If you have debts, you should of course take care to incur even more debts by borrowing money. It is not very good to have large debts and usually these also cost money in the form of interest and fees, which is why you want to get rid of them as soon as you can. The exception is, of course, mortgages and the like, which are a common part of your personal finances. However, there are some situations when a loan can be good for sorting out your bad finances, which we will look at in this post.
Having debts usually means having to shell out expensive money every month in interest. Especially if you have taken expensive private loans or have credit card debt with a high interest rate. This type of debt can quickly eat up your salary and make it hard to get money over. It may sound strange that the solution to the problem would be to take out a loan but sometimes it can actually be a good idea after all.
Collect expensive loans with a large cheap private loan
The most classic solution for avoiding expensive loans and credits is to take a larger loan with a low interest rate and use that money to pay off the old debts. The idea then is that you can pay off several small loans with a high interest rate and instead get a single larger loan with a low interest rate and thus save a lot of money.
Basically, you want to avoid loans that have, for example, 20-30 percent interest and replace them with a loan (which is basically equal in total) that only has, for example, 8-10 percent interest. It is the smaller private loans, SMS loans, installment purchases and credit card debts etc that have high interest rates and which become expensive. By taking a regular large private loan from a major lender, you can repay all the small loans and only keep the cheaper loan.
So you lower your interest cost by maybe 50 – 70% or similar by doing so. This is called gathering loans to solve expensive loans and is a very effective method of lowering their monthly costs. However, it is important to do the right thing for it to succeed.
Large private loan with low interest rates
Firstly, you can even get a large private loan with low interest rates, which is not a given. You need a fixed income and a not too horrible economy for it to go your way. Payment notes can clearly put a spanner in the wheel. Secondly, it is important that you really get a lower interest rate on your big loan, so that you also save money every month. Regardless of what interest rate you have right now, it is required that the new interest rate is noticeably lower, so that you can actually save money.
Finally, it is also important that you actually use your new loan only to pay off all old expensive debts. If you do the right thing, you will only borrow as much as you really need to pay off all small and expensive loans. It is not a good idea to borrow more money or to use it for something else. Your goal is to reduce your expenses and then it is only important to avoid the expensive loans with high interest rates.
Borrow your home further
Something that many people forget is that there may be room to borrow more money with the housing as collateral. When you take out your mortgage, you can certainly borrow as much as you can, which is 85 percent loan-to-value ratio but over time you get more room.
The mortgage loan is the cheapest loan you can find where you get an interest rate of around 1.5 percent. This makes this loan a very good loan compared to all other loans (possibly apart from student loans which also have good interest rates). Therefore, it is a very advantageous loan for those who want to clean up their finances and get rid of old expensive loans.
After owning your home for a few years, you start to get some leeway and can borrow some more. At least if you have been repaying your mortgage regularly. If you repay a reasonable amount each month and also expect that the property has increased in value since you bought it, you can certainly have some room to mortgage the property further.
As mentioned, you can have a loan-to-value ratio of 85 percent of the value of the home at the most, which means that you may very well have some opportunities here. If you have, for example, repaid USD 3,000 a month for five years, you have already paid off USD 180,000. If your home at this time has also increased in value by, say, USD 200,000, you could theoretically borrow USD 350,000 extra on the mortgage.
The principle is then the same as collecting a loan with a cheap private loan. Borrow the home at a really favorable interest rate, beyond what can be obtained elsewhere, and pay off all the expensive loans. Because the interest rate is so low on mortgages, you can even repay ordinary cheaper private mortgages and earn it.
A regular private loan may have an interest rate of 5-8 per cent and if you can instead get around 1.5 per cent in interest, it means a very large reduction in interest costs. You can save a lot on that. If you have more expensive loans, you can save much more money. You reduce your expenses by taking out a new loan. The important thing is just to take the right type of loan and use the money properly.
Credit card as extra buffer
The previous tips are about using loans / credits to improve the situation when you already have old debts. However, this is a way to avoid getting into the debt trap from the beginning. Preventive measures simply.
One way to end up in the debt trap and to incur debt is to not have a buffer. By buffer I mean savings money that is earmarked for unexpected expenses and unusually high costs that can arise for any reason. If such costs arise (for example, that the car or the refrigerator is broken) you need to be able to handle them and it is not always possible to pay these things only with the monthly salary.
After all, you should still be able to afford all the monthly bills, food and the like, and if you do not have very good margins in your finances, the risk is that you do not have all the money required on the day the unexpected occurs. In such a situation, many simply take out a loan to meet the cost. Sometimes an SMS loan, sometimes an expensive small private loan, sometimes another type of credit.
If you do not settle this loan quickly, you are sitting there with an expensive loan that you have to pay on a monthly basis. Therefore, you should primarily have a buffer with savings money that you can use to avoid having to incur debt. However, if you have no such buffer then a credit card can act as a small buffer.
However, if this method is to be used, it must be handled correctly. A credit card can be expensive if you handle it incorrectly. The advantage of the credit card is that it is usually interest free for 45 days or something and therefore it is not so dangerous to use the card for things that you know you can afford to pay next month.
Borrow money interest-free
You can borrow money interest-free if you need it, which is not so stupid. However, if you do not repay the entire amount when the next bill arrives, it will be interest on the money and that interest rate is quite high. You definitely want to avoid that. So pay back the full amount.
Thus, if you use the credit card correctly, you may have a small buffer for those occasions when you need a little more money than you have in the account. You can borrow money free of interest for up to around 45 days and can thus basically get a loan for free this period. This is as long as you pay back on the next invoice. So it is a good option for expenses of the size that you can afford to pay back within a couple of months, but less good for large expenses.