a lower interest rate can potentially help you pay off higher-interest debt—saving you money and getting you out of a hole.
However, borrowing at a higher interest rate can do exactly the opposite. Having to continually get money at higher rates of interest in order to pay off preexisting loans is living on borrowed time. The longer you do this, the deeper the hole gets.
These are a few different situations where you might find yourself considering the pros and cons of borrowing money to pay off debt.
Borrowing Money from Family or Friends
Maybe you have a family member or close friend willing to lend you a bit of money to help pay off your debt. This can either be a blessing or a curse depending on a couple of factors.
First, you need to consider the interest rate factor. What are the terms of this loan you’re getting from the family member or friend? If they’re offering you an interest-free loan because they care about you, then that might be a viable option. But if they’re asking for interest, that can make things more complicated.
You don’t want to end up in a situation where you’re unable to pay back someone you know—no matter the sum. That can put a serious strain on your relationship. Before borrowing any money, whether it’s from a loved one, friend, or financial institution, make sure you have a written plan for how you’re going to pay it back.
Performing a Balance Transfer
Credit card balance transfers can also be positive or detrimental depending on the circumstances. A balance transfer is where you take credit card balances and move them onto another card with a low or zero-percent introductory interest rate. The idea is that you can take advantage of paying down what you owe better when you’re not accumulating interest.
While this is great in theory, there are a couple catches to consider. For starters, balance transfers generally come with a transfer fee, typically in the range of three to five percent of the account balance. This can counteract some of the benefits of doing a balance transfer at all. Furthermore, you need to have an attack strategy for paying off the debt. Otherwise, you’re going to just end up with more debt in a different account, possibly at an even higher interest rate after the introductory period ends.
Get a Consolidated Loan from a Debt Relief Company
Debt relief can come in many forms. One form is consolidation, or taking out a loan to pay off high-interest debts, then repaying the loan over time at a lower interest rate. Another is a settlement, or negotiating with creditors with an end goal of getting them to accept a lesser amount than originally owed on each balance.
Companies like Freedom Financial Network even offer qualified consumers options like taking out a consolidation loan to expedite debt settlement, then repaying that single loan at fixed terms over time.
Using More Credit to Pay for Other Debt
It’s easy to fall into a cycle where you’re continually using more credit or personal loans to pay for your other debts. While this might work in some cases when it can significantly reduce interest, it’s often a house of cards that will almost certainly come crashing down eventually.
At some point, you won’t be able to take on any more debt. And at that point, you’re going to have to come face-to-face with the reality.
While debt can be a powerful tool, it can also be a destructive force when it becomes too overbearing. There are certain scenarios when it can make sense to borrow money in order to reduce debt. But it’s important to understand the conditions of this kind of agreement before diving head-first into anything.
- Pros and Cons of Financing a Business
- Here’s When Personal Loan Would be the Best Resort for You
- Best Credit Cards for Every Type of Purchase
- Defeating the Debt Dragon: Pay Down Your Debt
- 12 Tips for Getting Your Bank Loan Approved