# Regulatory Compliance Category > Consumer Protection Act Forum > [Question] DO YOU BELEIVE IN PAYING A DEBT WITH A DEBT

## sdukzen

I have been going through some websites of consultant agencies. Some of this agencies do not even try to investigate your case they will push that you take their LOAN option, and pay them back latter in the year. Does this work though starting a debt to pay a debt, I think the new debt will come with more interests and cost more than the original debt. 


I STAND TO BE CORRECTED!

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## tec0

Paying debt with debt didn't work. My friend tried it he lost everything in the end.  :Frown:

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## Blurock

Debt is dangerous. Paying for a holiday with your credit card or fly-now-pay-later does not work. You are only putting a noose around your neck and you become a slave to debt.It can destroy you if not managed correctly, but sometimes we do need to get some form of finance to get by.

You should only incur debt if there is a financial benefit. Getting credit from a supplier so that you have time to sell the product and make a margin is fine. You may also take a loan to expand your business, provided that you have done your homework and the benefit is more than the interest that you will pay.

The worst thing that you can do is to take a loan to consolidate debt. You are only increasing the problem. Best is to play open cards with creditors and to come to some arrangement and then stick to it. I have yet to come across a bank who will turn you away when you want to negotiate repayment. 

Never renege on your promises as then you will lose credibility and then nobody will help you. :Cowboy:

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BusFact (25-Apr-12), geraldenek (25-Apr-12)

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## BusFact

Well said Blurock.

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## SilverNodashi

Also bear in mind, those "debt consolidation" options often put you under debt review, which could leave you in a much worse state that you're in and count against you one day when you're debt is finally paid off and you want to buy a house. 

Simple rule of thumb:
1. Pay off all credit cards, and close them
2. Pay off revolving credit loans and close them
3. pay off overdraft and close it.
3. Only now do you start saving and investing money, since the interest on the debt you had it much higher than the interest you gain from saving and investing.

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## murdock

i dont agree with you on the credit card or over draft...

credit card is a better option than paying cash or using a debit card...why because they both incur fees to draw cash and fee to swipe debit card...i only use my credit card to pay for stuff unless i get a cash discount...or if i got paid cash from a customer...the trick is to reduce the credit limit to a manageable amount...for me R1000 for others it could be less or mor.

overdraft are very handy in bussiness...but in a personal capacity i dont know so much.

good tip about not trying to save money when you have debt...the difference in the interest just makes it a foolish option.

when it comes to debt...rather take a step back...count to 100 then consider your options...i have been down this route on a few occassions...but people know i am good for my word...which is the most valuable asset i have.

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## SilverNodashi

> i dont agree with you on the credit card or over draft...
> 
> credit card is a better option than paying cash or using a debit card...why because they both incur fees to draw cash and fee to swipe debit card...i only use my credit card to pay for stuff unless i get a cash discount...or if i got paid cash from a customer...the trick is to reduce the credit limit to a manageable amount...for me R1000 for others it could be less or mor.


I actually meant that, if he has (for example) R10,000 debt on his credit card, and R10,000 debt on his overdraft, and say R50,000 debt on his revolving credit loan then he should settle those accounts before doing anything else. The compounded interest he pays on those type of accounts will make more debt if it's not paid off ASAP. 



Using a credit card and overdraft for anything, even business is always a good idea (no need to carry cash, transaction fees are less, etc, etc) BUT only if you can manage cashflow and don't allow those account to run a large debt.

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## adrianh

I'll say one thing about debt, I can see why the poor get poorer and the rich get richer. If you are unable to pay Wesbank on time they charge you 10% extra, if your debit order bounces they charge you R125 even though the debit oder may have been for R20. You pay massive fees for overdrafts etc. I screwed myself with 30 day acounts too, never again. If I don't have the cash to fund a job then the customer can pay 50% in advance, if he doesn't want to then he is welcome to go somewhere else. I will also never let a custemer take anything unless it has been paid in full - I've been bitten by that too. I will never ever buy anything on credit again (except a house), including credit cards and overdrafts. When the $h1t hits the fan and you lose your income then you will see how the banks eat the little cash you have left and then bleed your stone until it turns to dust. 

I learned a new term in the last couple of days, namely: Annuity Income ...my new fixation...

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## sdukzen

THANK YOU ALL FOR YOUR INPUTS

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## BusFact

> i dont agree with you on the credit card or over draft...
> 
> credit card is a better option than paying cash or using a debit card...why because they both incur fees to draw cash and fee to swipe debit card...i only use my credit card to pay for stuff unless i get a cash discount...or if i got paid cash from a customer...the trick is to reduce the credit limit to a manageable amount...for me R1000 for others it could be less or mor.
> 
> overdraft are very handy in bussiness...but in a personal capacity i dont know so much.


One step better is to use a credit card, but always have a positive balance. This way you get the credit card benefits, but if something goes wrong there is nothing to pay off.
Yes the overdraft is very handy, until the brown stuff hits the fan, and then it becomes a nightmare.

Debt to loan institutions (of any type, formal or informal) is like walking a high tightrope.

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## adrianh

The banks kill you with fees when you are in the dwang, they are quite happy to shove you deeper and deeper into the dwang hence my unwillingness to use their services. If it was up to me I would put all my money (the little I've got) under my mattress, at least I don't get to pay somebody fees for stashing it or withdrawing it or saving or just looking at it.

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## murdock

i am with you on this adrian...by the time you are finished paying deposit fees withdrawl fees and all the fees in between....you are better of just keeping the money stashed away...the other bonus is you know when you have lots to spend and when to ease off the spending when the pile goes down....the less sars knows about your financial affairs the better off you are...the difference between you and i getting nailed for fraud and some goverment official...they dont have to pay it back...you get a fine...penalties and interest.

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## Citizen X

*I have several things to say about the issue of debt in general and the paying of a debt with debt in particular. Here goes:*
*1.The first ideas for this explanation were conceived by John Hagee. It’s his idea and reasoning.* *I endorse such reasoning.*
*2. If I run your business in the capacity of manager and I loose R100 000 per month for 12 months, will you classify me as a good manager or a bad manager?*
*3. Okay, let’s take it further, if I loose R100 000 per day, will yyou classify me as a good manager or a bad manager?*
*4.Right, let’s say that you went into business 2012 years ago when Jesus was born and you lost R1000 0000 per month, every single month from the year 0 to now 2012 you still would not have lost one trillion Rands!!!!*
*5. The USA had to borrow 1.7 trillion dollars in 2010 just to run itself!!!* 
*6. “ If you spent $1 million a day since Jesus was born, you would have not spent $1 trillion by now...but ~$700 billion- same amount the banks got during bailout.”*
*7. A trillion dollars = $1,000,000,000,000.That's 12 zeroes to the left of the decimal point. A trillion is a million million dollars.*



*
So to answer the question directly: Is it good to pay debt with debt? No, it isn’t but some people don’t have the choice, they have to sometimes borrow money to pay existing debts i.e pay their cars and houses
*
*This concept of reckless borrowing is what led to the global economical meltdown.*

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## Jacechop

Nope, i dont see the sense.  :Big Grin:  :Chair:

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## Citizen X

Let me then resolve as follows:
1. The management of the USA which is the Government are currently in a situation where they are in 14 Trillion Dollars debt! Had they been good custodians from the outset, this debt deficit would not have occurred. The point I'm earnestly trying to drive home is simply this, if I ran your business and lost 3o million per month for many years, would you still want me in your employ??
2. Being in debt can never be a good thing, that said, there are people who take out personal loans and credits cards for the sole purpose of paying off other loans, credit cards and debt that they have. It's avicious circle....

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## adrianh

What do you do if due to unforeseen circumstance you can no longer afford the repayment on short term debt but if you were to consolidate that debt into a second bond on your house you would be able to survive comfortably. This is making debt to pay debt yet it will resolve your predicament - isn't this a perfectly valid reason for making debt to pay for debt, all other things being equal.

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## adrianh

Please explain how the global economic meltdown occured?

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## Citizen X

*Firstly, there are as many opinions for the causes of the global economic meltdown as there are individuals to formulate such opinions;*
*1. Most people agree that the global economic meltdown started in late 2007;*
*2. I’ll tender my opinion upfront: the global economic meltdown is inextricably linked to reckless lending of money, personal loan, bond , car and credit card. This chain reaction started in the USA(the father of capitalism, so I submit Communism failed BUT, the real question is: Is capitalism working????). Financial institutions in the USA were recklessly lending money to whomsoever would apply for a bond or loan. This is where this chain reaction started, at about the same times hundreds of thousands of people who loan money from banks were at the same time unable to make their monthly payments and this persisted until banks and other companies collapsed.*
*3. Recession in and of itself has two meanings: 1: a period of months or years where there is generally a reduction in productive economic activity2: Any first year BCOM, NDIP or economics 1 student would be able to answer as follows: a down swing or a contraction of the actual business cycle with several periods of negative GDP growth;*
*4. “According to the U.S. National Bureau of Economic Research (the official arbiter of U.S. recessions) the recession began in December 2007. US mortgage-backed securities, which had risks that were hard to assess, were marketed around the world. A more broad based credit boom fed a global speculative bubble in real estate and equities, which served to reinforce the risky lending practices.[ The precarious financial situation was made more difficult by a sharp increase in oil and food prices. The emergence of sub-prime loan losses in 2007 began the crisis and exposed other risky loans and over-inflated asset prices. With loan losses mounting and the fall of Lehman Brothers on September 15, 2008, a major panic broke out on the inter-bank loan market. As share and housing prices declined, many large and well established investment and commercial banks in the United States and Europe suffered huge losses and even faced bankruptcy, resulting in massive public financial assistance.”*
*5. Tim Castello explained as follows:"The immediate cause of the global financial crisis was the massive growth and then collapse of a new asset class –securitised subprime mortgages. On one level, subprime mortgages have a positive social role – helping people with relatively poor credit ratings to own their own homes. However, the scale of the lending, the way these mortgages were sold, and how they were developed into hugely complex financial instruments that many people – even people in the financial markets – did not understand, led to a shock to confidence in the global financial system not seen since the Depression of the 1930s."*

*
So to summarise what is otherwise an exhaustive discussion, in my opinion, the global economic meltdown was caused by reckless lending in the form of home bonds, personal finance, vehicle finance and credit cards…
*

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## Blurock

Recless lending? Yes! ...and stupid!

A bank will give you R20k or R30k on a credit card without blinking. Ask the same bank for an overdraft of same amount, they will turn you down.

Try it, I dare you...

Ask for finance on a new car - no problem. Now ask for a loan to buy a machine or equipment for your business. Something that will generate an income. No chance without a huge deposit, bond on your house or other security. :Whistling:

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## adrianh

I suppose the banks consider risk vs reward. A credit card has huge interest rates to compensate for their risk. I suppose loans on cars and houses are easier because they can grab the asset. I think the problem with machines is that small business fail so easily and that the asset only has value in a very narrow market.

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## Citizen X

Yes, it doesn't make any sense! You rather finance a machine that will generate income, jobs and boost economic activity...but instead you more happy to finance a car..

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## adrianh

A bank is a business just like any other, its not a charity!

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## Blurock

> I suppose the banks consider risk vs reward. A credit card has huge interest rates to compensate for their risk. I suppose loans on cars and houses are easier because they can grab the asset. I think the problem with machines is that small business fail so easily and that the asset only has value in a very narrow market.


So if they need to grab an asset to justify their lending are they not just pawn brokers?

I agree with risk and reward and I have been generalising, but often a bank will not consider the past performance and credit history of a business due to perceived risk. This is sometimes (mostly?) because they often do not understand the business or the industry in which the business operates. Because they are content to sit in their offices?

Yet, they will grant credit to the business owner, who depends on this very business for his income! :Stupid:

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## adrianh

> This is sometimes (mostly?) because they often do not understand the business or the industry in which the business operates. Because they are content to sit in their offices?


hmmm...their business is money, it is not knowing the business or industry in which the other business operates.

The difficulty in banks is due to the sheer volume of clients and transactions and the complexity of their systems  decisions are largely made by systems developed over time. Those systems are not able to look at the nuances of each individual business and its inter-connection with other businesses so as to make a decision based on fuzzy logic. Decisions are hard-wired on strict criteria. 

Don't get me wrong, I'm not pro banks, I hate them as much as you do, but I do understand why they do a lot a lot of things that they do.

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## Blurock

> hmmm...their business is money, it is not knowing the business or industry in which the other business operates.
> 
> The difficulty in banks is due to the sheer volume of clients and transactions and the complexity of their systems  decisions are largely made by systems developed over time. Those systems are not able to look at the nuances of each individual business and its inter-connection with other businesses so as to make a decision based on fuzzy logic. Decisions are hard-wired on strict criteria.


The banks do have research departments where share markets and different industries are being studied. There is even an industry analysis comparison where a business can be measured against the performance of its peers. Corporate bankers know all about this. Believe me, the better bankers always make a point of visiting their clients, even if it is once a year. They know their clients and the risks in that specific industry. 

Unfortunately it is at the lower levels and in credit departments that things sometimes go pear shaped. The available information and knowledge is not applied and often credit is awarded on a points sytem that has no bearing on the purpose of the credit applied for. Paint by numbers may apply to the demographics of the masses of individuals, but there is far more to a business than that.

I am not a gambler, but if I had to risk money on a horse, I would want to know everything about the horse, its pedigree, past success, the jockey, his abilities and even the grounds on which they are racing. If you do not do your homework before the time, you are only gambling, and that is then why you should take additional security to cover your potentially bad decisions. :Hmmm:

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