How to Borrow Your Way Out of Debt

It might seem counterintuitive to go further into debt to pay off existing debt. Yet, taking out a personal loan for credit card debt consolidation can make sense in certain situations. In fact, it could return you to solid financial footing.

Here’s what you should know about how to borrow your way out of debt.

What is Debt Consolidation?

In essence, debt consolidation combines all your debts into a single fixed monthly payment. This makes it easier to keep track of multiple unsecured debts. Ideally, you’ll also get a lower interest rate, which would reduce your payments.

Is Debt Consolidation Right for You?

Before taking out a debt consolidation loan—

• Take an honest, unvarnished look at your financial circumstances. If your unsecured debt payments equal half or more of your income, and you can’t see yourself erasing your debt within five years, a debt relief program might be a better solution.  
• Compare the loan’s cost to what you’re paying now. Factor in the monthly payment times the number of payments, in addition to any fees. Be wary of lenders that offer low payments but exorbitant rates and longer terms. 
• Keep loan terms short. To minimize the amount of interest you’ll pay, you want the shortest-term loan available. Ideally, the loan will be for three years or less. Five at maximum.
• Seek direct creditor payments. Why risk temptation? If the lender offers to pay your credit card issuers directly, you should take that option.
• Think about closing your cards. Yes, closing them may lower your credit scores, but if that’s the only way to get out of a continuous cycle of debt and repayment, perhaps you should consider it.

Risks of Debt Consolidation

Perhaps the No. 1 risk is falling into the trap of using a personal loan for consolidation, only to run up balances again in short order. Neither consolidation nor any kind of solution will stick if your spending isn’t brought under control. 

Of note is a study of 189 Indiana residents who took out consolidation loans. Within three months, 35.5% had incurred more debt. Within a year, 87.5% were back in debt. Just 25% of respondents reported feeling less financial stress after getting a loan; another 25% reporting feeling increased stress.

Further, research based on the Panel Study of Income Dynamics found that individuals who took out consolidation loans didn’t file for bankruptcy any less than those who did not.

Before applying for a consolidation loan, it is critical to understand how your debt got out of hand and taking definitive steps to ensure it doesn’t happen again.

Benefits of Debt Consolidation

This approach streamlines bill paying, since there’s only a single monthly payment and one due date of which to keep track. An added benefit is that you’re less likely to miss a payment.

If your interest rate is lower, and you can make additional payments with the money you save monthly, you can pay off your balance faster. In addition, your overall monthly payment will likely fall because your new payments will be spread out over a longer period.

A personal loan, when handled according to the terms of the loan agreement, could improve your credit scores. This happens because decreasing your credit utilization rate, making consistently timely payments, and paying off the consolidation loan will boost your credit over time.

On its face, borrowing your way out of debt doesn’t sound like it makes a lot of sense. However, if taking out a personal loan to consolidate and pay off your debts fits your circumstances, it could be the right strategy for you.