Should you apply for loans to get out of debt?
I hear this question asked all of the time by people in debt. There are many forms that this question comes in like,
- Should I take out a loan to consolidate my credit card debt?
- Should I borrow money from my 401(k) to pay off my debt?
- Should I take out a home equity loan to get out of debt?
You get the picture. People for some reason think that if they owe less people but still owe the same amount they are somehow ahead.
I couldn't disagree more. You can't get out of debt by borrowing more money.
I hear financial planners saying, "Oh you should consolidate those loans." Or, "Borrowing against your home is a great way to reduce your interest rates." But, this advice is dangerous.
Getting out of debt requires one thing and one thing only - Disciplined Personal Finance. There is no secret trick. No one is going to get you out of this mess. You have to do it yourself. It is as simple as that and as hard as that.
It is simple because it is not complicated. It is hard because let's face it we lack self control. But, with disciplined personal finance you will get out of debt.
So, instead of taking out loans to get out of debt, create a budget, reduce your spending, and pay more money to your creditors. If you focus on being disciplined with your money, you will get there.
Spend your time focusing on paying off your debt instead of applying for loans to get out of debt. The latter just results in you having the same amount of debt.
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{ 4 comments… read them below or add one }
Draining protected funds in a 401(k) or 403(b) or converting unsecured debt to secured debt against the house is not a good idea at all.
Generally the loan plan is just the first thought that comes to mind. It is a knee-jerk reaction.
Steve
I agree, to a certain extent. We just utilized a HELOC to pay of our credit card (which was @ a 2% interest, until we made a relatively large (3K), emergency purchase on it & BOA raised it to 14.99%).
We still plan on focusing & paying the debt down in record time, but at least we don’t feel like we’re being totally taken advantage of; and we’re paying less than half of the interest than the credit card. That excites us & keeps us motivated to paying it down.
It was a positive move for us. However, if we didn’t close the BOA card & continued to use it, that would have been plain old dumb.
You are absolutely right Steve. It is horrible to engage in these quick fix schemes. Putting your house or retirement at risk for this type of debt is foolish.
Mrs. Smith,
My concern with paying off credit card debt with a HELOC is that you put your house at risk if your financial situation changes and you are unable to pay the loan.
Saving money on interest is good, but you need to seriously consider the risk of losing your house.