You are in debt and rapidly losing ground in your attempts to make the necessary payments. Perhaps you have already fallen behind and find yourself dodging collection calls. If either of these scenarios describe your current financial situation, you are probably desperate for help in eliminating your debt. Before you make any hasty decisions it is important to step back and look at every option to ensure you don’t make a bad situation worse.
There are several options popular among consumers looking for ways to get their debt under control. One of these options involves borrowing money to pay off existing debt. In certain situations this strategy may prove successful to help get your debt under control, however there are certain drawbacks that could result in owing even more money than you did at the start of the process. Proceed with caution if you are considering the following methods of paying off debt.
Balance transfers- Moving high interest balances to a credit card with a much lower interest rate can result in significant savings. Before taking this step, be sure to read all of the terms and conditions regarding the transfer as well as changes to the interest rate. Introductory rates may lure you in and change after a short period of time, reducing your savings and in some cases reaching numbers higher than those of the credit card you just paid off. Transfer fees and other hidden costs can quickly add up, making this option less attractive.
Consolidation loan- This type of loan can be used to consolidate several loans/debts into loan with a lower interest rate. In doing so you can greatly reduce the amount of interest you are paying across the board. When handled correctly this can result in thousands of dollars in savings. The danger of using a consolidation loan is that you are trading unsecured debts for a secured debt. When you use your home or other assets as collateral for a secured debt, you run the risk of losing these assets if you default on the new loan.
Family and friends- Sometimes you are fortunate enough to have friends and family who are willing to help you through tough financial times. While it may be much easier to accept money from a loved one to get your finances back in order, it is important to remember there is more at stake here than just money. Many relationships have been ruined over borrowed money. If you are considering this route make sure to put the agreement in writing before any money exchanges hands. In doing this everyone knows exactly what is expected of the other party.
In essence when you borrow money to pay off existing debt you are not really reducing the amount of money you owe, but instead who you owe. For this reason you should pay close attention to the numbers before making any decisions. If moving your debt from one place to another can significantly reduce the amount you owe then it might be a good move. If the savings are minimal or the risks too high, consider other debt relief options.