Here is the best article that can answer the following question: when should you take out a loan to repay your debts?
Living in Canada these days is very expensive. Indeed, there is a huge gap between the average cost of living which is only increasing due to inflation and the average income which is failing to keep pace. This means that we are forced at one time or another in our lives to go into enormous debt.
Unfortunately, there comes a time when our income can no longer support the repayment of our debts. This leads to the unleashing of your creditors who will put pressure on you. Faced with this, your defensive instinct may push you to take out another loan to pay off your debts.
To know if this is a good idea, you have to ask yourself the following question: is this a short-term or long-term solution?
What are the right conditions for taking out a loan to repay debts?
Taking out a loan to repay your debts is possible if your financial situation is based on solid foundations. By solid foundations I mean that you have a good credit history, a regular income and a low debt ratio. This will show the financial institution granting you the loan that you have the financial capacity to repay the loan on time. Also, it will be proof that your over-indebtedness situation is due to a particular circumstance and that you are used to meeting your payment obligations.
The second aspect goes more in depth by taking into account the terms of the loan. For the loan to have its raison d’être, its terms should be more advantageous than the contractual terms of your debts. The reason for this is that your new loan must allow you to have a surplus of money after you have paid all your debts and not the other way around. You will especially have to pay attention to the interest rate and the amount of the monthly payments.
If these 2 parameters are green, then you can take out a loan to repay your debts. For added assurance, you can use a loan repayment calculator to check if you have the financial capacity to handle your personal loan.
When should you not borrow to pay off your debts?
Getting a loan with a good credit score is positive in itself, because it essentially means that someone else trusts you. In effect, you’re using other people’s money to make a purchase only because your financial metrics show you’ll pay it back. However, you must keep in mind that using credit means giving debt. Who says debt says financial obligation.
If you have bad credit, you could end up paying close to the maximum interest rate that can be imposed on you in Quebec. I see people almost every day who are unable to break free from the debt cycle because they take out loans that come with the highest interest rates on the market. In fact, in this scenario, taking out a loan to pay off your debts is only chaining you to the same problems that you are trying to solve.
What are the real solutions to avoid borrowing to pay your debts?
Taking out a loan to pay off debts is only a symptom of the real problem. Indeed, if you happen to find yourself in such a situation, it means that you have a lifestyle that your income cannot support. Using credit to pay off debts can be useful when you do it once in a while because of an unforeseen event. But even for that, you would have to be sure to repay your debt on time.
Does your income manage to cover your expenses?
By answering these questions, you can identify the warning signs of excessive debt. If this is really the case, then you must call on a professional who can inform you about all the existing debt solutions in Quebec, taking into account your particular situation. Here are all the solutions available to you to repay your debts more quickly if you live in Quebec:
A phone call or a free consultation with a licensed insolvency trustee can help you analyze the causes of your financial difficulties, as well as the most effective way to get your debts under control.
