Consolidation Loans

[BrookValley]

Hi all! There seems to be a good deal of wisdom when it comes to finances here, so I thought I would pick your brains with a financial question.

I consider my husband and I to be fairly responsible and smart when it comes to money, but not nearly smart enough. We are extremely fortunate to be mostly debt-free; we have no mortgage, no car payments, etc. We (mostly my husband, though I do have some decent mutual funds) have a good long-term saving plan in place. Mutual funds, 401K accounts, a good education fund set up for a little one. However, like so many Americans, we have a good deal of credit card debt hanging around our necks like a dead weight. We don't really use the cards anymore; this is debt that has followed us since we were young. And stupid. It drives me crazy. Sometimes, literally drives me crazy. Every month when I make the payment on my one card (all of my husband and my accounts are separate) I want to cry. I can only make the minimum. I never get anywhere paying it down. My husband has 2 credit card accounts; he pays a little more than the minimum usually, and so has made a little more headway than myself, but not much.

Would it make more sense financially to obtain some sort of loan to just pay them off and be done with them? I have no idea what types of loans are available for this sort of thing and what the interest rates are like. The advertisements I see/hear for "debt consolidation" loans seem so shady to me. We have good credit and the rates on our cards are not terrible (8.99 on mine; I believe my husbands are 7.99/8.99). But we pay, combined between the two of us, close to $400 per month toward these cards. When I think of what a car payment would be if we got a loan for $15K (what we'd need to pay off all 3 of our cards) I know that payment would be less than $300....AND we'd definitely have it paid off in 5 years, instead of never, as the case seems to be when paying the minimums on the cards. Can you get a loan like this to pay off credit cards? Are the rates astronomical? And where is the best place to start looking? Our bank, or an independent company?

I know that there has got to be a better way than the way we are handling this now.

 

[the simple life]

Always go to the bank you normally do business with first. Independant companies, alot of the time have alot of hidden fees.
It would make sense to see if you can get a lower rate and consolidate, plus it will be a relief to only have one payment a month rather than worrying about paying three.
This type of consolidation loan will have an end date. You will know when it will be paid off and that alone will give you piece of mind rather than not ever knowing when you will be paid off. Paying the minimum not only will take longer but will cost you alot more in the end. Even if your rate is good, you are paying interest every month for a long time which will cost you more in the long run. You could get the same interest rate from your bank ( although hopefully it will be less) and still save money by getting the consolidation loan because as I said it will have an end date that will be earlier than paying the minimum on those three cards.

 

[BrookValley]

I just checked with our bank on their rates for home equity loans. 4.75%, not bad--nearly half as much as the rates on our credit cards--but that rate is only good for 6 months? After that it can go up to 15% !! Is this typical for a home equity loan? And is there really such a thing as a home equity loan, or are they all really "lines of credit"? I'm so confused; the banks seem to be using both terms interchangeably.

Nevermind, I figured it out. The two are different, loans have a fixed rate...but it's those lines of credit that the banks seem interested in selling you, and I see why, with the way they can skyrocket the rates on you!

The rates on the loans (fixed) aren't terrible, though. They seem to be averaging just under 10%, which is slightly higher than our cards, but with the end-date....I think we'd end up paying less overall.

 

[patandchickens]

Have you run the math on taking the money that you're putting into savings/investments and diverting it to paying off the credit-card debt? It seems to me that unless you are getting a higher % return from your investments than you're paying on the credit card balances -- which would seem unlikely in today's world -- that would be a reasonable idea. Then you could pay off more than just the minimum, which as you say is just an expen$ive treadmill.

Whether a home equity loan makes sense depends on what the respective interest rates are (don't forget to figure in any other costs of getting the loan, too), and how secure you are about your home's value and income stream and so on and so forth.

(Edited to add: by any chance is there any other way that you could scrape up extra payements on a temporary basis, to pay the debt down? ANYthing you can do to pay off principal will make BIG differences in the total amount you spend paying off the account. I am thinking of things like -- have a garage sale (every $100 counts!), sell some furniture or 'toys' that you do not use so often, cancel the cable-tv until the cards are paid off, skip eating out, etc. Of course you may already be doing this but in case you're not it might be a good thing to consider, esp. if you sit down and figure out how much $400 worth of restaurant foods per year is costing you in extra credit-card interest payments <g>)

Good luck,

Pat

 

[miss_thenorth]

Just a thought... If you have more than one credit card, you should be paying of the one with the highest interest first. One thing you could do is call the banks, and ask them if they could reduce your interest rate, or at least switch you to one that has a lower interest rate.,you never know, banks MIGHT want to help you.

Okay, so pay off the credit card with the highest interest first. It will hurt, you will have to make an effort and sacrifice, but you need to do it. Every time you pay some off, call the bank and get them to decrease your credit limit by that much. That way you can't use it. When it is all paid off--cancel it. Next, work on the second and third credit card in the same manner.

You could go the "line of credit route" and pay off your credit cards with the line of credit. Most credit lines do have way cheaper interest, but there is a catch there too. if you pay off your credit cards with the line of credit, and don't cancel your credit cards, you will eventually, if your not careful, run up your credit cards again, and tehn you will have the line of credit AND the credit cards to pay off. If you do go the line of credit route, ----CANCEL your credit cards!!!!!!

 

[hoosier]

I was listening to Dave Ramsey today, and there was a caller thinking of taking out a loan to pay off credit cards. The catch was that all of the interest was paid up front so if you paid more than the minimum, you did not decrease the amount that you would pay out.

Also, if you get behind on a line of credit against your house, you could lose your home.

I agree that you would probably do better to pay off your debt then increase the amount you ae able to put into savings.

 

[heatherv]

I just breezed through the other responses... don't think this was mentioned? But have you tried calling the credit card company and explain what's going on. (can only pay min. payment, would like to get it paid down etc) When DH and I were trying to get out of debt we did that... and one of the companies closed out my account, and switched the balance to a new account, that had a 0% introductory rate for the first year (I think that's how long it was). Anyways... it was great to not pay any interest on that amount for a year.

And I totally agree w/ miss_the north to pay off the one w/ the highest interest first. Go to your bank, or call first actually.. and ask to make an apointment w/ a credit specialist/credit counselor. Not sure if all banks have them? But we went to a bank that we dont' even have an account at. She had us run our credit reports first... and then she went over everything with us and what she felt was the best thing to do with credit cards, student loans etc. We had different goals though, we wanted out of debt, but also to increase our credit score, to get a better rate on purchasing a home. So if you have a plan for a loan in the future, know what you're doing before you cancel out accounts.

Good luck!

 

[BrookValley]

Thanks for all of the responses everyone. It is very helpful!

We don't have a lot of frivolous expenses. We don't eat out, we don't spend $100 everytime we step into Target , etc. We very, very rarely buy new clothes. I wager that our spending habits are quite different than "mainstream" America. We are very simple people. The only frivolous spending I was really guilty of was showing my horses--which I haven't done in two years, since I got pregnant/had my son. We don't have much in the way of bills, nowhere to cut anything out there. Of course we could always do better at budgeting and cutting costs with everyday expenses--just because we are good about not spending money wastefully doesn't mean we are perfect, by any means. But we have had this debt for nearly 10 years. We've tried paying it off in chunks, we've tried paying more than the minimum. But it's never enough to make a real difference. We will definitely cancel any cards we pay off. I'd like to eventually have just one account with both of us on it with a limit of maybe $500--just something for emergencies, something that can't ever get to be more than we could pay off in a month if we had to.

Part of the problem now is I don't have very much income (I can only work minimal hours because I stay home with my son), and we depend mostly on my husband's. Which works out just fine for everyday needs, it's just not enough to have any extra to go towards paying off the cards. Even if we scraped together every extra penny, we would still pretty much be in the same boat. Yes, we could pay a little more on them, but it wouldn't be enough to make much of a difference in the time it would take to pay any of these off.

I could sell a horse and pay it off, but I'm not hurting bad enough to do that. It's just hanging over our heads...we can manage, but I just want it gone!! We've done the yardsale route. We might be able to sell a couple of cars, but that wouldn't get us very far toward the total amount--and we're going to need a new car in the next year or two, and were hoping to sell said cars and use that money as a down payment on a new (well, we always buy used but "new to us") car.

I will have to ask my husband about diverting some of his savings. He does have a financial advisor he likes, so maybe he could sit down with him and see what he says...

I definitely wouldn't go the line of credit route. Sounds like trouble. A fixed-rate loan, maybe. We don't have any loans now, no mortgage or anything. The payment on a loan for the entire amount is do-able. I worked it out earlier, and a loan at 10% for five years would have a monthly payment lower than the 3 combined credit card minimums.

 

[patandchickens]

Well, it does sound like you're already doing things right, and I totally understand about being reluctant to lose the horse (speaking as someone with 2 retirees plus another increasingly-middle-aged greenie who never seems to get ridden, all standing around in the backyard eating hay and accruing farrier bills, and probably all of them going to continue to stay here forever )

Even if we scraped together every extra penny, we would still pretty much be in the same boat. Yes, we could pay a little more on them, but it wouldn't be enough to make much of a difference in the time it would take to pay any of these off.

Have you looked at it not in terms of the *time* to pay things off, but the *cost*. Even a little bit extra paid towards the account really does save you more than itself in the long run. And multiple 'not really enough to make much difference' amounts add up to a more significant chunk o change.

I will have to ask my husband about diverting some of his savings. He does have a financial advisor he likes, so maybe he could sit down with him and see what he says...<snip> The payment on a loan for the entire amount is do-able. I worked it out earlier, and a loan at 10% for five years would have a monthly payment lower than the 3 combined credit card minimums.

Bear in mind that some, not all but some (I am biting my tongue here to avoid saying 'most' ) financial advisers have a larger stake in managing their own finances than in managing clients', shall we say , and they generally (unless they're flat-fee) do make money off of getting you to invest in things, whereas they do not make any money at all from your putting that money into paying off credit cards instead. Just something to remember

Really you would have to be getting a GIANT yet at the same time very safe return on your investments to outweigh the interest rate that you're paying on the credit card accounts. Paying off the debt also has an additional security factor, in the sense that leaving it hanging over your head leaves you vulnerable to it ballooning into even MORE debt in the future if your financial situation changes. While it is obviously beneficial to have savings, it is arguably even more beneficial to have no debt that can fall down splat on your head if circumstances change.

Good luck,

Pat

 

[FarmerChick]

When establishing my farm I went into big credit card debt....ugh...took like 7 years to pay it off and darn near finished the final one....and yes, it is mind numbing paying that payment every month (many payments on different cards)!

I know your frustration big time!

Pay off the smallest balance first. Not the highest interest. Choose your smallest balance on any card. Pay minimums on all others and BE SURE to pay MORE on the lowest card. Do this until paid off.

When that card is paid off, choose the second lowest balance and attack that card with more. Pay that card off and so on and so on.

You must pay off cards, get rid of them. A little on each card doesn't work...I know, I tried it..HA HA

But paying off the smallest, no matter how long eliminates a card. Believe me this works well.

Never take an equity loan on your home. Your home is free and clear and never add debt on that home. It is a freebie and personal security for you. I took out an equity loan and it was a NIGHTMARE to pay back. I will NEVER do that again in this lifetime..LOL

best of luck....time is what is needed to pay off the loans, and we all hate paying over a long time...but we got into this debt fast and it takes time to get out.

hope some of that helps ya....take care and don't worry, it eventually gets paid off....just like for me, it took 7 years of scraping extra money on those cards to get almost clear....you can do it!!!

Just what worked for me and maybe it can help you.

Karen