Borrow Your Way Out Of Debt

December 11, 2019

You cannot borrow your way out of debt.  Trying to do so is a useless strategy that will get you into far more debt than you had to begin with.  Mortgage lenders present the fact that mortgage rates are generally lower than for other forms of debt, which is true but lower interest rates do not necessarily mean you will pay less.

For example, if you refinanced a $10,000 credit card balance into a mortgage at 3% it may sound better than paying the credit card interest rate of 19%.  But when the debt is amortized over 25 years the total interest payable becomes $4,215 versus aggressively paying the credit card for 2 years and paying only $2,000.

Now it’s true that on a cash flow basis it’s a whole lot easier to pay about $48 per month on the mortgage than $500 per month on the credit card, but the end result is a lot more interest (debt you have to repay).  As you can see the more you try to borrow your way out of debt the more debt you accumulate.  And, the more debt you accumulate the less likely you will ever reach the end of repaying your debt.

One finance company is aggressively advertising high interest loans, and on its website advertises low weekly payments.  A quick look at their loan calculator is a little confusing, and you may be forgiven for mistaking the weekly payments for monthly payments – because the layout tells you how much you will pay and for how many months (see the picture that accompanies this article).   You mind sort of skips over converting the weeks to months, it is clever advertising.

The loan amount of $10,000 requires weekly payments in the amount of $103 for four years.  The total of those payments is $21,463.52 which amount to $11,463.52 of interest.  Now if you paid the credit card off over the same time frame at $299 per month you would only pay $4,352.06 in interest.  You should also be aware that there may be penalties for paying out early for either the mortgage or the finance company loan.

The bottom line is “caveat emptor” (buyer beware) if it looks too good to be true it probably is.