When money is tight, taking a new loan to pay an existing debt can seem like the easiest way to get through the month. You may borrow from a bank, use a credit card, take a store account advance, borrow from a family member, or use another form of credit to make sure an existing instalment is paid on time.
But borrowing more money to pay debt does not automatically solve the problem. In some cases, it can simply move the debt from one place to another while adding another interest charge and repayment to the household budget. The important question is not only whether you can get another loan, but whether the new borrowing will actually make your financial situation easier to manage.
When Can Borrowing to Pay Debt Make Sense?
There is an important difference between taking another loan because you cannot afford your current repayments and using a structured debt-consolidation product to replace several debts with one repayment.
Debt consolidation generally involves combining multiple debts into one new loan. The existing debts are paid off, and the borrower then makes one monthly repayment on the new loan.
For example, someone might have a personal loan, a credit-card balance and a store account. Instead of making three separate repayments, they could potentially take a consolidation loan and use it to settle those accounts.
However, having one repayment instead of three does not automatically mean the debt has become cheaper. The borrower needs to compare the interest rate, fees, repayment period, monthly instalment, and total amount that will eventually be paid.
A lower monthly instalment can sometimes come with a longer repayment period. This may make the monthly budget easier to manage while increasing the total cost of the borrowing.
The Danger of Taking a Loan Just to Survive the Month
The bigger warning sign is when a person repeatedly borrows money to cover existing repayments or everyday expenses. For example, imagine someone has R2,500 available after paying their essential household expenses, but their debt repayments total R3,000.
They are already R500 short. Taking another loan to cover the R500 may solve that month’s shortfall, but the new loan creates another obligation. The following month, the person still has the original debts and now has a new repayment.
If the household budget has not changed, the shortfall can return. This is how a temporary cash-flow problem can develop into a cycle of borrowing. Consumer guidance from the National Credit Regulator identifies borrowing money to pay other debts as one of the warning signs that someone may be over-indebted.
Ask These Questions Before Taking Another Loan
Before borrowing money to pay another debt, look at the full picture rather than only the amount you need immediately.
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Why am I short of money?
Is the problem a one-off expense, or does your income consistently fall short of your monthly commitments?
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Will the new loan reduce my overall debt?
If you are simply using one loan to pay another while continuing to spend or borrow at the same level, the underlying problem has not been fixed.
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What will the new loan really cost?
Check the interest rate, initiation fees, monthly service fees and total repayment amount.
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How long will I be paying it?
A longer repayment period may reduce the monthly instalment but can mean paying interest for longer.
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What happens if another emergency comes up?
If you have no emergency savings and no room left in your monthly budget, another unexpected expense could lead to another loan application.
Don’t Only Look at the Monthly Instalment
One of the easiest mistakes to make is comparing loans only by their monthly repayments. A repayment of R800 may appear affordable compared with an existing R1,100 repayment. But if the new loan runs for several years and carries fees and interest, the total amount paid could be much higher than expected.
Consumers should therefore ask the credit provider for the full cost of the credit agreement before signing. It is also worth checking whether the new loan is actually paying off the old debt or whether you will end up carrying both obligations.
What if You are Already Struggling With Several Debts?
If you are borrowing to make repayments, using credit for basic necessities or regularly missing payments, taking another loan may not be the only option.
Start by speaking to the companies you owe. A bank, lender or other credit provider may be able to explain the repayment options available to you. The earlier you raise the problem, the more clearly you can understand what choices are available before taking on more credit.
If you are dealing with a dispute involving a financial institution, the National Financial Ombud (NFO) may also be able to assist. The NFO deals with qualifying complaints involving banking, credit, non-bank credit and insurance.
For certain legal and consumer matters, Legal Aid South Africa also provides assistance to qualifying people. Its legal advice services cover areas including debt, consumer matters and contracts.
Where someone is genuinely over-indebted and cannot manage their existing repayments, debt counselling is another option to investigate. A registered debt counsellor can assess your financial situation and, where appropriate, help restructure your existing debt into a repayment arrangement.
If you consider debt counselling, check that the debt counsellor is properly registered.
Be Careful of Loan Offers that Promise an Easy Way Out
People who are already struggling financially can be attractive targets for scams. Be particularly careful of advertisements promising loans to people with poor credit records or saying that you are guaranteed approval regardless of your circumstances.
You should also be cautious if someone asks you to pay an upfront fee before giving you a loan or asks for sensitive banking information such as your PIN, password, or one-time PIN. Before accepting credit, make sure you know who the lender is, what the loan will cost, and exactly how much you will have to repay.
A New Loan Should not Hide an Old Problem
Borrowing to pay another debt is not automatically wrong. A properly structured consolidation arrangement can replace several debts with one repayment, but the numbers need to make sense, and the borrower needs to be able to afford the new agreement.
The bigger warning sign is repeated borrowing simply to keep up with existing repayments. If your income cannot cover your living costs and debt repayments, another loan may only postpone the problem. Before signing another credit agreement, write down your monthly income, essential expenses, every debt repayment and the total cost of the new loan.
If the numbers still do not balance, consider speaking to your credit providers or getting independent financial, legal or debt advice rather than automatically adding another debt to the household budget.
