Now THAT’S the million dollar question, isn’t it? Or whatever currency you’re more familiar with. While scorned by many (who believe it to be counter-productive), many more might concur that choosing to pay off a debt with a debt (or consolidating debts, to make it less of a mouthful) makes perfect sense. There’s no definitive right or wrong answer here, as it all depends on personal circumstances at the time and is therefore considered, relative to a certain degree. So instead why not look at the predominant pros and cons involved in such decision making; and try to determine what scenario would work best for you.
Pros and Cons of Paying Off a Debt with a Debt in Summary
In terms of the pros of taking this route to financial solvency if and when your life takes a turn for the worse, and these include;
- Reducing your monthly payments
- Potentially cheaper to pay off/settle
- Only owe money to the solitary lender
Addressing the perceived cons of using this means to an end, and we’re talking about;
- Might take longer to pay off/settle
- May have to pay fees
- Could end up costing you more in the longer run
- Could impact unfavourably on your current/future credit score
Historically the more common terminology used for, essentially paying off an existing debt with a debt as a solution is a consolidation loan, and providing the broader financial climate is advantageous at the time you seek to pursue this option, then you may well benefit from terms which work for you. Conversely however, if the higher rate of interest calculated for said consolidation loan is in excess of the average of your current credit card-based debt agreement, then generally it’s advised to steer clear. So, a lot depends on the bigger picture if we’re being perfectly honest.
Admittedly, debt settlement in this form and function may appear to offer enticingly low monthly repayment figures, but remember the underlying reason for this is due to the consolidation loan being spread over an extended repayment period from the get-go. There’s the counter argument that if you took the time to factor in the interest you’d pay out over the life of a loan of this consolidatory nature, that at the end of the day you’re likely to have spent more money than if you’d chosen not to, if that makes any sense. Which of course, it doesn’t.
What Debts Might you Need to Consolidate?
Typically there are any number and type of debts you may wish to consolidate, with the overall objective being to combine all your outstanding debts with creditors into the one, easy-to-keep-tabs-on payment. What’s more, the idea is to find one which offers interest rates which aren’t extortionate and which result in a lower monthly payment going out than as is. In a nut shell you’re looking to make your debt more manageable, and with a view to working through your current and project financial hardships that much quicker, and in a more streamlined and easily-accessible manner. The debts which are often consolidated by people entering into the territory of paying off a debt with a debt, so to speak include; Credit cards, personal loans, bank overdrafts, payday loans, outstanding utility bills, tax arrears, debt collection/agency debt and/or bailiff debt, to name just some instances.
What Are the Main Types of Debt Consolidation Plans?
Normally there are four predominant ways in which to consolidate existing debt, and these are debt management plans (DMP), arranging a balance transfer on credit cards, personal loans and home equity loan (or established line of credit). Although in more recent times another variation on a theme has gained column inches; and logbook loans is a popular choice, despite only being an option for a relatively short space of time compared to the other examples. For the record, a logbook loan as such is – in Layman’s terms – another form of secured lending available here in the UK; and which represents the latest in a long line of being a security bill of sale. In a sentence, a logbook loan affords a borrower the opportunity to transfer ownership of their car, van or motorcycle to the logbook lender, as a viable means of security for a loan. Or in this case, hypothetically, a more sizeable loan to pay off an existing loan.
Personal loans tend to be the most well subscribed to of those options available, and they are more often than not divided into the two sub-categories; secured and unsecured. As you might have already worked out, the former is where the loan is secured against something you already own (like for example the aforementioned car, or alternatively even your home), while the latter is where the lender has no legal claim on your belongings (or property) should you fall behind on repayment plans. With regards to any other means of avoiding signing up to a consolidation loan, then of course there’s always the question of whether or not you have any savings you can use in your hour of financial need. Otherwise you may wish to consider 0% money transfers and/or peer-to-peer loans.