Friday Financial Tidbit-Borrowing money to get out of debt does not work

One of the joys of being a financial coach is working with people to dump their debt and experience financial freedom. To make this dream a reality, we work with people and show them how to start living on less than they make and to start paying off their debt using the debt snowball. It sounds simple but when I sit down with folks and hear how they have tried before to get out of debt, I often get complicated stories of how they tried to borrow money to get out of debt.

When it comes to your debt, the interest rate is not your problem. The debt is your problem! Home equity lines of credit, 401(K) loans, and debt consolidation are all popular ways of borrowing money to pay off debt, but at the end of the day they do not work! You are still in debt, except you changed the lender’s name.

You can not borrow your way out of debt. By doing so, you are just robbing Peter to pay Paul. Yes, you might now have lower monthly payments that you can manage, but we do not want you just to manage your debt, but rather eliminate it for good!

If you fill a hole by digging another hole and putting the dirt in the old hole, all you have is just a new hole. Doing that would be weird, but that is exactly what we do when we borrow money to pay off debt. It does not work because it keeps you in debt. What we need to do instead is to get intense and decide to get rid of the debt once and for all.

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2 Responses to Friday Financial Tidbit-Borrowing money to get out of debt does not work

  1. This is a great post Jon. I’ve found that many people are confused about how to pay off the debt as well. Sometimes they move credit card balances around — chasing lower rates. Or they wrap up all of their debt on a line of credit.

    Sometimes this can be effective, but ONLY if the monthly savings is used to pay down the debt! Unfortunately, oftentimes the freed up money is used on other things. Or worse, it’s used to pick up a new “monthly payment” on a new debt incurred.

    I love your comparison about how moving debt around is just like digging another hole and filling the old one with the dirt used to dig the new one. This is so true!

    • Jon White says:

      Jenny, thanks for the comment. A lot of times people get hung up on the interest rate they are paying and move their credit cards to lower rates, but like you said that only works if you pay down the debt. The interest rate is about 10% of your problem; the other 90% is the actual debt! But when we interest rate jump, we get into this pattern of digging one hole to fill in another.

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