Should I Borrow Money to Pay off Debts?

There are few people in the world who like being in debt. But most of us borrow money anyway, because it’s the quickest way to get the things we want and need. Unless you’re independently wealthy, saving up to pay cash for a home or a new car would take many, many years.

But it’s rare for us to stop with necessities. Credit cards make it easy to borrow smaller amounts of money, and the temptation is often more than we can handle. So we keep charging until we find ourselves in more debt than we ever thought we would let ourselves get into.

When we look back, we might regret accumulating so much debt. The best thing we can do is get it paid off and remember the lessons we’ve learned. But paying off debt is not nearly as simple as incurring it.

When facing a large amount of debt, many consumers consider borrowing money to pay it off. If you go this route, you’re essentially transferring your debt from one creditor (or multiple creditors) to another. You still owe just as much money, but if you play your cards right you can come out ahead.

Borrowing money to pay off debts is common practice, but it is a bit controversial. Here are some pros and cons to think about if you’re considering it.

Pros

If you can get a lower interest rate, borrowing to pay off your debts could save you money. Some credit cards offer 0% interest on balance transfers for a limited time, and if you can pay it off during this promotional period, you can save big bucks. Those that don’t offer such programs still usually have lower interest rates for balance transfers than you would pay otherwise.

Transferring your debt can get you out of trouble. If you’re behind on credit card or loan payments, borrowing the money to pay them in full will allow you to make them current and keep them that way. It can even improve your credit rating, because you’ll have a lower ratio of debt to available credit.

If you consolidate your debt, you will only have one monthly payment to make instead of multiple bills. This makes it much easier to keep up with, and you’ll often end up with a lower minimum payment.

Cons

Borrowing from certain sources comes with unique risks. If you borrow against the equity in your home, you risk foreclosure if you don’t keep the payments up. If you borrow against life insurance or a retirement plan, you run the risk of having lower payouts when you need them.

When you’ve paid off your credit cards, it’s tempting to start using them again. If you do, you could end up with much more debt than you started with. The easiest way to prevent this is to cut up your cards, but many people are unwilling to do so.

Your new loan or credit card could turn out to be less wonderful than you originally thought. If you don’t read the fine print, you could be subject to increased interest rates after a specified time period and not know it. If this happens, you might have to pay more in interest than you would have without consolidating.

Sometimes, borrowing to pay off debt makes sense. Other times, you’re better off just paying extra on each account until they’re all zeroed out. Carefully weighing your options will help you decide which road you should take.