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I mean, doesn't that defeat the purpose of paying off debt? They incur more debt to pay off existing debt. Doesn't make good sense to me. Why do people do it?

2007-03-07 06:34:33 · 8 answers · asked by Anonymous in Business & Finance Credit

8 answers

It makes them feel like they have done something to take care of the debt when actually they havn't.

2007-03-07 06:54:56 · answer #1 · answered by heybulldog 5 · 0 0

It depends on the debt and the loan. Borrowing from your home was and in some cases still is a good way in paying of credit debt. The interest in the home equity line of credit is tax deductible (at least in California) and is normally lower than the credit card rates. However, when housing prices fell and interest rate rose many people ran into financial problems that included foreclosures.

In a different scenario, some rely on payday loans to make weekly, biweekly, or monthly finances balance. However, (as you stated) the higher interest rates defeat the purpose. In some cases, a person became trapped from borrowing $100-$1000 from one to several payday advances. The trap is a person could not stop because he/she ran up debt that they needed those payday loans to subsidize financial expenses.

For example, say a person borrows three $300 payday loans a month to subsidize financial expenses. They are receiving $765 and paying $165 in interest per month. The trap begins when they depend on those loans and cannot get out. If they pay off the payday loans $900, they still have to pay $765 in monthly expenses. The only way is to earn extra income.

You are right in a sense that it is not wise to pay off debt with other forms of debt. However, the only way to get ahead in some of those situations is to generate more income (a raise or another job). Cutting the fat out of the budget in most cases is not enough.

2007-03-07 06:58:31 · answer #2 · answered by jynxx25 2 · 0 0

If you took out a home equity loan at say 6% and used the money to pay off credit card debt that was accruing interest at 22%, you could save yourself hundreds of dollars per month in interest charges.

Plus the interest on the home equity loan would be tax deductible while the credit card debt would not.

2007-03-07 07:39:07 · answer #3 · answered by Anonymous · 0 0

because people basically are stupid and greedy..they have got themselves in debt by being greedy..when these loan sharks offer the easy way out of immediate debt they take it thinking that maybe they can forget the previous debt for a while ..then concentrate on the new debt..later..I am glad you asked this question as it is a bugbear of mine..I hate all the adverts for loans ..easy repayments..etc.(there should be a law against it)

2007-03-07 06:48:40 · answer #4 · answered by silver44fox 6 · 0 0

Sometimes, they do it because they can get a lower interest rate and consolidate a bunch of bills into one monthly payment.

But, it can also make things worse, especially if they then go out and charge up a bunch of stuff again on the credit cards they just paid off.

2007-03-07 06:39:45 · answer #5 · answered by Faye H 6 · 1 0

420

2007-03-07 06:41:21 · answer #6 · answered by Anonymous · 0 0

Most likely for a lower interest rate.

2007-03-09 11:28:41 · answer #7 · answered by Alletery 6 · 0 0

Was wondering the same thing

2016-08-23 20:34:18 · answer #8 · answered by Anonymous · 0 0

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