It is that time of the year when a lot of us are cleaning house on our budgets to get ready for a new year. As I was doing so I was thinking about the new categories I need to include this year: there is the husband fund (explain in future post), the Christmas fund and the date fund (woo hoo!). But I also came across these four nagging credit/store cards we carry in our budget spreadsheet. Here are the terms:
| Card | APR | Amount Owed | Payment per month |
| CC #1* | 11.24% | 1862.99 | 37.00 |
| CC #2 | 12.9% | 608.34 | 59.00 |
| Store #1 | 21.9% | 1284.01 | 38.00 |
| Store #2* | 17.99% | 1189.00 | 50.00 |
| 4944.34 | 184.00 |
CC #1: doesn’t even account for the rate increase I recieved in the mail today.
Store #2: 0% Financing ends 1/1/2010 and jumps to 17.99% owing approx. $200 in finance charges
We’re slowly piddling these cards down with a huge whopping APR combined. I asked myself, “why have I not taken a personal loan for debt consolidation on these cards?”.
I’ve done it in the past with my Dell, BofA, HD, and FFCU cards. Saving myself a good deal in interest. I decided to calculate the terms to see if it’s worthy to consolidate; entered the 4 cards, corresponding APRs and the amount paid per month.
*calculating*
- If the hubby and I stay on the route we are on then it will take 33 months paying $1728.00 in interest.
- If the hubby and I apply for a (personal loan for) debt consolidation at approx. 9% – 11% it will only take us 24 months paying $500 – $600 in interest..
(please see update terms below)
*Changes/Updates I made due to comments below. I seemed to have confused taking out a ‘debt consolidation loan’ to taking out a ‘personal loan for debt consolidation’:
“why have I not done a debt consolidation loan with these cards” to “why have I not taken a personal loan for debt consolidation on these cards”
I went ahead with the approval process to see what would be offered (I have not yet accepted the loan):
The terms:
Loan: $5,000
Origination fee: 3.75% or $187.50
APR: 11.14%
36 months
$164
The payments would actually be extended by 3 months, but the payment would be $20 less than the current. I have the option to PIF the LC loan early without being penalized.
I would end up paying $771.51 in interest with $187.50 origination fee – total equalling to $958.51 saving us $769.49 in interest.
The other point: The hubby and I are not making any major purchases in the next 6 months. I am actually cancelling the store/cc cards after they are PIFd. I don’t want any more credit cards (except for one emergency card). A decreasing credit score is not of concern at this time.
I personally am not a fan of con. loans — have you gotten any balance transfer offers? Good luck in your decision
Why are you not a fan of con. loans?
For me, I don’t like them because then I don’t learn to fix my mistakes, but if you can do it & hae it work for you – Go Christine!!!! 🙂
It was my mistake from wording ‘con. loans’ vs. ‘personal loan for debt con.’.
You’re right, con. loans don’t fix the behavior. And why would we hand anyone else to deal with our finances in this manner when we can do it ourselves?
I think it’s important for people to read all these comments to understand the distinct difference between loans and the pros & cons. Thank you for sharing. 🙂
I’ve never done a debt consolidation loan. Is there a fee involved? If so, you need to take that into account too. And are you sure that you’ll pay off the debt consolidation loan in 24 months? Other than that, it makes sense to try to lower your APR.
Well, I don’t think lowering the APR is going to be a choice as they are all raising APRs right now (recieved 2 notices in one day, yesterday).
Yes, the loan will be PIFd in 24 months.
I was offered a 11.14% ($782 interest).
Thanks Tom and carongts on your 201st Post! That’s quite a milestone, keep up the good work, and look forward to the Carnival of Personal Finance on Monday!
I’m personally not a fan of consolidation loans. For one, you might be able to negotiate better APR’s with your credit lenders which is what Lending Club will be doing for you. And two, it may affect your credit score negatively. If you are planning on making a big purchase in the near future, like buying a house, this might not be such a good idea. However, if you really think the payments will be lower and you can pay off your loans quicker, then maybe? Good luck.
P.S. I’m not a financial analyst, so take my advice with a grain of salt!
Actually, what I am taking out is a personal loan. The APR is 11.14%. paying almost less than 1/2 the interest originally there.
I am not too worried about my credit score. We do not plan on making any big purchases within the next six months.
What is your reasoning behind not being a fan of consolidation loans?
i’ve heard some pretty good things about lending club’s borrowing program (mainly from DFA and Five Cent Nickel). only considering the facts you’ve outlined, coupled w/Matt’s glowing recommendation of lending club, i’d say yes.
regarding little house’s comments, i didn’t know that lending club negotiates rates w/creditors. is this true?
lastly, others brought up some interesting points to research/consider (1) fees and (2) potential impact on credit … if that’s important to you.
I am not sure about lending club negotiating rates w/ creditors. LC was actually a pretty simple and fast process to getting approved – then the loan goes live and there is 2 weeks for investors to fund you. It’s quite a different process but I liked its ease – it processes you Debt to Income ratio, score, etc… it’s all up there for you within seconds. I can chose not to take the loan once it becomes funded. So the process is still in queue.
I forgot to mention: there is an origination fee of 1.25% = $62.50 on a $5K loan. Plus it will be at 11.14% APR. I’ve heard good things too. That is why I am partial to Lending Club.
I had a financial planner guy tell me that what a debt consolidation company does is (essentially) hack off the creditors. They take your money, but then hang onto it and don’t pay your debts until the creditors get really really mad… then the consolidation company convinces them to take a lesser amount and the creditors take it just so they can get paid. I don’t have personal experience, but this guy did, and he’s a trustworthy fellow.
I agree with Little House, that if you’re willing to talk to the creditors, you might be able to negotiate a better rate with the credit card companies without having to pay someone else to do it. I would try that first, before going to debt consolidation.
Dave Ramsey, who is my financial hero, is completely against debt consolidation loans, but that’s usually because you end up with a smaller payment over a longer period of time. I wonder what he would say about this. I also wonder if there is something the debt consolidation company isn’t telling you — lower interest AND shorter time sounds too good to be true.
I think I may have confused over debt consolidation loan versus the personal loan for debt consolidation that I am looking into. I will be forwarded the full amount of the loan where I will be making the payments to my creditors. Please read the comments above for the terms.
In my opinion debt consolidation doesn’t fix the problem it masks the issue. By attacking them one by one you get the satisfaction of blasting one and moving on. This isn’t simple math this is behavior. The old debt snowball works I’m living proof of that. I spent most of my adult life moving debts around, transfering balances to try and save a few bucks and beat the system. What I ended up doing was racking up even more debt in the long run rather than not spending more than I earned. Some people have had success with this idea but I personally have not nor have many of those around me. Download one of the many free spreadsheets, lay out all of your debts and start blasting. I wrote a post awhile back entitled The Debt Snowball Saved my Marriage: A Spreadsheet Tell-All which shows how I setup our debt plan using a great free spreadsheet from Vertex42. That definitely helped my wife to see how we could get it done and by tweaking numbers here and there how much we could impact the time we were debt free.
I agree with you first sentence. However, this will be my second personal loan for debt consolidation purposes. I hold a good standing in paying it back and NOT recharging the cards. And at this time we will be cancelling those cards in question.
You’re right, it is behavior. Behavior that has gotten us in trouble before, but we have learned from our experiences. I would like to agree that your comment holds a lot of truth and I would highly recommend it for someone who has not taken a personal loan before; especially if the behavior has not been corrected.
I love Verte42 and have the excel spreadsheet on my home PC. And I will definitely check out your link. I am also going to read your debt free history to see if I can find any tips I may be able to use in my own marriage and getting my husband to be as aggressive as I would like t be. 😉
Thank you for your thoughts. I highly appreciate them. And good luck meeting your goal for January! Can’t wait to see how it pulls thru.
If you decide to go with Lending Club, you’ll have to tell us how it goes. I thought about using some of my savings to make loans there, but you need a net worth of 50K, so it will be a while before I can do anything like that.
It seems like a pretty cool process. I will be sure to let you know how it goes.
Websites worth vitising…[…]here are some links to sites that we link to because we think they are worth vitising[…]……
I just talked with Rob from Lending Club. Very excited the way this program works. I think if you choose to be an investor for LC, its a great investment.
Say if you invest in this loan I am requesting… you would get a return of 11.14% on your investment. Tres cool! I think when my debt is cut down I may just become borrow to investor. 😉
I took a look again, and it looks like they have changes their requirements a bit – I can invest up to $2500 without meeting the income/net worth test (now 70K/70K). So I signed up to invest, although you will probably be long funded by the time my bank transfer goes thorough.
If anyone wants an extra $40 to invest at the Lending Club, they have given me the offer to “invite a friend” and have them receive $40 at sign-up. Send your email address to swiven[at]yahoo.com with a subject heading that indicates to want a lending club invite, and I’ll be glad to “invite” you for your extra $40.
I think everyone who commented above had lots of good advice, which I do not want to repeat. I definitely agree that you could probably do a better job of negotiating lower APR on each card. You could even threaten to transfer the balance to another lower interest credit card offer—usually there are tons out there.
It seems as though the math does make sense but I am curious as to whether or not you are getting one big loan, with a lower interest rate and paying OFF the balances on all 4 cards with that loan? OR will someone else be negotiating for you and taking payments from you? f it is the first option then I would say it would be worth it because it really is no different than transferring the balance from one card to another. the mistake people make is thinking that they are actually accomplishing something by doing this—in other words that their problems are all over. If the habits that ran up the debt are the same then the problem will return.
I am adamantly against debt consolidation for many reasons but it sounds like what you are talking about is not what I am against. I am against using debt consolidation companies for the reason listed in my link above.
*sorry this comment got lost in spamville – all better now*
I did need to clear up debt consolidation versus getting a personal loan for debt consolidation. I should of gave the meanings more thought before typing. But, I am happy to have this discussion with everyone. I think its great. And hopefully anyone who may read this in the future beable to distinguish the difference and know why debt consolidation companies are not a way to go.
That is another thing – if you go with consolidating your debts in any manner – one definitely needs to make sure the spending habit is broken.
So it is that I am getting a personal loan to bring down the APR and pay out less interest.
Thank you for your input – I knew you were highly against debt consolidation (and I understand why) – I thought it’d be nice to have your thoughts. And well written they are. 😉
I took out a personal loan thru prosper about 2 years ago to consolidate some debt. It was a good idea but when times were really rough, a lot of my ccs that I had consolidated had apr’s that dropped lower than my loan apr.
I might do another loan sometime in the future because I can’t get my apr’s negotiated.
Ouch. Well, I don’t think that cc APRs are going to drop any lower than loan rates at this time! It’s a mad house with the CC companies!
Since 3 companies just recently raised their APRs, I don’t think it is likely I will get them to negotiate. Although, the centsiblelife did win with her efforts.
I think getting a loan is good as long as you don’t rerack that debt back up! Me, I’m on a no CC crusade – and I’M LOVIN’ IT! 🙂
True! I’ve been trying to get my APR’s lowered on a few of my CC’s and they will not budge, where in the past I have been able to get them lowered by calling to negotiate. Personally I will probably try to negotiate my cards soon and if they refuse I will probably do another loan. Not sure if I’ll go the Prosper route again though.