The concept of borrowing money can be considered good or bad depending on how you view it; but in today’s economic environment where many are finding it hard to pay their car loans, credit card debt or even enjoy a relatively good standard of living, borrowing money to pay off existing debt may be the “pot of gold” at the end of the rainbow that many hope for.
Now, I’m sure many of you may have heard the terms “good debt” versus “bad debt”, and while you may know these terms, do we truly understand them? In fact, many persons justify their spending habits by using these two terms loosely and find themselves in debt that they’re unable to pay off and have far exceeded their income.
So what is good and bad debt?
Good Debt: Students and homeowners are the typical consumers of good debt when they borrow money for school/tuition fees and mortgages. These types of debt will help them to increase their future earnings or enable them to earn more to service their other debt.
Bad Debt: This is simply a kind of debt that is used to purchase items that do not enhance or potentially enhance one’s income. Such items include clothing, a motor vehicle (that will not be used for income generating purposes) and vacation trips.
So, should I borrow to pay my debt?
In today’s environment, there are several options which persons can utilize to assist in the process of paying off their debts. If one’s debt is unmanageable, meaning it far exceeds one’s income and I impacting greatly on one’s standard of living; then one should look at the various options offered by lending institutions. However, it must be noted that borrowing costs money and the longer you owe money, the more it costs. Some of the options to be considered are:
Debt Consolidation: This is an option that persons can consider if there are several debts. This will allow them to combine these debts to arrive at a single more flexible and/or lower monthly payment, and in some cases this option carries a lower rate of interest, and if repaid as scheduled, may work out to be the best option. It should be noted however, and must be clearly understood, that all loans are now merged; hence one must be more prudent and follow carefully the repayment plan as, if not careful, one can lose everything, if payments are not made.
Overdrafts: Commercial banks typically offer a specially arranged facility where you can have a limit up to which you can borrow from your current account. There is no minimum repayment and therefore, you can take the money up to the overdraft limit using any withdrawal method. Please note though that interest rates are generally higher than those for personal loans, and this method is not the ideal as it requires a monthly or quarterly fluctuation of the amount of the overdraft limit.
Borrowing from family & friends: This option, while not usually advisable, as it can open a “can of worms”, may be considered one of the best options, as in most cases they usually don’t have interest rates or fixed payments tied to them. If this option is available then it is advisable to take advantage of this assistance from family and friends who are willing to help in the process. Make sure, however, to make payments promptly as if you’re paying back to a lending institution, as not doing so hurts your credibility for future advances.
Overall, it is usually not advisable to borrow money to pay your debt. This is like “borrowing from Peter to pay Paul”. However, if you’re experiencing difficulties making your payments, please visit your bank to discuss with them an affordable option. Be sure to give them a view of the entire situation (be honest about your financial status). If possible, your banker may propose other options that may assist you in the process.
If considering another loan, remember that payments have to be made on this loan too and if you’re not managing your existing loan, it is best not to take that route. Try to find ways to reduce your costs by cutting back on unnecessary spending habits that will impact your overall ability to maintain your financial well-being.
Make some sacrifices and eventually, you will be rewarded. With proper management, your debt will disappear.