Although paying off debt with more debt may sound counter-intuitive, there is a range of financial products available today designed to help minimise some of the financial pressures that come with owing large sums of money.
Years ago it wouldn’t have made any logical sense to borrow money to help with debt, because it sounds like the complete opposite of what you should be doing.
However, as financial services have broadened in the 21st century there is a range of companies and products that intend to make our financial lives a little bit easier and stress-free. There are a number of ways to borrow money to pay off your debt, although not all of them will help you in the long run. Here we cover some of the best methods of borrowing money, how they work and who they will best suit.
Personal loans are one of the best ways to replace your current debt with a lower-interest and more cost-effective option. Personal loans were designed to help people loosen their cash flow and feel a little less stressed and a bit more comfortable while working to eradicate their debts.
This type of loan is best suited to those who may have a few smaller loans that have high-interest rates, as these are the loans that can end up having a significant impact on cash flow. Many people choose a personal loan for consolidation reasons as it often can help minimise their monthly installments and take some of the pressure off.
This doesn’t mean that all personal loans will help your situation, they could make no difference at all or even make the situation worse. That is why it is vital that you shop around for the best personal loans for you. The key things to look out for in a personal loan are that the interest rates and any fees are lower than what you are currently paying for your loans, and also that the length of your existing loan repayment period won’t interfere with your new loan.
Sometimes it can be more costly to merge a high-interest loan that only has a few months remaining into a new lower interest loan, so make sure you carefully calculate the overall repayment before committing to a loan to ensure you won’t be paying more in total.
Not all credit cards will be an effective solution for paying off debt; however, a 0% balance transfer card can be an innovative and effective solution to transfer balances from high-interest loans into one lower interest, more manageable location.
Furthermore, some of the 0% balance transfer cards on the market offer an interest-free period of between 4 to 36 months that could be a great opportunity to channel more funds into paying off your debt. The interest period will typically depend based on each individual’s financial situation, but an interest-free period of any kind is better than continuing to pay high interest each month.
The option of 0% balance transfer credit cards is ideal for those whose debt is on credit cards with high rates of interest, as it allows everything to be moved over into one simple and manageable place, and the interest-free period is a bonus.
However, it is also important to remember that the 0% interest rate will only be a considerable benefit if you are able to pay off a large amount of your loan at that time. Before committing to a 0% balance transfer credit card, make sure you aren’t going to end up paying more once the interest rate kicks in after the 0% period, and investigate how much transfer fees could subtract from your savings too.
Home equity loans
Home equity often sounds like a daunting way to free up cash flow in your household, however, if you have found yourself under financial stress due to large debts, this is probably a more convenient and effective option than you think. Home equity essentially means the difference between the value of your property and the amount you have left to pay on your mortgage.
When you attain a home equity loan you will be able to access that equity amount, which, depending on how long you have left on your mortgage, can be a sizeable amount. A home equity loan works in a similar way to a personal loan, however, the bank has an added layer of security in lending you money due to their mortgage on your home. You may also be able to access a longer repayment period and the possibility of lower interest rates.
However, as with all the loans mentioned in this article, despite this loan helping to take some of the pressure off other debts the longer repayment may lead to you paying more overall. It is important to weigh up whether it is more important to lessen monthly repayments right now or to pay less in the long term. This loan is great for accessing a larger amount of money for big purchases or paying off a large debt, and it is best suited to situations where the priority is feeling less pressed for immediate cash.
The borrowing options mentioned in this article are all effective ways of improving your financial situation in the short term.
Personal loans and credit cards are usually best suited to multiple smaller debts, whereas home equity is better suited to situations when borrowing a large amount is necessary. Before going ahead with your chosen method of borrowing, always consider the long term impact and that you are lessening your total debt as much as possible.