Using Debt to Pay Debt: Why Easy Access to Credit Can Be Costly

If you’re overwhelmed by debt and struggling to keep up with your bills, you might look for ways to borrow money. Many lenders offer fast access to cash through high-interest loans, often without a hard credit check. Unfortunately, these borrowing methods can come at a steep cost.

Paying off debt with debt may seem like a simple solution, but it can be risky and expensive if not managed correctly.

On the other hand, if you can qualify for a low-interest loan and follow a strict repayment plan, using debt to pay debt has the potential to help you save money and pay your debt faster.

Here’s what you should know about borrowing money to pay off debt to avoid further financial trouble.

How Borrowing Can Help You Manage Your Debt

Paying off debt often involves borrowing money to repay your existing debts – Paying Debt with Debt.

For this strategy to work, you need to secure a new loan or credit card with a lower interest rate than your current debts. Then, you use the new loan or credit card to pay off your higher-interest debts.

Paying off debt with debt can be a strategic financial move if you do it right. By securing a loan or credit card with a lower interest rate, it’s possible to lower the cost of borrowing and pay off your debt sooner. But before you use debt to pay off debt, ask yourself why you need to borrow more money and carefully consider the type of debt you plan to borrow.

Useful Strategies for Paying Off Debt With Debt

Debt consolidation loan

A debt consolidation loan is a personal loan that you use to pay off multiple debts. For instance, if you have credit card debt and other high-interest-rate loans, you can use a debt consolidation loan to pay them all off so you only have one monthly payment. The goal is to find a debt consolidation loan with a lower interest rate than your current debts.

Balance transfer credit card

You can use a balance transfer credit card to pay off multiple credit cards using one monthly payment. Like a debt consolidation loan, you want to find a credit card with a lower interest rate. Many lenders offer low or 0% introductory interest rates for a promotional period, typically six to 12 months. If you aim to pay most of your debt during the promotional period, there’s potential to save a significant amount on interest.

Line of credit

A line of credit is a revolving loan that works like a credit card, but typically has a lower interest rate. You’re able to borrow money up to a certain limit. You can use the money and then pay it back. You only pay interest on the money you use. It’s possible to use a line of credit to consolidate other high-interest debts.

Challenges of Borrowing to Pay Off Debt

Before taking on more debt, make sure you understand some of the challenges and potential risks.

You need a healthy credit score

If you have bad credit, you might find it challenging to qualify for a loan, line of credit, or balance transfer credit card that offers a low enough interest rate to make paying off debt with debt worth it.

You might have to pay extra costs and fees

There are often fees or extra costs associated with taking on new debt. For instance, with a balance transfer credit card, you’ll usually need to pay a fee to transfer your debt. The balance transfer fee generally ranges from 3% to 5%. For instance, if you want to transfer $5,000 with a 3% fee, you will pay a $150 fee.

It doesn’t address underlying problems

Consolidating your debt doesn’t address your underlying financial issues. If you have a history of overspending, poor credit management, or you don’t make enough money to pay back your debt, you might want to speak to a Licensed Insolvency Trustee (LIT) or a not-for-profit credit counsellor.

There’s potential to make your debt worse

If you pay off multiple high-interest credit cards with a debt consolidation loan, there’s potential to reuse those credit cards and increase your overall debt loan. Have a plan in place to ensure you don’t rack up new balances on the credit cards you’ve paid off.

Debt Repayment Strategies

Having a debt repayment strategy can help you stay focused on eliminating your debt quickly. If you have multiple debts to pay off, there are two popular strategies you can consider: the debt snowball and debt avalanche.

• Debt snowball. You focus on paying debts with the lowest balance first. Paying off your lowest balance can give you an early win and help keep you motivated.
• Debt avalanche. You pay off your highest interest debt first. This is the most cost-efficient way to pay off debt.

With both strategies, you continue to make your minimum payment on all other debts.

High-Interest Rate Borrowing Options to Avoid

It’s possible to use new debt to pay off old debts, but only under the right conditions. You should only take on new debt if:

• You’ve addressed your underlying money issues
• It provides a lower interest rate
• It helps to simplify debt repayment

There are certain borrowing options that you should generally try to avoid. While these loans are usually easy to get, they can be incredibly costly and send you further into a debt spiral.

1. Payday loans. These loans typically come with extremely high fees and require you to pay them back in the short term. If you miss a payment, you can get caught up in a cycle of debt that is difficult to get out, resulting in additional debt issues.
2. Title loans. Some alternate lenders offer title loans. These are expensive, short-term loans that you can get with bad credit. You can use your car as collateral to guarantee that you’ll repay your loan. If you miss your payments, you risk losing your car.
3. Pawnshop loans. These are short-term, secured loans that don’t require a credit check. To get one, you offer a valuable item (such as jewelry or electronics) as collateral in exchange for a loan. You then repay the loan, plus interest, within an agreed-upon period. If you pay your loan on time, you get your item back. If you don’t, the pawn shop can sell it and keep the money.
4. Credit card cash advance. You can quickly access money with a credit card cash advance, but it will cost you. Cash advances often come with a higher interest rate than regular purchases, plus additional fees, so they are not a good idea when already in debt. There’s also no grace period, so you start paying interest as soon as you withdraw the money until you pay it back in full.

Need Help: Talk to a LIT About Debt Relief Strategies

If you’re stuck in a cycle of high-interest debt and struggling to pay your bills, it’s time to speak to a Licensed Insolvency Trustee (LIT). A LIT can assess your financial situation and explain all of the debt solutions available to you. If you need a more formal debt relief plan, LITs are the only professionals in Canada who can administer Consumer Proposals or Bankruptcies. For a free, no-obligation consultation, call us at 1-888-371-8900, or complete our online contact form.