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If you’ve ever been in a position where you were unable to make your loan payments on time, you might have considered paying off loans with other loans. This idea is really tempting for a lot of reasons, and creditors generally make it easy enough to do. There are a few different ways this can work, and depending on how you go about it, it may or may not be the right choice to make. Sometimes you’re better off leaving things as is, while other times it could make a lot of financial sense to take out a loan to cover another one.

Credit Card Balance Transfers

Doing a credit card balance transfer is essentially the same as paying off one loan with another one. If you have a card with a high monthly interest rate along with a very high monthly minimum payment, you could wind up over your head rather quickly if you start missing payments on the card. Credit card companies often add in lots of outrageous fees for missing payments and even more fees on top of those for exceeding the credit line. To avoid this, you could seek out a card with a lower rate of interest and a high enough credit limit to accommodate your balance on the other card with less desirable terms. In general, doing this is a good idea as long as the card you’re transferring your balance to has better terms than the old card. It’s best not to do it if the terms on the new card are the same or worse than your old card. The main problem with paying off loans with other loans by doing a credit card balance transfer is that depending on your credit score, it may not be possible. If your credit is bad, you can’t really count on getting another line of credit open.

Debt Consolidation

Applying for a debt consolidation loan through a reputable lender, such as a local bank, could help you tremendously if you have lots of small debts that you’re having difficulty keeping up with. Having, for example, five to ten separate little loans to pay on can be expensive and hard to keep track of. When you’re trying to keep up with making payments on time to so many different lenders, chances are good that at some point you’ll forget to pay one of them. As you certainly know, missing payments has expensive consequences, and it’s best if it doesn’t happen. A traditional debt consolidation may be a good answer if you’re able to get the loan with a decent interest rate. Debt consolidation generally works like this: You tally up the balances of all the debts you want to include in the consolidation, and the lending office will look at the grand total and decide whether or not to give you a loan. Lenders tend to give debt consolidation loans to homeowners fairly regularly, but it’s also possible to get a debt consolidation loan without owning a home. If you get the loan, either you or the lending office will distribute the money to your various creditors, and you’ll be left only paying the lender who gave you the debt consolidation loan. If you’re dealing with a reputable company and your credit is at least above average, your payment should be fairly low and ultimately you’ll be saving yourself a lot of headache because you won’t be trying to keep up with so many different monthly payments. Even though debt consolidation is often a good thing, it can also be a bad thing. Some companies offering debt consolidation are shady and will ask you for a large “processing fee” upfront before agreeing to let you in on the program. Many of these companies market themselves as non-profit credit counseling agencies, but their only true goal is to rip you off. After you pay that initial fee, you may begin making payments to them only to discover that they are not distributing your payments. A good rule of thumb is to do your research and check out all lenders and credit agencies thoroughly before agreeing to any debt consolidation program. The Better Business Bureau is probably the best place to start doing your research.

Things to Avoid

Many people decide to try to pay off loans without doing debt consolidation or credit card balance transfers. They simply need money and decide to borrow the money from lender A to pay off lender B. This is really something you should avoid doing unless, as stated above, you are getting better terms from the second lender. You should also look at how close you are to paying off the initial loan. If you only have another year or less on the first loan before it is paid off and by taking out another loan to pay it off you’re agreeing to another two or three years of debt, you might need to reconsider. If the first loan is close to being paid off, it could save you a ton in interest if you really crack down and make an effort to get the balance paid. You might think that taking out another loan is the only answer if you’re late on your payments and don’t see any light at the end of the tunnel, but you should talk to your creditors before making the decision — don’t avoid them intentionally. Sometimes creditors are incredibly accommodating when it comes to giving people more time to get payments together and will hold off on reporting to the credit bureaus if they at least have a promise to pay. However, they’re not likely to accommodate you much if you are intentionally avoiding them and dodging their phone calls. They will appreciate your honesty and willingness to work with them if you try to do so.

Bottom Line

Taking out one loan to pay off another doesn’t really make financial sense unless you really are getting a better deal with the second loan. Your lenders might try to make you believe that you actually are coming out on the winning end when you’re really not. Don’t just take their word for things and sign on the dotted line no matter how much you trust them. Have a good understanding of what your current loan terms are and what you’re trading those terms off for, and always read the fine print.