Thoughts on personal loan for debts

You, me, and dculberson apparently. Although none of us are as 'extreme' as MMM.

I'm down

I would read it.

Depending on your comfort with risk, it can be advantageous to keep some debt while also having savings. In our case, we have a home equity line of credit that charges a low interest rate- about 3.25%. We also have most of our cash non-retirement savings in a mutual fund. On a bad year, that might return 7%. So, there's a 4% net return, plus the home equity interest is tax-deductible.

Also, if you include the normal home mortgage in "debt", a lot of people would never save anything. Again, when mortgage interest rates are sub-4% and a 401k/ IRA might return more than that, AND the mortgage interest is tax deductible...

Yep, more math.

To the OP's original question:

As with everything, BE CAREFUL. Make sure you understand all terms and conditions. Look for things like "prepayment penalty" and "balloon payment" and et cetera. Anything you don't understand- question. Don't agree to anything unless you understand it.

One tactic I have used in the past is to use a low interest offer on a card to pay off another. But, you have to be careful. Often there's a transfer fee- sometimes fairly significant. If they're offering a 1.99% APR for a year but the offer comes with a 4% balance transfer fee, then the effective interest rate is basically 6%.

I've never used a Personal Loan, but I would watch for similar things like "documentation fees" or "origination fees", etc. Make sure you're really getting the deal you think you are.

I was going to suggest a GRM solution and sell your expensive car and buy a beater Volvo 240, but I see in your profile you're already rocking the cheap seats.

Shuffling debt around to get lower interest rates can work, or it can fail spectacularly.

volvoclearinghouse wrote: Depending on your comfort with risk, it can be advantageous to keep some debt while also having savings. In our case, we have a home equity line of credit that charges a low interest rate- about 3.25%. We also have most of our cash non-retirement savings in a mutual fund. On a bad year, that might return 7%. So, there's a 4% net return, plus the home equity interest is tax-deductible.

Absolutely! I still carry my primary mortgage because it's 3.375%. Paying it off early would delay retirement. But credit card debt is pants on fire emergency time.

Regarding keeping a cash emergency fund while carrying credit card debt: for simplicity's sake, let's say you have $10k in cash and $10k on a card costing you 15% interest. Keeping that cash is costing you $125/mo, and it is a non-productive $125/mo. If you instead pay off the card immediately and start putting the $125/mo then you've got $10k again in 7 short years. If two years in you have an emergency, you've got $3,000 in cash on hand and get a $7,000 cash advance. That cash advance would be at a higher rate - let's say 20%. That $7,000 is costing you $117/mo in interest. No harm, no foul. If you're currently paying higher than 15% then you'd be even better off to use the emergency funds to pay it.

Again, that heavily depends on your ability to keep balances from building up on your credit cards. In my experience it's not "emergencies" that cause credit card debt but typical lifestyle inflation problems. An "emergency" comes along and your existing debt problem is brought more into focus. You already had that problem but didn't realize - or weren't willing to recognize - that it was a problem.

I use emergency in quotes because there aren't that many true financial emergencies in American life. If you have medical insurance, that is. Car repairs and house repairs need planned for, but they're easily anticipated and budgeted for. And until you have cards paid off and liquid assets built up you can not afford fancy dinners and new/expensive cars.

ProDarwin wrote: You, me, and dculberson apparently. Although none of us are as 'extreme' as MMM. I'm down

Yeah, I don't skip showers and cut back on laundry to save money, that's for sure!

But I enjoy MMM's blog and have tried to use his philosophy in my life. He's one that helped get my wife and I on track for zero debt and building liquid assets. Until 2005 or so we were doing the typical American dream thing of spending all of our pay checks, more and more money as we got raises. It is incredible how good and rich your life can still be without spending it all. People forget how little money you need to actually get by in American life. It's nothing ground-breaking; a lot of our grandparents (or great-grandparents for the younger folk here) did it but it seemed to have been forgotten around the baby boomer's time.

In reply to dculberson:

I agree. I guess I've never been in the position where I've paid such confiscatory interest rates on anything. Every loan Mrs. VCH and I have currently is at 4% or less. And they all have tax deductible interest.

We too occasionally read the M^3 website. He has some good ideas, many of which we do- no cable TV, no land line, no car payments, bought a small house, eat out maybe 2x-3x per month, etc. We have huge deductibles on car, home, and medical insurance and save the difference between the higher-cost plan and the one we're on in an HSA or the mutual fund.

However, it is true that a lot of folks in bad debt situations did have emergencies. I know more than one person who had health problems that crept into massive debt. That sucks. And they can get pretty defensive when they hear people spouting off about not eating out and buying starbucks and stuff when a broken leg from a car wreck was what set them 10 grand in the hole.

One final point- I like to remind myself that saving a dollar puts a dollar in my pocket, but spending a dollar actually takes about a buck-thirty out of my pocket. Due to taxes, I have to earn essentially $1.30 or so (actually, probably a bit more) in order to buy $1 worth of stuff. Essentially, mark everything you want to buy up by 30%.

TL;DR version: It's a lot easier to save a dollar than it is to earn an extra dollar.

Scary credit card debt is rarely a financial problem...it is a lifestyle problem. Too many people are seeking to maintain a reckless lifestyle by swapping CC debt for the debt consolidation. It is a good plan if and only if you can avoid the trap of thinking that you have more money to spend now that CC debt is now not a problem!

How long did it take to get 10K in debt? 4 years? 10 years? 20 years? I saw a couple that were thrilled that they had consolidated loans and now paid $210.00 a month less and had plans on how to use this extra money. I showed them that the debt had grown because they were already spending $273.00 a month more than they made and they had NO extra money. Without a budget and reduced spending their debt would continue to grow! Imagine the look of horror I received when I suggested that they cut down from 4 Starbucks a day to only 2 or even none and buy a coffee machine. I showed them the amount spent on coffee in 3 days was enough to put them on a positive track with no other cuts or increases in spending!

Getting a little breathing room financially is a good thing unless you keep doing the things that got you in trouble in the first place.

Bruce

canoe

egnorant said:

Scary credit card debt is rarely a financial problem...it is a lifestyle problem.

Truth. 

In reply to thedanimal :

Dave would say you failed. Do the class again. Seriously, moving the debt is a bad mind game. Lock down the budget. Hammer on the hours. 

Full disclosure,  we drank the cool aid and shaved our heads. We haven’t carried a credit card in 3-4 years. We carry no debt except a mortgage(7 years to go).  

tester said:

In reply to thedanimal :

Dave would say you failed. Do the class again. Seriously, moving the debt is a bad mind game. Lock down the budget. Hammer on the hours. 

Full disclosure,  we drank the cool aid and shaved our heads. We haven’t carried a credit card in 3-4 years. We carry no debt except a mortgage(7 years to go).  

Weird, so when I took on some credit card debt to buy my house (appliances and the like) it was a bad idea to then move the debt to a 0% card. Divide the amount by the number of months the offer lasted and kept cash in bank and paid no interest. I guess that was stupid of me, who would have guessed?

Ramsey annoys the crap out of me because he ignores a lot of other factors. 

For example, why would I pay off my student loan debt early (1.49% rate) instead of putting that money into my 401k like I'm currently doing, which is far surpassing the rate of inflation? If you use it properly, not all debt is bad debt.

z31maniac said:

tester said:

In reply to thedanimal :

Dave would say you failed. Do the class again. Seriously, moving the debt is a bad mind game. Lock down the budget. Hammer on the hours. 

Full disclosure,  we drank the cool aid and shaved our heads. We haven’t carried a credit card in 3-4 years. We carry no debt except a mortgage(7 years to go).  

 

Weird, so when I took on some credit card debt to buy my house (appliances and the like) it was a bad idea to then move the debt to a 0% card. Divide the amount by the number of months the offer lasted and kept cash in bank and paid no interest. I guess that was stupid of me, who would have guessed?

Ramsey annoys the crap out of me because he ignores a lot of other factors. 

For example, why would I pay off my student loan debt early (1.49% rate) instead of putting that money into my 401k like I'm currently doing, which is far surpassing the rate of inflation? If you use it properly, not all debt is bad debt.

Agreed. Debt is a powerful tool. Like most any tool, it can also cause significant damage, but it can also help to build something grand. 

Ramsey annoys me to an extent, but even he will admit that what he is harping is "bad math"--his point is that if you were good at math, you wouldn't be in the situation. I personally have carried astronomical levels of debt on credit cards, but I'd be shocked if I've had even $20 in interest fees against those cards in my lifetime. 

mtn said:

even he will admit that what he is harping is "bad math"--his point is that if you were good at math, you wouldn't be in the situation. 

His approach is a psychological one, not a mathematical one and that is difficult for my brain to reconcile. But, I haven't thought about his views that way.  This makes him more tolerable IMO.

Take it for what it's worth. Dave Ramsey's plan is good. However, The E-fund he recommends as the first step is outdated. It should be one month's income in Cash minimum. His $1,000 plan is better than nothing but way too broad.

As for Credit Cards, I only have one and that's enough. Pay it off and never carry a balance over a month. 

ProDarwin said:

mtn said:

even he will admit that what he is harping is "bad math"--his point is that if you were good at math, you wouldn't be in the situation. 

His approach is a psychological one, not a mathematical one and that is difficult for my brain to reconcile. But, I haven't thought about his views that way.  This makes him more tolerable IMO.

The problem is a psychological one, not a mathematical one.  I don't agree with everything he says, but his ideas are sound and if someone in debt follows them, they will be much better off.

So for the zombie thread canoe bait closure, what ever happened, danimal?  Did you get it all worked out?  Not in debt anymore?  Have control of your on resources once again?  Still on the road to it?

Dusterbd13 said:Then we took out an unsecured personal loan due to me not owning jack E36 M3. The unsecured personal loan was 12%.

Realizing now how much I love my credit union.  When I bought teh R, it was with an unsecured personal loan at 3%.  A car loan would have been 1% but the difference in interest was so minor that I went with the unsecured loan strictly because it made title hassles go away.

Disclaimer:  I racked up $4k in debt earlier this year/last year on credit at exorbitant rate (26% IIRC).  I'm just making sure that my gozintas are larger than my gozoutas and it's going away.  I considered a lower interest loan but that won't make the other bills go away, so it's just easier this way.

I'd wager that fiberglass canoes float your boat more effectively than iron canoes, but hey, if you're going to battle (debt?) you just might need that armor.

There is no quick and easy way out.

You first have to learn to control your finances.

Otherwise your uncontrolled spending will negate any relief.

There has to be a certain amount of pain in order to motivate you to fix what you are doing wrong.

I’d use the equity in my fleet of canoes to pay off my credit a card bills. 

I've seen a number of card companies offer promotions with  with 0- 9% promo rates on balance transfers for the first 6  to 9 months and stripped down low interest card at 10-12% on purchases. Might be worth a look.

https://www.forbes.com/advisor/credit-cards/best/balance-transfer/

So I work in banking, specifically auto lending but I've been working with consumer lending and consumer credit for nearly 20 years.

There is a lot to like about going the personal loan route some of which hasn't been pointed out yet.

First off, the likely interest rate of a personal loan will be well below what you're paying on cards and should therefore allow you to either pay the debt off early or reduce how much you have going out each month to leave room for living expenses.

As pointed out above, going to a personal loan could save you $100 or more per month in interest.  While everybody likes to think they can pay the debt off faster (ideal), with one income currently you might be better served to stretch the term and have the lower monthly required payment.  This should leave some much needed living cash for your family, which prevents you from accumulating more credit card debts while your wife isn't working.  Over a 5 year span you will still save a ton, and better still there is an end date on this debt.

Also, equally importantly, going to a personal loan moves the debt to the "installment loan" section of your credit report.  Installment loans tend not to reduce your credit score, whereas credit card debts do.  A factor in determining your credit score is "revolving debt utilization" meaning how much do you owe on credit cards vs. their credit limits.  This ratio has a massive affect on your credit score which in term dictates what the cost of borrowing money will be for you in the future.

Unlike the advice offered above, when you pay the cards off DO NOT close the accounts.  Instead cut up all but one or two of them for emergencies.  Let the accounts remain open, thereby improving your revolving debt ratio.  I.E.:  if you have $20,000 of limit on all of your cards and current have $10,000 of debt on them, it's a 50% revolving ratio.

If you paid them all off and close all but one card with a $2000 limit, but carry a minor balance of around $1000 total, your ratio will still be 50% which lowers your credit score.  If you had left the full $20k active, but had only $1k of cc debt, then you have only 5% revolving debt which IMPROVES your score.

Have a plan, be thoughtful and you can get through this.  The important thing is that you are wisely evaluating options before you are buried under a mountain of insurmountable debt.  

Never mind, it's a canoe. 

In reply to DanaFox :

Is one of those pluses that you can buy multiple canoes for one low monthly payment?