The title sounds a bit awkward, right? Make little sense, no? Or, no sense at all?
You cannot fight debt with debt. If you do, you won’t be able to get out of the vicious cycle. For many personal finance experts, the motto is “fighting debt and growing wealth”. Fighting debt with debt is never an option for them. However, while there are many people who are dead against debt, there are also many for whom the only rapier left to cut through debt is debt itself.
Indeed, there are ways to pay debt with debt for those who need it. It may not make sense for everyone. But for a few, it does.
Paying debt with debt
The concept is not entirely new. People have been using this technique for ages. Most of us have used this technique while playing the credit card balance transfer game. It’s very tempting to move balances from one credit card to another for a lower interest. In a way, it’s rewarding because you’re paying less. However, put simply, it’s just exchanging debt with debt.
Similar exchanges are done with personal and debt consolidation loan. Paying one debt with another has become a very common phenomenon these days. However, there are certain things you need to understand before you start moving debts around or borrow loans.
Paying debt with lower interest rate
Paying one debt with another makes sense only in few circumstances. The most common scenario is when you get a significant lower interest rate on the new debt in comparison to the old one. For instance, if you have a credit card with a rate around 28%, then a balance transfer credit card offering zero fees on transfer and a rate of 15% would be quite luring. Even a personal loan offering a rate of 18% would be favorable. A rate drop even by 5% can make a huge difference and you shouldn’t miss the opportunity.
Well, there is another common circumstance as well.
Consolidating debt for better management
Debt consolidation loans are quite common these days. You can see the adverts on TV, books, and online almost every other day.
A debt consolidation loan is something that offers you the privilege to combine all your existing debts into one. This is very simple. You can do it on your own. You just need to take out a low-interest personal loan and pay off all your existing debts with it. This means that you only pay one low-interest loan instead of many high-interest ones. This is a very common debt relief practice among people. You just need to check that you’re getting an attractive interest rate.
Secured vs. Unsecured loans
Sometimes, things can get tricky. Often, a majority of people get into the business of paying off unsecured debts with secured debts. This is a red flag situation. This should never be done. Let me help you understand the difference.
Unsecured loans are those that do not involve a guarantee of payment or collateral, unlike secured loans. An example would be credit cards. You’re offered loans in the form of credit cards based on your ability to pay them back. Before offering anything, the lenders take into account your credit score and income. They base their decision on these factors and prepare the repayment terms. Unfortunately, if you default on these loans, it becomes harder for the lenders to retrieve the money.
On the other hand, secured loans are always backed with collateral. In the case of mortgages or car loans, the ownership remains with the lender until the loan is paid off. If you default, the lender sells off the property to recoup the losses.
Never make the mistake of paying off an unsecured loan with a secured loan. Often this happens with a home equity line of credit (HELOC). People take out HELOC loans to pay off credit card debts, thus keeping the home as collateral. This is very unreasonable. If anything unfortunate happens and you fail to pay off the home equity loan, you can lose your home.
Paying debt with debt makes sense only in few scenarios. If you want to consolidate your loan or pay off high-interest loans with lower ones, make sure you’re following the rules of the game. Take the time to find out your options. Even today there are a number of professional debt consolidation companies to help you get over the situation. You can get in touch with them.