Paying off debt with more debt, or loan consolidation, can sound ominous; and yes, it’s true that something like this should be weighed cautiously before making a decision. Several factors will need to be considered in determining whether taking on new debt to pay off old or more considerable debt is the right move; it’s not for everyone or every situation.
Before you consider exchanging one debt for another, it’s essential that you consider your reasoning for doing so. If you find yourself asking “Should I pay off debt with a loan?” consider these key points first:
If you’re considering taking out a loan to pay off debt because your current payment obligations are challenging to meet, you may be able to lower your monthly payments by taking out a loan to pay off your debt. It’s essential to consider, however, how much your monthly payments will reduce in the process and if you are potentially adding a substantial amount to the time, it will take to pay off the debt.
If you have a high interest rate on your current debt(s) and are thinking about taking out a loan to lower this rate, it’s essential to consider how much your interest rate is going to decrease. Some loan and debt consolidation companies will tout low-interest rates in trying to draw in potential customers, but often the rates won’t be much different from the current interest amounts you’re being charged.
It can be appealing to consolidate your debt with a new loan and lower your monthly payment obligations; however, doing so can extend the life of your debt by years. Depending on your financial situation, it may be more beneficial for you to retain your current debt and restructure your budget to accommodate your payments better so that you can pay your debt off sooner than later.
Taking out a loan to pay off credit card debt can be beneficial to your overall financial health; your monthly payments may be lower, your APR may be lower, and your credit scorer might increase. However, are you prepared to leave those credit cards alone? Continuing to use your credit cards after consolidating your debt will only make your debt situation worse.
You can be taking a gamble with your credit health when you restructure your debt with loan consolidation. There is a possibility that it can improve your overall score by freeing up lines of credit, but there is also a chance of your score decreasing because you have added debt and maxed out that particular line of credit. It’s important to consider how much debt you are going to consolidate vs. how much debt you will show as unused. Will this new loan severely impact your debt to income ratio?
One of the most important things you can do if you are considering taking out a new loan to pay off debt is to thoroughly research and compare different options and companies in the market. Once you dive into this area, you’ll find an almost saturated market of loan companies wanting to consolidate your debt; most of these debt consolidation offers are not going to be beneficial to you financially and may worsen your situation. Be sure to thoroughly research the company and its certifications, customer reviews, and what the plan is offering to you. If possible, check into taking a new loan out with your bank or a credit union as they are obligated to follow certain restrictions and guidelines put in place to protect you.