Borrowing Your Way Out of Debt

by Andy Hough on March 9, 2007

You can’t borrow your way out of debt. That saying is true but smart borrowing can speed up the debt repayment process. Moving your debt from a high interest rate to a lower interest rate will allow you to pay off the debt quicker and reduce the overall amount of interest you pay. Of course it isn’t as easy as some debt consolidation companies would like you to believe. There are pitfalls in this process to look out for.

Here is an example of how I switched high interest debt for low interest debt. I have a private student loan with an interest rate of 11.75%. The interest rate is variable so it could go up even more. I took out a Grad Plus loan at 8.25%(fixed) and applied the proceeds of that loan against the 11.75% loan.

The mistake I made in doing this was not immediately applying the new loan to the old loan. The new loan was for a total of $15,200 disbursable in two amounts of $7600 (one for fall semester and one for winter semester). After leaving this in my bank account for a couple months I realized that I had been spending my money too freely and had used part of the new loan proceeds for my current spending. I ended up using about $2000 of the new loan money for current expenses rather than for paying on the old loan. Luckily, I was able to make up the $2000 this semester but it left me with much less money to live on for this semester. Also since the old loan was larger than the new loan I still don’t have it completely paid off. I plan to do that over the summer.
This is possibly the biggest pitfall of trying to borrow your way out of debt. If you don’t use the new money to pay off the old debt you will just end up even deeper in debt. Paying off a credit card and charging it up again is basically the same thng. Another thing to look out for is that you don’t extend the payment term on the debt. If you end up paying the debt off over a much longer time period you could pay even more interest than before despite having a lower interest rate.

These are things to look for if you are thinking about borrowing money to help your debt repayment process. If you’re not sure that you have the discipline to avoid these pitfalls than you should probably not borrow any more money.

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