The greatest cause of stress and anguish in people is the economic issue and within this, what generates the most stress are debts”
Rubén Chávez, director of Yotepresto.
There is a debate about whether one debt should pay another, that is, borrowing to pay off some expensive loan that does not decrease and on the contrary has become a snowball.
From the outset it does not seem to be the best idea because you would be acquiring a new economic commitment, but if the loan conditions are better than the one you already have and it makes you suffer, you could analyze it, as long as you consider a series of elements for this operation to be successful.
When contract a debt to pay another?
If you have more than one debt, whether in credit card, payroll financing, in department stores, with the neighbor, and they are suffocating your income, that is, you spend your fortnight paying them, you must verify which one is press more, the one that does not decrease for more payments you make.
Remember, the minimum payments on credit cards are not the best option, stop paying some financing either because interest rises and that’s where the famous snowball begins.
In some fintechs such as Yotepresto and Prestadero, most of the credits that people request are to pay other debts.
“Around 70% of the loans we give at Yotepresto are to pay other debts,” said Rubén Chávez, CEO of Yotepresto, a fintech specializing in personal loans.
For the use of this financing to be effective and you do not end up over-indebted, it is important that you respect the use for which you are taking it, which is to settle a debt.
What some financial companies do is transfer the money to the financial institution where the loan is, so that money does not pass through your hands or because of the temptation to use it for something else.
What to consider
If you have already defined that you are going to request a loan for this purpose, it is important that you consider various elements. The first has to do with which debt urgently needs to be settled. If you have more than one, check which one requires immediate intervention.
You can make a list of debts, their amounts, interest and pending payments to settle it. The one that is more expensive is the one you can start with. Some specialists also recommend taking a credit to pay all your outstanding debts, as long as the payment of interest on it does not commit you more.
Second, check that the loan you will take is not more expensive than the ones you already have. Look for them to offer a better interest rate and Total Annual Cost. Do not go by the first option that comes. There are credit comparators in the Condusef and in financial services companies that will help you review the options to make the best decision
“If you have a debt, for example of 100,000 pesos at a rate of 45% per year and there is an opportunity to change that loan, the same 100,000 pesos, at an interest rate of 15%, would you do it? The first criterion to see if it is worth exchanging one debt for another is to improve the interest rate, the second is the term”, highlighted the Yotepresto representative.
Investigate the institution where you will take the credit, if they ask you for an opening commission, be careful, it could be fraud. To review this, enter the Condusef Financial Services Providers Registration System (Sipress), where you can check if the company where you will acquire the credit is regulated.
Thirdly, define the term to which you will pay, although having several months to settle the debt will help you have financial freedom, sometimes it represents a higher interest payment.
Fourth, use the money you are accessing to pay down debt. Many times there are various financial commitments and it could be tempting to take part of the new loan to pay them off; however, this action will have significant repercussions.
After all this evaluation, if you see that with a new credit you will not save much in interest payments, it makes no sense to carry out the process, explained Rubén Chávez, director of the fintech Yotepresto.