Debts are more common than we imagine in Brazil. To get an idea: more than half of the population uses credit applications to close the month’s accounts. Because of fines and interest rates, this type of loan tends to be viewed with such distrust by the consumer.
But you can use it strategically, even if it is not one of the most effective alternatives. In certain situations, it pays to take out a loan to settle debts, you knew?
With a good dose of financial planning, a conscious decision of what the monthly costs are and what your monthly income is, a new loan can help to clear the most expensive defaults and, thus, favor your financial recovery in the medium term.
Do you want to know more about it? Then follow this reading and understand if it pays to take out a loan to settle debts and how to do this process, on occasions when it is an advantageous choice. For that, in the following topics we will talk about:
- When debts knock at the door;
- Find out if it pays to take out a loan to settle debts;
- Care when assessing whether it pays to borrow to settle debts;
- Alternative considerations to the loan;
- Good home economics practices.
When debts knock at the door
Regardless of the reason, in some month the family happens to realize that the bills will not match: expenses have exceeded income and this generates one or more debts.
For the following month, this family has to deal with the current accounts and, also, with the pending issues that were not honored last month. If there is no increase in income, in this period, it is likely that this family will suffer another month accumulating debts. This is a good example of how bad debt evolves in the country, but it can occur in several other ways.
This is the case of the entrepreneur who opens his own business, but the expenses swallow up his financial planning and he has to resort to overdraft and other types of credit to meet the costs. Or whoever bought a good (such as a car or property) and loses his job in the month after the conclusion of the contract.
Debts arise and are often unforeseen. But equally desperate, in any situation, which highlights the importance of knowing how to deal with each one of them if they accumulate in your pile of accounts payable – and this is what we will see before checking if it pays to borrow to pay off debts!
Review all your accounts
If the debts have reached your budget, it is necessary to review their costs and also compare them with your income. This is the best part of having good financial planning: you know, in advance, what the average amount of your expenses is, and you learn to balance them within your budget.
When the debts appear, even so, you have to add everything about them to the spreadsheet, such as:
- default time period;
- data and values of the respective interest and fines.
Having this information on hand facilitates your planning and taking action to reconcile your expenses and your family's average and monthly budget.
It even helps to assess which are the most urgent pending issues to be resolved, and we recommend that you prioritize those whose interest rates are higher. This is the case, for example, of the revolving credit card and also of overdraft, which are capable of potentially increasing debt in very few months.
Set goals to save every month
Based on the tip above, let's say you have established an average amount needed to settle pending issues gradually, month after month.
Consequently, it is time to evaluate how monthly habits and expenses in your home can be reworked so that an economy proportional to the amount of costs to settle debts is achieved.
Think about it in the short, medium and long term, but always keep your goals under monitoring. This helps to maintain the focus so that debts are reduced and there are no unforeseen events in this process.
Negotiate your debts
To help combat the accumulation of debts – and even consider the question of whether it pays to borrow to settle debts -, resort to creditors and negotiate default.
Usually, it is in everyone's interest that the situation be resolved and this involves reconciling new terms, amounts and installments for the payment of the debt. Just remember to know exactly how much (and when) you can spend on each of these debts and take them to the negotiating table with the creditors.
Thus, you set up a plan that fits your budget and that will not harm your financial commitments beyond current defaults.
Find out if it pays to take out a loan to settle debts
Answering, then, the question that gives title to this post, it is necessary to say: It depends. In principle, generating a new debt to settle others is not the best option, but it may be that the pending created in a loan application has smaller installments, lower interest rates than those applied to your current debts and a longer payment term.
In these situations, you would be exchanging one or more larger debts for one with a high value, but with better payment terms. For that reason, every care is more than necessary for you to make sure it pays to take out a loan to settle debts.
See, below, what are the cases in which this type of maneuver can be advantageous for you to settle the costly debts of your life!
Credit card and overdraft
We mentioned above how harmful this type of expense and default is to financial planning. Including, many UK citizens are tied to overdraft, currently, which concentrates one of the highest interest rates in the whole world!
Even so, it is one of the main reasons for having so many debts, and also a situation in which the loan can be providential to settle the debt.
The tip, however, is for you to look for credit concessions that concentrate interest rates lower than those practiced in your current pending – either by credit card or overdraft.
Urgency to clear the name
The “dirty name” is a term that refers to people with active debts and who, because of that, have their documents (CPF or CNPJ, in the case of companies) registered with credit protection agencies, such as Serasa and other institutions .
Some of the consequences of this can be summed up by the difficulty in obtaining credits in the market, and even requesting new credit cards or renting a property in your name, among other factors.
Therefore, those who have an urgent need to remove this pending issue may find it worthwhile to take out a loan to settle debts. It is worth remembering, only, that this type of attitude must be thought out so that it fits in your budget. Do not take out the loan if it will mean a new pending which, in the short term, will knock on your door.
Settle non-negotiable debts
In a previous topic, we highlighted that debt renegotiation can be an advantageous solution before considering whether it pays to borrow to settle debts. But for some institutions, the rules are inflexible and interest only increases while you decide what to do.
Ouch, the loan can help to settle these debts quickly which you would have a hard time getting rid of, assuming more accessible interest and installments with the new credit application.
Care when assessing whether it pays to borrow to settle debts
On the one hand, there are certain advantages to replacing debts, as we assessed in the previous topic, but we have already stressed that this strategy must be accompanied by lots of care and exaggerated dose of planning.
To help you make the best decision, in these cases, we've put together a few questions that you should consider before deciding whether it pays to take out a loan to pay off debts. See what they are, below!
Charges and interest rates
The first aspect is also the most relevant: you have to make sure that the new loan is going to have a more attractive interest rate than the current percentage of interest that you currently deal with.
Value of each installment of the loan
In addition, compare the interest with the value of each installment to be paid in the loan. This means that this monthly amount has to fit your budget, otherwise you simply postponed the unavoidable.
A good tip for this is that you never make a financial commitment whose share exceeds your total monthly income by 30%. After all, you have many other accounts and variable expenses that arise throughout the month – not to mention any unforeseen events, such as expenses with medicines, maintenance of the car, etc.
It is an unfair proportion, but that unfortunately exists in the country. Just as people are desperate to get out of debt, there are those who seek to profit from it. Hence, attention to not accepting any supposedly irresistible condition that suspicious companies or people offer you.
We even have a very complete post on the subject. Leave it safe to read next, and understand why you should avoid using a loan shark loan as much as possible!
Alternative loan considerations
Now that we have seen if it pays to take out a loan to settle debts, we will delve into the subject and explore alternatives that can be considered before the loan, and then we will highlight some good practices for those who want to save more on a daily basis!
Starting with the alternatives that can help to clear the outstanding debts, and without assuming new interest rates and installments with that. See just what they are:
- extra income source, even if temporarily, just to improve the budget in this period of debt settlement;
- sale of assets that help pay off debts, such as the car or even your property;
- refinancing current values (the aforementioned renegotiation);
- loan with friends or relatives (after all, interest may be lower or even non-existent if the income comes from someone you trust, and vice versa).
Following these tips, you may not even need to apply for a loan to pay off current debts. It is worth remembering, however, that it is important to have a financial plan that foresees all your financial objectives and also the challenges you face, on a monthly basis, to close your accounts.
Good practices in home economics
As we have seen, it is eventually possible to consider that it pays to take out a loan to settle debts. However, this topic has the mission of making you plan more and more efficiently.
And that translates, over time, into less debt, more financial stability and even a reserve from which you can invest and aspire to even greater financial goals in the future – who knows, a good investment option, for example?
- start saving now. Eliminate the unnecessary purchases, assess the budget and cut spending;
- create a plan where everyone in your home knows how much they can spend throughout the month – and what are their purchase priorities;
- use spreadsheets so that everyone can monitor the evolution of expenses throughout the month;
- research before you buy. Sometimes, a good offer at the competing supermarket can contribute to good savings at the end of the month;
- ask for discounts. In online shopping, including, there are discount coupons that can be purchased. It is worthwhile to approach the companies and question whether there is any different condition in this regard;
- make a shopping list before going to the market. This helps to avoid impulsive acquisitions;
- eat less outside. Cook more, and have meals at home
- attention to the consumption of resources, such as water and electricity;
- reevaluate the transportation options used by your family.
To stay on top of this issue and delve further into good economic practices, be sure to check out our article that better explains how you can save on a daily basis!
Thus, you can evaluate if it pays to take out a loan to pay off debts, but you also acquire a practical and efficient way to prevent this habit from becoming a recurrent part of your family's routine!
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