When Getting Another Loan Isn’t a Good Idea

Posted in Debt Help
Posted by Ian Martin, CPA, CA, CIRP - LIT

getting-a-new-loanLife today is expensive. Many people find themselves without enough money to cover their living expenses. With the increasing cost of housing, utilities, cell phones, insurance, groceries, and clothing – the list of expenses seems endless.

A natural impulse to being short on cash is to use a loan in the form of credit. There are so many options out there with credit cards, lines of credit, and payday loans, a new loan can be difficult to resist. But ease of access just makes it harder to draw the line, because what you really need to do is ask yourself “is this new loan a good idea?” A good way to gauge whether or not getting another loan a good idea is to think of the big picture. Is the relief temporary, or will this help your financial situation in the long-run?

When is it a GOOD idea?

If it provides you with a long-term solution.

Getting another loan is a good idea if you have a stable financial foundation and a strong history of repayment. If you’ve historically had a regular income, paid your bills on-time and have minimal debt, you’re most likely able to repay your new loan over time. Unexpected costs can shock every one of us and yes, at times we all may need to take on unexpected debt.

Before you do, make sure you assess your situation. Are there assets that you can sell or funds that can be borrowed against a lower interest rate to help repay the debt? If the chances of you being able to repay that debt are strong, then getting another loan is a good idea. Remember to use tools like our debt repayment calculator to help keep your scenario as realistic as possible.  

When is it a BAD idea?

When you mistake credit as a substitute for cash. 

Having credit may sound positive because it essentially means that someone else trusts you. You’re using someone else’s cash to acquire something because they trust that you’ll pay them back. However, using credit means having debt. Trust comes at a cost, and with a poor credit rating, the interest rate on broken trust is higher than average. If you need a snapshot of the maximum interest you can be charged in Ontario, see our blog post on it.

I see people every day who are unable to break free from the cycle of debt. If the only available credit comes with high interest charges, you are shackling yourself to the same problems that you are trying to get away from. It’s important to identify if you’re mistaking credit as a substitute for cash. Can you realistically afford to repay that new loan? If you’ve recently had a significant reduction of income, are in the middle of a divorce or already have a mountain of debt, taking on a new loan is probably a bad idea.

Look for Real Solutions

Having too much debt and needing to take on a new loan is just a symptom of the real problem.  Accumulating debt is a result of your expenses exceeding your income.  Using credit can help maintain balance between the ins and the outs of your income, but it comes with the burden of eventually repaying the debt – and with interest.

If you were in a situation where your existing debt was eliminated, how would you look financially? Was your debt a result of a short-term shock to the system? Or were they a result of a shaky foundation?  Do your expenses exceed your income? If so, are there changes that you can make to your expenses to help balance those levels?  

If you identify with any warning signs of having too much debt, it may be time to call in a professional. Identifying patterns to make sound financial decisions for yourself is difficult when you don’t know where to start. A phone call or free consultation with a Licensed Insolvency Trustee can help you analyze the causes of your financial difficulty, as well as the most effective way to get your debt under control.   

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