Can You Borrow Your Way Out of Debt?

Man in credit crisisSo you’ve gotten into trouble with debt. It seems as if you’re receiving a past due notice every day. Debt collectors and credit card companies are calling you constantly. You didn’t want to get so deeply in debt but when you were laid off from that job and your benefits ran out you just had no choice except to use credit cards just to get by. Or maybe you were able to get another job but you’re earning only half what you were just a few short years ago.

Budgeting hasn’t worked

Maybe you’ve tried budgeting but you just can’t cut your expenses any further and you’re still not saving enough to put a real dent in your debt. A friend suggested that you get a debt consolidation loan and you’re wondering if it might make sense.

Do your research

Many Canadians have turned to debt consolidation loans as a way to get rid of their monthly payments. One of these loans might make sense for you but before you rush out to get one, you need to do your research and understand your options.

The benefits of a debt consolidation loan

There are several good reasons to get a debt consolidation loan. You can use it to pay off all of your debts. You will have a monthly payment that is likely to be much lower than all of your current monthly bills added up. If you do it right, a debt consolidation loan can help you get out of debt faster, reduce the amount of interest you need to pay to your creditors and even improve your credit rating.

Evaluating a debt consolidation loan

All of this might make a debt consolidation loan seem very attractive. But there are factors to take into consideration before you apply for one. First, you need to find a loan where the interest on your debt will be lower than the interest rates on the debts you are consolidating. For example, if you have credit cards at 18%, 20% and 22% and can transfer that debt to a credit card with an interest rate of 15% or get a bank loan at 10%, a debt consolidation loan would make sense. Second, you should have a payment on that loan that will be less than the amount of money you have to pay each month on your debts. Third, you need to be careful and not trade fixed-rate debt for variable-rate debt. A variable rate loan might start at a very attractive interest rate but could move up substantially in the years to come. Finally, you should be able to pay off that new debt as fast as you can. Since you will have a lower monthly payment, you might be able to double up and, thus, get out of date in just a few years.

Will your house be at risk?

If you need to borrow a substantial amount of money like $10,000 or more, you will probably have to get either a second mortgage or a personal line of credit. Regardless of which of these options you choose you may be putting your home at risk as your lender could foreclose on it should you ever fail to make your payments.

Other options

There are other ways to consolidate your credit card debt that you might want to explore. For example, you could transfer your high interest credit card debts to a credit card that has a lower interest rate. Many of the credit card networks are now offering zero balance transfer rates. These are cards where you’re not required to pay any interest for as many as 20 months, which gives you the opportunity to pay down more of your balance owed.

If you have a whole life insurance policy, you could borrow against it. You could do the same thing if you have a retirement account you could borrow from.

You can’t borrow your way out of debt

The biggest problem with all these options is that you’re basically borrowing from Peter to pay Paul. In other words, you’re not paying off your debt so much as you’re moving it from one set of creditors to another. In comparison, if you choose Maple Leaf Debt Helpers, our professional debt counselors can negotiate to have both your balances and interest rates reduced. They will help you develop a payment plan where you make monthly payments that are set aside to eventually pay off these reduced balances. You should be able to save thousands of dollars and be debt free in 24 to 48 months.

Call our toll-free number today for help or fill out the form on this page to get a free debt analysis and let us take that debt burden off your back.


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