- 5 min read
- Prepare your finances, so you can evaluate if taking a loan to get out of debt is helpful.
- If you have good credit and home equity, then take out a cash-out mortgage loan.
- Avoid bad credit or payday loans.
Loans to Pay off Debt - Fighting Fire with Fire
Isn’t it somewhat funny to think of taking a loan to help you get out of debt? Loan is debt, isn’t it? The idea of taking a loan to help you get out of debt is somewhat akin to fighting fire with fire. It can be an effective tool, if used properly; but it can cause more damage if misused.
There are different types of loans and different types of debts. There are also different types of debt relief solutions, one of them being debt consolidations loans. In order to take a low interest loan you will need to have good credit, so this debt relief solution is not for all.
In order to determine if taking a loan to help you get out of debt, take these steps:
- Help Yourself Get out of Debt - Goals and Budget Tools
- Control the Flame - Pay off Debt with a Loan
- Out of the Pan into the Fire - Avoid Payday loans
Quick tip #1
If you don’t have good credit or a home with sufficient equity to take out cash-out mortgage refinance loan AND you have debt problems, then read the section below "Get your Goals and Budget in Working Order". Then, make sure you use Bills.com Debt Coach, an innovative tool that helps you analyze your financial situation and recommends to you a debt relief solution.
Help Yourself Get out of Debt - Goals and Budget Tools
The obvious isn’t always easy to do and we all realize that. It is obvious that you need to maintain good eating, exercising and spending habits. It is obvious that making a good plan helps to set up and maintain good habits. However, experience teaches us that good plans and good habits are not easy tasks.
Getting out of debt is a great goal. Make sure that you combine it with the flip side, which is to build your equity. Setting up and maintaining a budget is not an easy task. Use the Bills.com budget guide to help you get going. If you need professional help, then consult with a credit counseling service.
Gather information and create lists regarding your situation, as follows:
- Financial Situation: Include a detailed analysis of your asset, debts, monthly income and monthly expenses.
- Financial Goals: Setting broad goals like pay off debt, or save more money is a good start. Then break them down into concrete goals with a time-line, cost, monthly savings required, and an action plan to achieve that goal. Here is an example from the budget guide:
|Goal||Timeline||Cost||Month Savings Required||Action Plan|
|Pay off Student Debt||3 year||$10,000||$277.78||Increase Monthly payments|
- Key Ratios: Keep track each month of your financial status using these financial ratios -Monthly cash-outflow to gross income, saving to gross income, total monthly debt payment (includes mortgage, credit cards, auto loan, student loans) to monthly gross income, monthly mortgage payment (or rent) to gross income.
Control the Flame - Pay off debt with a Loan
If used properly a loan can help you pay off your debt by either making your payments affordable and thus you avoid default, or by creating a payment plan where you pay off your debt at a lower interest rate and shorter time. If you don’t have good to excellent credit, then this is not a viable option. If you have equity in your house, then consider a cash-out mortgage refinance loan, by following these steps:
- Check the value of your house, through an online site or asking a local agent. (This is a ballpark figure, not one used by lenders).
- Determine your LTV by dividing your current mortgage balance by the value of the house.
- Determine the amount of funds you can take out in a cash=out refinance. In general, banks offer up to 80% financing, although with Mortgage Insurance, it is sometimes possible receive up to 90%.
- Determine if the new monthly payment will be affordable. Use the mortgage refinance calculator to see what your monthly payments will be based on different loan periods.
- Get quotes to see the rate and terms of a cash-out mortgage refinance.
Quick tip #2
if you have equity in your house, and a cash-out mortgage refinance can help you put your finances in order, then get a bills.com quick quote and get matched with some of the best lenders in the country
Before you take out a cash-out mortgage loan to help you get out of debt consider these factors:
- You are transferring unsecured debt into secured debt. That means if you have financial difficulties, your creditor has immediate recourse to foreclose on your property.
- Your house is a major asset and savings vehicle. Make sure that your financial plan includes a debt free date for you house mortgage.
- You will use debt responsibly and not debt and putting it on your house
Another loan option is an unsecured personal loan. You will need good credit and a low DTI to qualify, and even so, interest rates are not cheap. Before exploring this option, see if you can negotiate better terms on your credit card debt, or do a balance transfer. Just by making larger payments on your credit card debt, you can pay it off quicker and save a lot of money. Check out the Bills.com minimum payment calculator.
Out of the frying pan, into the fire - Payday Loans
If you financial situation does not allow you to raise low interest and long term loans to pay off your debt, then you might be tempted to take a pay day loan, or a bad credit personal loan.
If your debt problems are bothering you, you feel stressed out, and you really need to pay a bill, an unexpected expense, or another debt payment, then those easy to get offers look attractive. Think again, because you will be jumping out of the frying pan and into the fire. Payday loans and bad credit loans are short-term loans with high interest rates and high fees. The lenders are aggressive collectors. Instead of taking a loan to get out of debt, you will just be deeper in debt. Your best course of action is to AVOID them.
Quick tip #3
There are different debt relief solutions including credit counseling and debt settlement. If your debt problems need immediate attention, then receive a free consultation from one of Bills.com's pre-screened debt providers.