When Should You Take Out a Loan to Pay Down Other Debts?


take out a loanIt’s practically a commandment of sound financial management that you should never throw good money after bad. And that means never taking out a loan to pay down debts, because in so doing you just create a cycle of more debt, more stress, and less control over your own finances.

Like all rules, though, this one is not carved in stone. Sometimes your debt nightmare is so bad that you need to get out of it, no matter what it takes. Other times a loan can actually be a financial windfall. The following circumstances warrant considering a loan to pay down debt.

Balance Transfers and Low Interest Rates

If you can transfer a high-interest balance to a low-interest loan or credit card with an introductory interest rate, you should absolutely do it. This stops the debt snowball of escalating interest, and can also encourage you to quickly pay down your debt, before the introductory rate expires.

Tax Debt

If you owe back taxes to the IRS or to your state Department of Revenue, the consequences can be dire. Talk to your accountant about the specifics of your situation, but remember that if you don’t have a payment plan, that debt can be an endless source of stress. It can also lead to liens and even criminal prosecutions. Consider taking out a low-interest loan to pay down the debt, then paying down the loan as quickly as you are able.

Debt from Lawsuits

If you owe money on a lawsuit, you may not be able to discharge it in bankruptcy, and can accrue additional charges if you fail to pay. Pay these debts down as quickly as possible, even if it means taking out a loan. Just make sure you opt for a low-interest loan, so you don’t find yourself later getting sued by the company from which you received the loan!

Reverse Mortgages

If you’re over 62 and own your own home, a reverse mortgage is a low-risk way to get reliable income from the equity in your home. This option can dig you out of a financial hole, offer you a low-interest loan you might not otherwise be eligible for, and help you get some financial breathing room at long last.

When Not to Take Out a Loan

You may encounter other circumstances that necessitate pursuing a loan, but you should never go into debt to pay down other debt in the following circumstances:

  • When the interest rate on the new debt is higher than the interest rate on the loan you are paying down.
  • To get luxury items, go on vacation, or buy a new car. A used car is almost always the most financially savvy decision.
  • When you know you cannot afford to pay back the loan.
  • When your home is in foreclosure.
  • When you do not owe the money claimed; you have a right to dispute debts, and you are not responsible for paying debts that all outside of your state’s statute of limitations.
  • If you have so much debt you don’t know where to begin. Bankruptcy might be the best option, but talk to a financial planner before making the decision.
  • When taking out the loan will not enable you to pay down the full balance of the other debt.

Annie Doisy is a reverse mortgage expert who helps seniors enhance their lives by taking advantage of the equity in their homes. Annie writes for ReverseMortgages.com where her goal is to educate consumers on a wide range of topics around mortgages and other financial services.

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5 Responses to When Should You Take Out a Loan to Pay Down Other Debts?

  1. Cathy @MonetizeMyMins 05/11/2016 at 8:47 am #

    I do think it is important to look at the entire situation when you are considering acquiring a new debt to pay off a current one. Granted, if you can get a low interest loan to pay off higher interest debts (like maybe credit cards), it may not be a bad idea. But that will only work if you truly have the discipline to stop using the higher interest form of credit.

  2. Nate Matherson 02/20/2016 at 11:57 am #

    hmmmm…. I don’t really think it would make much sense unless you would lower the total cost of the debt. Even a lower interest rate might not make much sense, unless the term length decreased the overall cost. Interesting article.. hope all is going well Paul!

    • Paul 02/21/2016 at 6:20 am #

      I agree Nate! The whole purpose of a consolidation loan is to lower the overall debt cost, makes no sense to take out a loan that increases your overall cost!

  3. Jayson @ Monster Piggy Bank 02/20/2016 at 3:55 am #

    It really depends on the needs, but as much as possible, I wouldn’t take a loan just to pay debts, which would mean that I would get myself another debt. That said, I may consider taking a loan if doing so would save me from paying those additional interest rates.

  4. Frugal 2 Freedom 02/17/2016 at 12:54 pm #

    That is how I feel. Every situation is differently. All financial rules do not apply to all people. If that was true then millionaires would not borrow money.

    Sometimes you have to go backwards to go forward.

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