Life…One thing I’ve learned about life, from experience and from countless observation, is that there always comes a time when it backs you into a corner. It’s never, ever comfortable. But, what’s worse, is life backing you into a corner…debt-wise. Whether it’s unforeseen medical costs, or damage to uninsured property, or even the loss of a job, life can drive you in a tail spin and leave you with massive credit card debt. I know how it feel, I have been there and the mere fact that you are reading this article somewhat puts it forward that you are in that corner as well.
When you acquire too much debt, it might be tempting to take out a loan to pay off that debt. This will give you a temporary feeling of relief, but is it a good idea?
Should You Take Out a Loan to Pay a Loan?
So, should you acquire a loan to pay back a debt? You have to admit, that sounds a little bit crazy and unwise. Nonetheless, of course you can get a loan to pay off your debt, even though it’s really not advisable. Just because you CAN does not mean you SHOULD. If you take out a loan to pay off a debt, what you are essentially doing is buying some time on the inevitable, while trying to make the debt a bit less agonizing.
With that said, the rest of this article is going to be written in a somewhat “neutral” way. I will flat out say that I do not recommend taking out a loan to pay off a loan (unless it’s done in the form of proper consolidation), but if you have already made up your mind and decided that’s what you are going to do, I would like to provide advice on how to do this in the best possible way.
Before Getting Started…
Before you start looking into the various methods to take out a loan to pay your current debts, you need to make a few changes. To begin with, you need to put a stop to the bleeding. The best way to get out of debt is to increase your income, simple as that. This doesn’t mean you need to ask for a raise. In the world we live in there are a lot of ways to improve your income…for example, you can drive for Uber or Lyft.
While improving your income, you need to cut back on your spending. Significantly reduce your expenses and learn to live within the means that you have available. Otherwise, you’ll end up right back in debt once you finally get it paid off.
With that out of the way, let’s talk about the various loan options that are available to you.
Loan Options That Are Available
1. Home Equity Loan
If you are a home owner and you have some equity, or in other words, your home is worth more than you owe on it, you could try to make the most of that equity and acquire a loan for the debt amount. Such a move will most likely turn a high-interest debt into a low interest debt. However, in doing so, you are turning an unsecured debt into a secured debt which consequently puts your home at risk. That’s obviously not great news, but desperate times…desperate measures.
2. Peer to Peer Loan
If banks aren’t willing to give you a loan, you can always turn to peer to peer online lending services. The popularity of peer to peer lending is rapidly increasing, mainly owing to the lack of credit somewhere else, and also because for some people it makes complete sense. The beauty of this type of loan is that over time, you will most likely pay less interest. You’ll also be able to prolong your monthly payments to a more convenient amount.
3. Personal Loan
Do you have a steady paycheck and have you been consistent on paying your bills? If so, then you might be able to qualify for a personal loan which you can then use to pay off your debt. For some credit unions and banks to give you a personal loan, those two are the only requirements they need. So if you meet those requirements, you have an upper hand. The best part is these loans are usually unsecured which means none of your personal assets are at risk.
4. Life Insurance Loan
This is the riskiest option, but an option nonetheless. If you happen to have a life insurance policy accompanied with a cash value portion, it is possible to get a loan against those funds to help you clear the debt. This move defies the initial objective of the money – protecting your significant other and your kids. Not a good move.
5. Debt Consolidation Loan
Here, you just take all your debts and put them on one payment plan. Looks simple, doesn’t it? It’s always not as simple as it looks…there’s always a catch.
This is because companies doing the consolidation for you are in business to reap money off of you. Occasionally, with a debt consolidation, you’ll end up paying more interest in the long run and it will also take you much longer to pay off the entire debt.
One of the most efficient ways of becoming debt-free is identifying the root cause of the debt and addressing it. This option doesn’t help out too much here. No wonder people who go for debt consolidation often find themselves in dangerous debt levels all over again.
However, if you are responsible and are able to make the payments after the consolidation, this is one of your best options
6. 401K Loan
Just like the life insurance loan, a 401K loan gets money from a source where the original purpose of the money is something other than what you are intending to use it for. It’s not a good option since it makes some other aspects susceptible. However, this doesn’t mean that a 401K loan doesn’t have its pros.
First off, these loans are pretty easy to access. Secondly, the 401K administrator is not concerned at all with what or how you use the money…they just loan you the money. Lastly, when you repay the money, the minimal interest rate is paid to your 401K balance.
As great as all this sounds, the reason it isn’t recommended is because it’s never a good idea to tap into your investments early.
7. Balance Transfer (most recommended)
Here, you get to do your own consolidation by taking all your unsettled balances and transferring the debt to a single credit card. Generally, the new credit card is going to have a promotional 0% interest rate period and a 3-5% fee due to making the transfer. If you can get approved, this you might just be the option for you.
There you have it, 7 possible options. Some are recommended, some are not. However, the final decision is up to you. Remember, if you can avoid taking out loans to pay off debt, that would be your best option. However, since that’s not always possible, at least take your time to consider the pro’s and con’s of all 7 possible options talked about in this article.