Personal Loan to Consolidate Debts??
Debt Consolidation Loans
Eight Ways to Consolidate Debt
Borrowing to Meet Current Expenses
Taking a Personal Loan to Pay Off Credit Cards
I was wondering if it's a good idea to take out a personal loan to pay off credit cards? All told I owe Mr. Plastic about $10,000. I am thinking that it would be better to get a 2 or 3 year personal loan from my credit union at 11.65% rather than the 21% and fees some of my cards charge. It looks good on paper but with this much debt I'm wondering if the banks would consider my application to start with and if there are any pitfalls I should avoid.
Look for Lower Card Rates Before Consolidating
Before you go get a loan from the bank, you might try the following ideas. First, call the credit card companies and ask them to reduce your interest rate and waive the annual fee. Many cards will do that if you have been a good customer and make your payments on time. Second, if the interest rates are still higher consider doing some shopping for new credit cards. There are many cards out there that charge no annual fee and usually offer an introductory rate for 6 months of under 10%. Get a few of these lower rate cards, transfer your current balances, and then close out the former accounts. Continue to move your balances around to keep the lowest interest rate possible. It takes some bookkeeping to keep track of when to transfer the balances, but it keeps the interest rate low (often lower than what you could get at the bank).
Do the Math
YES! By all means.. I just did some calculations and if you were to pay just the minimun on the credit cards you would pay a total of $63,000. (that is assuming that the payoff was in 30 years which is most credit cards.) If you got a personal loan for 5 years at the lower interest rate the total payments would be $13,000 and it would only cost you 220/mo instead of 175/mo on the credit cards..
One note of warning: make sure you get rid of the cards when you do this.. Otherwise you will have a loan and credit card debt.
Home Equity Loan
I would like to point out that if the person interested in taking out a loan to pay off credit cards can get a home equity loan then all interest paid on the loan is tax deductible.
Our (Bad) Experience
We've been through these problems ourselves, and learned the hard way, via bankruptcy, that taking out a loan to pay off old debt is never the answer. What is the answer is to scale down one's lifestyle dramatically.
First off, this person needs to cut up the credit cards, and quit spending any money except that which is required to live each month. No shopping for clothes, etc. If he cannot make the minimum payment each month, then send a little each week. Don't eat out. Cook in bulk and freeze. Hang laundry out to dry. Turn off lights in rooms. Bake bread.
We have no debt. We don't use credit cards. And we're way too old to worry about keeping up with the Jones's. Cut up the cards. Pay cash for everything or don't buy it. Call the credit card companies and work out a plan you can stick with. I could go on forever on how I managed to alter my lifestyle, and get way much more out of life itself, but I have to go to school and volunteer in my 5th grader's class - a true enjoyment. Keep stretching,
Like a Liquid Diet
Consolidating debts can be a lot like going on a liquid diet: you lose a lot of weight (read "debt") very quickly, but unless you change your habits, it will come right back once you start leading a "normal" life. I'm sure debt consolidation is a valuable tool, but unless it is used in conjunction with a balanced budget, you could easily find yourself in the same mess as before, only worse, especially since you will suddenly owe nothing to the credit card companies. Unless you can be very self-disciplined (And be honest with yourself; can you?), I'd pass this opportunity up.
Try Credit Union
Your best bet would be to try to find a bank or Credit Union that may go for a high 10 thousand dollar personal loan. Keep in mind that your payments would be higher than your mimimum payments on your 21% credit card but, the good news is that your 10 thousand loan will be eliminated at the end of a set term (3 or 4 years).
If you just make minimum payments on your credit card, your balance comes down minimally and will take bookoo years to pay off. At least get a lower rate card and even better, a term (3 or 4 yr. personal loan) CUT UP THE PLASTIC even if you get a lower rate card. Transfer the balance then cut the card up and pay cash for things.
The personal loan with fixed payments and years is the way to go if you can swing the payments. In a few years you will be "high as a kite...debt free". Submit some applications. The worst they can do is say no. But I'm sure you will find one that says yes. They will pay off your card, cancel the account and you will cut the card up!
Try Credit Counseling
Are you planning on buying a house or making another major purchase anytime soon? If the answer is "No" or "Not in the next 3-4 years," then I would recommend Consumer Credit Counseling Service. It's a free service that negotiates with your creditors to lower or even eliminate (yes--to 0%) the interest rates on your cards.
They act as a consolidator in that you pay them one amount and they disperse it to your creditors for you. You can pay as much as you want above the minimum that they negotiate for you, and you can specify how much goes to each one. (You should pay the most to the highest rate card, obviously.) The reason for the home-buying question is that, once you are a client of CCCS, mortgage companies look a bit unfavorably on that set-up even though you have made arrangements to pay your bills and are on time with all of them. It sends a signal that you got in over your head and might again with a mortgage. After you've paid off your CCCS agreement, it takes about 6 months to a year for your image to be un-tarnished with mortgage companies and others, but if you can deal with the wait for that, it's definitely worth it! Some of my rates went from 21% to 9%, and some (AmEx) went to 0%!
Call them; it's free, and it wouldn't hurt to sit down with them even once-- you're under no obligation. The best part is that they help you write out a budget--very eye-opening!
Jan in Houston
I consolidated about 5 years ago and kept my credit cards. Guess what, I created new bills and am finding myself in horrid financial trouble. To avoid bankruptcy, I am moving to an apartment, returning one of my vehicles and trying to make some $$$ on the side. I realized that I was not living within my means and it has caused me great heartache.
My suggestion to you is to 1. Cut up all your credit cards and close your accounts(if you can't do that temporarily keep one card 2. Get information on a budget and stick to it 3. The Debt Free and Prosperous Living book is a great help to me ( I have a debt elimination plan that will allow me to pay all my debts off in a year and no longer than 3 years).
I had less than 10,000 in credit card debt but I looked at how I was spending $$$ I did not really have. I wasted so much money and really, I have nothing to show for it. I find myself starting over at 27 years old, married with two children and having to move my family out of our home and into an apartment, all because I lived above my means and a consolidation loan did not help me changed my spending habits it provided temporary relief. And I still have credit card debts!
Home Equity Caution
My husband and I got into a bad situation with home equity loans. We were told that the percentage was 11%. Come to find out that the loan's finance charge was actually 18% and the only way to get the interest rate down was to file the finance charges at income tax time. Well, Silly US! My husband started calling the credit card companies and asked them for a lower interest rate. Some companies will, but companies like Sears and store cards wouldn't budge. We have since employed the use of Consumer Credit Counseling and most companies have taken the interest to 0%. Sears, well they want their money. But I feel that our bills are manageable and when I have "extra" money, I slap it on the smallest debt until that is wiped out and start on the next one.
Make Sure You're Eligible
Amusingly enough, debt consolidation loans are a bear to get. I had wonderful credit, no late payments and a high salary when I applied for one in 1993. I was declined. Why? Because I owed too much money! Duh.... That is the reason I was applying. I had too many payments with too high an interest and wanted to consolidate them all under one payment with a lower interest. Before you waste too much time wondering if this is the right option, apply and see if you can get the loan in the first place. The loan officer told me I had some of the best credit she had seen in a long time, but because of the large amounts I owed, I was considered a bad risk. No sense wringing your hands over the solution until you are sure that this is even an option.
Long Range Planning
If you can afford the payments that is an excellent idea. My husband and I also fell into the evil trap of Mr.. Plastic. One day I was checking out a debt program I had downloaded and was shocked at how long it would take to pay these cards off and how much they really cost when paying the minimum payments. We made out a long range plan that included extra payments on these cards and will cut the time and amount we will be paying considerably. It was enough motivation to cut them up and only keep one for emergencies.
I wanted to recommend to the person who wanted to pay off a $10,000 credit card bill, Dave Ramsey's Book Financial Peace. His ideas and his snowball debt reduction plan are really great. And, it works!
Take the Next Step:
Also In This Week's Issue
- Documents you need when disaster strikes
- Where are all the fixed-rate credit cards?
- 5 scary paths that lead to damaging debt
- 6 steps to a successful money talk with your mate
- 5 steps to boost your savings account
- 8 signs you're flirting with financial ruin
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