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New Zealand ranks seventh out of 42 developed economies when it comes to the amount of debt residents have.

Depending on what you owe and to whom, debt can be crippling. It makes it much harder to get back on your feet financially. Plus, it can be a major source of stress and anxiety.

No one wants debt hanging over their head.

Many people have considered taking out loans in an effort to pay down some of their debt. However, adopting more debt is always a risky proposition.

Taking out loans to pay off debt is something that many people have considered. But is it the right choice? Read here to find out.

Here are the factors you should consider before using loans to pay off debt.

Consider Your Interest Rates

Interest rates are one of the most detrimental aspects of carrying debt. Every day you remain in debt, your interest will continue to rack up.

One of the best reasons to use personal loans to pay off debt is to attempt to lower your interest rates.

If the interest rate on your personal loan is less than that of your other debt, it would be wise to use a loan to pay it off. Lowering your annual interest rate will help you recoup more of your money in the long run.

Additionally, a personal, short-term loan with a low-interest rate will be far easier to pay off.

If the personal loan does not give you a lower overall interest rate, don’t use it. You will just be trading one kind of debt for a more expensive one.


You want to avoid playing a shell game with your debt. Most debt is accumulated through a variety of different sources.

Some of it may come through credit card debt on one card, some might come from a second credit card, and more might come from long-term student loans you’re still paying off.

It can be helpful to consolidate all those smaller debts into one larger one. A larger debt can be easier to focus on. Plus, it won’t feel as overwhelming.

It’s easier to be more goal oriented when you know exactly what your monthly or weekly installments need to be to pay off your loan.

Make sure you won’t be costing yourself more money by adopting a larger interest rate. Usually, the larger the loan, the higher the interest rate.

Calculate how much interest you will be paying against how long it will take you to pay back your loan. If it’s less than what you are currently paying on your various smaller debts, it would be a smart move to consolidate.

Consider Your Spending Habits

It’s important to know how you tend to spend and save. Taking out another loan on top of your existing debt is a risky proposition. If the loan doesn’t immediately go to the right place, you will only be adopting more debt.

Think about how and why you got into debt in the first place. If you’re generally fiscally responsible and are in debt with student loans, using personal loans to pay off debt might be a good option for you.

However, if you’re thousands in credit card debt due to somewhat irresponsible spending? Well then, maybe you should think hard about how you will use the loan. If you can’t trust yourself not to spend the money foolishly, look for other options to get out of debt.

Make sure that you have a strategy planned out. The easiest way not to misuse the loan is to immediately put it towards whatever debt you’re using it to pay off.

If you’re using it to tackle a more immediate bill, plan out how you will use the money you’re saving toward paying off your debt.

When taking out loans to pay off debt, you should allocate all of the money you receive to paying off the debt.

Debt can feel invisible when you don’t want to see it. This means that loans can often feel like found money. Don’t fall into this trap. Focus where your money needs to go to get you out from under debt. No matter how tempting, don’t stray from that mission.

Move Slowly

Let’s say you’re paying off one high-interest credit card and a student loan. Your combined monthly payment is $750.

You weigh the risks of taking out a personal loan. Eventually, you determine that the interest rates for a personal loan will help you to save money in the long run. You use this loan to pay off your debts. So, this means that your new monthly installment comes out to $625.

Many people may think that this $125 saved every month can now be put in their pocket.

In actuality, you should be using that money toward your loan debt. If you could afford $750 a month before, you should continue to make those payments.

Again, if you’re the kind of person who will use that money saved on other things, you should look for other options than loans to pay off debt.

If you think you will continue to make the same monthly payments, a personal loan can help you get out from under debt much quicker.

Protect Your Credit Score

Because personal loans are installment loans, they won’t be as harmful to your credit score as a nearly maxed-out credit card.

It can also be easier to build up your credit again using a personal loan by paying more than the minimum required payments on each installment.

If you’ve calculated that the interest rate of a personal loan will get you owing less than 30 percent faster, that will go far in helping to improve your overall credit score.

Should I Use Loans to Pay Off Debt?

It depends on you and your situation.

First, determine whether or not consolidating your debt with a personal loan will lower your total interest rate. Then, make a plan for how you will use the money you save toward paying off the loan as quickly as possible.

If you believe that you can stick with this plan, then it would be a good idea to apply for a personal loan today.

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