MoneyMagpie Editor and financial expert Vicky Parry reveals how borrowing more can sometimes be the answer to solving debt overwhelm
Being overwhelmed by debt is something that many of us face – even if we don’t talk about it. The cost of living crisis has made things hard for the majority, and affording even everyday expenses is tight.
A debt spiral is easy to get onto and hard to get off. A couple of months off sick, redundancy, or a sudden big expense like a new boiler is all it takes for most of us to go from affording things well, to running up debt.
But before you bury your head in the sand, did you know that borrowing MORE money could prevent a debt spiral? Read carefully, as you’ll need to be disciplined and make sure you’re still able to afford your repayments. Not all these options will be right for everyone, so seek proper advice first.
Word of warning
Before looking into this any further, stop and think. Are your debt problems long-term? Have you already run up an unmanageable amount of debt in the tens of thousands?
Can you change your spending habits or have willpower not to spend more while you’re recovering from debt?
If the situation is already worrying, contact a debt charity to find out your options. The advice below is only for those teetering on the edge of debt, or who have small debts that won’t require filing for bankruptcy or insolvency.
Stepchange and the National Debtline offer free advice and can help organise the administration behind debt management plans, bankruptcy, and insolvency. The Government website has more advice on where to find help with your serious debts.
Why borrow more
Consolidating debt and shifting your debt to another provider can save you hundreds or even thousands of pounds in interest. When you pay your credit card installments each month, if you don’t pay the full amount due, what you do pay goes towards different parts of the bill.
Typically, this means the actual purchase price of something is paid off at a slower rate, while most of your payment goes towards fees and interest. This means you can keep paying loads every month but not see your balance reduce in the long-term, as interest continues to grow on the amount owed.
Borrowing more can help you wipe the debt from very expensive credit cards or loans, and put everything into one easy to manage payment each month.
Balance transfer credit cards
If you’re struggling to pay your credit cards in full each month, because the interest rate has grown, consider a balance transfer credit card. These are not for making purchases on. The interest rate on purchases is sky-high.
However, they do give you breathing space. Look for a balance transfer card with a long 0% interest on balance transfers – and, ideally, an introductory offer of 0% on balance transfer fees, too. This means it won’t cost you to shift your balance from your existing credit card onto the balance transfer one.
As long as you then pay what you can – and always the monthly minimum – ensuring you pay off the full balance before the end of the 0% interest period, you’ll have saved money. That’s because you won’t be paying interest on that large sum of money that was costing you extra just sitting there on your last credit card. These cards are for breathing space: without interest, you can pay down your actual balance.
Take a new loan
A loan is a lump sum that means you can pay off outstanding debts. Look for a low interest rate, and ideally the shortest loan term you can realistically afford. This helps prevent new long-term debt building and keeps the cost of the loan down overall.
You may also have heard the term debt consolidation loan. There is a slight technicality to be aware of, here. While both a consolidation loan and personal loan can be used to pay your debts, a consolidation loan is only for your debts while a personal loan can include money for other things.
A debt consolidation loan can be managed by the provider. This means they agree to the loan, then they are responsible for contacting your current creditors and repaying your outstanding balances in full. You then pay the consolidation company a single payment each month to repay the loan, rather than each credit card, overdraft or other creditor.
A personal loan is a lump sum paid directly to your bank account. You can do what you want with the cash – which is risky if you can’t trust yourself to not simply spend the new money instead of using it for your debts.
Check interest rates vs loan terms
Before you jump into applying for more credit to repay your debts, it’s time for some maths. Look at the interest rates on both your existing debts and the loan you want to take. Work out how long it would take you to pay off the existing debts as you currently stand, and how much the interest will cost you.
Sometimes, a consolidation loan or personal loan will cost you more in interest and keep you in debt longer overall. So, it’s important to spend time thinking about your approach before applying for any kind of loan.
Try paying debt off high-to-low
Finally, if borrowing isn’t the best situation for your circumstances, try to tackle your debt in small chunks. Pay the largest amount you can each month to the most expensive debt you have. This will help you reduce the balance of the high-interest credit card or loan faster, saving you more in the long-run.
The alternative is to “snowball” your debt repayments. This helps you clear debts with a rewarding mindset: you pay the largest amount each month to your smallest debt.
It means you could clear your first debt within months, instead of paying equal amounts across all debts for years and years. Make sure you can still afford at least the minimum repayments on your other debts each month, ideally more, to prevent the interest accumulating.
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