When you’re trying to pay off debts, borrowing more money doesn’t seem like a sensible thing to do. Yet people will often tell you that getting a 0% interest credit card is an easy way to reduce payments. Borrowing can sometimes work, but if you get it wrong then you’re just going to put yourself in an even worse situation. If you’re struggling to pay off your debts and you’re considering borrowing money to clear them, this is everything you need to know.
Borrowing more money against the house and increasing your mortgage is a common way that people get extra cash when they need it, but is it sensible? The main reason that people do it is that the interest rate is likely to be lower than say another credit card. However, that doesn’t always mean it’s going to work out cheaper in the long run. The first thing to consider is that you’re putting your home at risk. If you can’t afford to make the repayments, your creditor can repossess your home. Adding to the mortgage just makes this more likely to happen. You also need to think about the increased payments; paying that extra money each month could easily complicate your budget and make you more likely to get into debt again in the future.
The interest rates themselves are also tricky because mortgages might seem cheaper on the face of it but in reality, the opposite is true. If you’re trying to choose between a credit card at 18 percent and a mortgage at 5 percent, the mortgage will be cheaper to pay back, right? Wrong. You’ll be paying the mortgage for much longer which costs you more money in the end. Say, for example, you’re borrowing $10,000; if you borrowed it on an 18 percent interest credit card and paid it off over 5 years, you’ll pay $5,200 interest. If you borrow the $10,000 on a 5 percent mortgage and pay it off over 25 years, you’ll be paying a total of $7,500 interest. It’s worth doing these calculations yourself before making any decisions.
Debt consolidation companies are one of the best places to borrow money from when it comes to clearing debt. You can use debt consolidation loans to pay off all of those separate debts and consolidate them into one simple monthly payment. This is of benefit for a couple of reasons; firstly, it means that you take some of the pressure off and you don’t have different creditors calling you up and hassling you for money. The single repayment is also far easier to keep track of when you’re sorting out your budget.
Balance transfers on 0 percent interest credit cards are one of the most popular forms of borrowing to reduce debt, but they’re a bit of a double-edged sword. They can be a big help because you can pay off high-interest debts and then you’ll just owe the base amount for a year, not the interest on top. This makes it far easier to clear the debt, but only if you do it within that year. Too many people rely on these balance transfers and end up just moving the debt round different cards each time the introductory period runs out. You’re avoiding the interest but you’re never actually clearing the debt.
Your best bet is to borrow money through a debt consolidation service. Balance transfers can be good but only if you use them right, but borrowing against your mortgage is usually a bad idea.