Does taking on new loans help solve your existing debt problems?By Caitlin in Debt
Being buried in a massive amount of debt is never a situation anyone would ever want to find him or herself in. Yet, scores of people eventually do come to the realization their financial situation is in really bad shape. They have simply borrowed far more than they could ever hope to repay. As the old saying goes, when you are in a hole it is wise to stop digging. So, it would make sense not to take out any secured or personal loans when you already owe too much to begin with.
Is this really good advice though?
The truth is the debt/loans conundrum might have a few more sides to it than people realize. There are actually times when borrowing more and taking out further loans can actually be a good thing. The key here is to replace bad loans with better ones.
Debt and Getting Back on Good Fiscal Footing
There is an unfortunate and rather unfair stereotype that plagues those who might be buried in debt. That stereotype is the debtor is someone who borrowed irresponsibly and lived far beyond his or her means. While some do fit such a description, quite a number of people with high levels of debt ended up in their situation because of circumstances outside of their control. A dire emergency necessitating costly medical travel or a job loss or caring for a sick relative can all lead to incurring huge debts.
Responsible people wishing to get out of debt likely will stop borrowing the minute their cash situation improves. There is nothing wrong with trying to avoid more debt. Yet, doing so can be a huge mistake not to look into personal loans capable of restructuring what is owed.
Getting Away from the High Interest Rate Debt Trap
Financial problems, along with interest, generally compound. Someone who is really in a tight financial bind might end up missing a credit card payment or two. The penalty for doing so is often a sharp increase in the interest rate on the card. A previously moderate rate of 11% interest on a credit card can jump to 27% by the time a financial situation stabilizes. At this point, getting out of debt with the initial card is going to be very tough.
Higher interest rate credit cards can present a nightmare scenario that is impossible to get out of. Maxing out a credit card with a 27% interest rate can lock up someone’s finances for years on end. The dollar figures on such a loan are shocker. To pay off a $5,000 balance on a credit card with a 27% interest rate paying $130 a month, it will take 7 years and 7 months to reach a zero balance. The total amount you would end up paying is $11,713. This includes the original $5,000 balance and a staggering $6,713 in interest. The very first $130 payment would only put $18 towards the principle balance. The remaining $112 would go solely towards the interest.
Of course, you could pay more on the card and speed up the amount of time it takes to pay it off. The problem is you would also need extra money to do this. If you are maxed out on three credit cards and have to make three separate $130 payments on a total of $15,000 in debt, you are going to have a very hard time. Paying the minimum amount on these high interest rate credit cards could even end up being a massive financial drain as upwards of $20,000 could go towards interest alone without even touching the principle.
At this point looking into new loans might be a wise plan of action to follow.
A New Personal Loan and a New Lower Interest Rate
Acquiring new a new loan can reverse the problems associated with high interest rates. That $5,000 maxed out credit card becomes a lot easier to pay off if the interest rate is cut down to 13% at the same $130 a month payment. Basically, it will take 4 years and 3 months to pay off the debt. The interest will come out to $1,504 for a total cost amount of $6,504.
That’s about a $5,000 savings.
Once you look at things from this perspective, you realize new loans make perfect sense. You would not be borrowing just for the sake of borrowing. Ironically, you are borrowing for the purpose of getting out of debt quicker. The other benefit is you save a huge amount of money. All that saved money could go to much better uses. Rather than paying off interest, the money can go towards paying off a house or acquiring interest in the form of safe, smart investments.
Putting All Your Debts Together Makes Managing Finances Easier
When you owe on several different credit cards, properly managing a budget becomes extremely difficult. Making three monthly payments of $130 means you would have to come up with $390 a month just to cover minimum costs on high interest debts. Taking out a single personal loan to pay off the other cards not only means you get a lower interest rate, you only have to make one payment a month. If you are having cash flow issues, a new minimum monthly payment amount of $280 can free up an extra $110 per month and that money can cover other costs such as food, car insurance, and utility bills. Of course, it can also be put towards the loan speeding up the amount of time it takes to pay the loan off.
A New Loan Can Mean a New Financial Lease on Life
No one is suggesting that you keep borrowing and borrowing to deal with financial troubles. At some point you do have to borrowing more money. However, you definitely can acquire new loans to improve your current debt situation. Looking into a lender capable of helping you lose those high interest rates loans and get a better handle on your finances just might be a good move.