Paying off debt with a loan: when it's a good idea

Borrowing money to pay off debt the smart way

Credit card debt is one of the worst kinds of debt there is. And the dealbreaker isn’t even the interest rate. It’s the length of the loan and the type of product; if it’s credit card debt or revolving debt that you can pay off and re-borrow endlessly, run in the opposite direction.

For example:

You've got a 19.99% credit card that’s been sitting there with $2,500 of debt for the last 4 years. Sure you make your minimum payment—sometimes a larger one even—but somehow it always ends up back at $2,500.

Then you get this great offer for another card, so you transfer your balance over. Hey, the intro rate of 2.99% for 6 months is pretty sweet. So you do that. Six months later, you're back to 19.99% and still hovering around $2,500. !@#$. This is how you know that the debt you're carrying is not the right debt for you.

That’s what we call bad debt. No one wants to be in debt, but if you have to borrow, you want the kind of debt that will get you to an end state of being out of debt (in a relatively short amount of time).

And some loans, even with a higher APR, can cost you a lot less in the long run. If you look at MogoMoney, our rates go up to 45.9%. We know what you’re thinking...

45.9 is a lot higher than 19.99 or whatever my credit card interest rate is. But here’s the thing. MogoLiquid is designed to be paid off in 5 years max, even if you make only the minimum payments. That means that ultimately, you’re saving a lot of money in interest payments.

Making minimum payments on a 10k loan

How does a high APR save you money?

Here’s how it works. Say you’re borrowing $10,000 and only making the minimum payments. If that’s a $10,000 MogoLiquid at 5.9% with a 4-year term, you’d be paying about $1,200 interest. But on $10,000 of credit card debt at 19.99%, that’s $48,000 of interest if you’re making the 2% minimum payments. Oh and it would take 83 years to pay off...

But let’s level the playing field a bit: even if your MogoLiquid rate was 22.9%, that’s still only about $5,300 in interest (paid bi-weekly over 4 years)*. Higher APR, still cheaper.

Conclusion? It’s not all about the APR. Look at it the amount of time that loan is keeping you in debt and you’ll get a much clearer picture of how much you’re really paying.


*Calculated using an interest calculator: itools-ioutils.fcac-acfc.gc.ca/CCPC-CPCC/CCPC-CPCC-eng.aspx

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