Attn. Financial Wizards... Need Serious Suggestions for Which Type of Loan (1 Viewer)

[Brian Mansure]

Ok, so let me lay it out for ya.


My wife and I have been slowly but surely paying down our collective debt we've both carried around for the past 7 years but have recently hit a huge plateau.
We certainly haven't been the most frugal of spenders at times but IMO we haven't "blown" our money on a bunch of non-essential stuff either. (sounds like a typical case of denial, doesn't it? )

Anyhow, outside of our mortgage, utilities, food and car fuel spending our current debt is around 10,000 dollars.
We don't have much in savings because most of our money goes directly to "normal" bills and the rest to pay down our debt. We feel why have a larger amount of money in savings if we still have debt to pay off.

Lately we've been falling behind in paying all our bills on time and I can see all our hard work over the past year or so go down the drain if something doesn't happen soon.

Thanks to friends and family we've been able to borrow and pay back a few hundred dollars here and there through tough spots but I'd like to be able to pay my own way and pay the debt off sooner then later.

We were able to re-finance our home to get a better interest rate and lower monthly payment but we weren't able to do anything about a debt consolidation loan yet.

I would like to consolidate all the credit cards, department store cards, misc. and car payments into one monthly payment. Just as our re-finance on the mortgage, we are planning to pay over the minimum due each month to pay off the consolidation loan in about half the original life of the loan. This should allow us to reduce the amount of money going to interest and more of our money will be applied to the principal of the loan.

So, with so many different types of loans out there which one/s would you suggest and why please?

Personal Service Loan? Signature Loan?, Line of Credit?

Would it be better to use my Credit Union PSECU?
or
Will a mortgage company or bank be a better loaner?

As always, I truly appreciate any opinions and suggestions.

Thanks,
Brian

 

[Eric_L]

Brian;

You really need counseling beyond what can be appropriately done here. A good adviser will need to know your income, housing costs, taxes, dependents, etc.

Since you just refi'ed I presume your liabilities are < 50% of your earned income.

I'll give you some basic advice:

1) Forget about consolidating. I've never seen someone do it who didn't end up digging themselves into a deeper hole. It is a last resort.

2) DO NOT GO TO ANY CREDIT COUNSELING SERVICES like you see on TV. In the industry we have a term for that : Bankruptcy practice.

3) DO go to a BANK and ask for them to review your finances. Ask for an employee who has been making loans for at least 5 years. Even better if they have collections experience. If they try to sell you a consolidation loan without counseling you first, leave.

4) You mention you have store charge cards. Close them. They are useless. Name one where the store does not accept VISA or Mastercard. They usually charge near usurious rates and have minimum payments that would take 50+ years to payoff.

5) Most people need only two credit cards. One for Regular use, and one for backup emergencies.

6) Make it a goal to payoff your smaller (and likely store) credit cards first. Make minimum payments on the rest. As they pay off, then take that same payment amount and add it to another's minimum that you've been paying.

7) Apply your tax refund to a card when it comes. (woot woot! tax reduction act passed!)

8) Did I say close your store cards? You must close them so that they can not be used for more purchases. You don't have to pay them off to do that.

9) Remove ALL of your credit cards from your wallet and her purse. Make them extra hard to use. You must actually go home and dig it out of the desk to use it. Often times that 'needed' purchase no longer is so needed by then.

10) When you are half way through paying these off start contributing to an IRA or 401k. It may not make sense to save when you still have debt. But you will have debt for a long time. If you don't get in the habit of saving you'll never get started. Trust me on this one.


Finally, from your post it looks like you are paying more on your mortgage than the minimum. Stop it. After tax that is likely your lowest rate. If you want to pay it down put that LAST, after retirement savings even.

If you find this advice not working, then as a last resort get a consolidation loan. For $10,000 it really should not be necessary. Get one that is equity secured, and only get it from a bank. The rate should be 6% or so. Some will offer you a home equity credit line. I don't think that is the right product for you, even though the rate is low - around 4.5%

I'm going to make some other assumptions. You are a young couple, around 24-25. No children, yet - maybe trying to pay off your credit first (never will-quit dreaming) It sounds like one of you just took a hit in the paycheck. Money troubles are making your lives miserable.

I wish you luck and hope this helps. Money is very hard on a relationship. If you can, just remember money is a world thing, marriage is a spiritual one. Keep them separate.

One last tip that I found useful: You will be living VERY frugally for a while. At night, empty all the change from your pocket into a jar. Once a month use that change to go out to dinner (for God's sake convert it to cash first) and appreciate each other that night.

Make sure to tip the waiter.

Good luck.

 

[Todd Hochard]

We certainly haven't been the most frugal of spenders at times but IMO we haven't "blown" our money on a bunch of non-essential stuff either. (sounds like a typical case of denial, doesn't it?

Yes, it does. Based on that statement, I'm betting that a consolidation loan would be your worst nightmare. After all, I'm betting the REAL reason you want consolidation, is to lower your monthlies, so that you have more on hand to blow. It's rumbling around in the back of your head somewhere, isn't it. Am I wrong?

Any consolidation loan, outside of a Home Equity Line of Credit, is likely to have a non-favorable interest rate, IMO. Most "personal" loans are 10% or more, and usually limited to a couple of grand. I would NOT recommend tapping your Home Equity for the things you've purchased. Generally, I'd limit that to uses for home improvements, kid's educations, and MAYBE for a car, if the interest rate is much better. In any of these cases, financial discipline is key, of course.

So, I'd say forget it. Start paying the max you can on the card/loan with the highest interest rate. When that's done, move to the next, and so on. Without moving balances around, that's the cheapest way to get it done, interest wise.

Like Eric, I'd recommend eliminating all cards except two. In this day, there really is no rationale for store cards, gas cards, etc. Two cards, and your debit card will cover all bases. My debit card has the Visa logo, I carry and use my AMEX Blue (AMEX that you can carry a balance on), and a Mastercard. None have rates above 10%, and none have balances (including my Checking account, the day before payday! :b )

One thing you may try- apply for a card with no-fee balance transfers, with low rates (

 

[Eric_L]

My debit card has the Visa logo

On a completely different topic:

I'd say lose the visa debit card. They are nice, until they are stolen/misplaced. If you are fortunate enough for the bank to reimburse you for any fraudulent charges how long will it take them? 30 days? 60 days? 90 days?

Meanwhile, you have $0 in checking till next payday. Real bad scenario.

 

[DaveGTP]

Don't jump to close old accounts. This can affect your FICO credit rating by reducing your average account age. This could affect your ability to get better interest rates. I would recommend doing what I did - keep the account number around in case you have a problem, and chop up the cards. Keep 1 around for emergencies. This takes away the ability to use them and thus never pay them off.

The most efficient method to pay off CCs is to pay as much as you can against the highest-interest credit card. When you get that paid off, take that old payment and pay it, plus your normal payment, against the next credit card. This is called the snowball (or rolldown) approach, because your payments get bigger and bigger over time. You can also start with the lowest balance card and snowball up to the biggest card (as suggested above). This is emotionally more satisfying but slightly less efficient over time (I was doing this, admittedly)

Some good links:
How long to pay off Credit cards at certain amounts: http://www.myfico.com/myfico/CreditC...s/PayoffCC.asp
Here is a good rolldown calculator:
http://www.myfico.com/myfico/CreditC...btRolldown.asp
I know how hard it is to pay off old credit card debt. I had about 3.5k in CC debt from one bad summer I had when I fell behind (car repairs, rent, etc). I also have a 2k personal loan that I originally got to pay off credit cards. I did so but charged my CCs back up with a head gasket repair (and a couple more repairs).

Now, I am almost 24, I go to college and work full time (making about 30k a year for the past 2.5 yrs). I was paying on the cards for like 3 years without really making progress. Tax refunds always seem to be eaten up by something (this year it was an engagement ring and a computer upgrade) Just recently, I got another 2k loan. My Grandma put up her money in her share account at the credit union for a guarantee on it. I got the loan @ 3% and paid off 3 credit cards with it. I am working on paying both of the personal loans now (@ 12% and 3%) instead of the CCs. It also helped my credit rating significantly (my big hit was too high % of my revolving limits charged up).

Use the calculators and set up a budget to pay off some cards. I did this for about a year and I managed to pay off several hundred dollars of my debt. This helped a lot, it enabled me to pay off all my open CCs with the 2k loan (I have another old closed CC balance I am still paying on). The calculators provide useful graphs showing your balance over x amount of months. Very useful for making sure you get somewhere.

Min. payments are designed to keep you in debt forever. My Discover min card payment of $25 resulted in less than $1.50 off the balance every month (the card was at 22.49%). The credit calculator errored out trying to figure out when I would have it paid off at that rate (it was over 15 years!). It's too easy to just pay the minimum without a budget.

Sorry for the long post, I hope some of it was helpful.
Edit: I see that you are paying extra on your mortage? Don't! Spend that extra $$ on the higher interest credit cards!! In the long run, you will have more money by paying against CCs than paying extra on your mortage.

 

[Eric_L]

This can affect your FICO credit rating by reducing your average account age

You are not the first person to treat credit scoreing as some sort of mystic calf.

Don't. really, I mean talk about superstitious behavior.

Credit scoreing has created enough junk advice to fill volumes.

You must be aware first of all that credit is not a game, in spite ot the term 'score'. It is a tool, to be used as YOU the borrower see fit. It is not a scoreing game.

Credit scoreing is a tool for lenders (not borrowers)and is not a golden rule. Too much open revolving debt is as detremental as anything else. Other factors include time employed, home ownership and net worth.

At the end of the day, use credit wisely, and damn the credit score. If you are a wise user of credit then it will never be hard to get. Score or not.

 

[Malcolm R]

Someone once suggested putting your cards in a dish, filling the dish with water, then putting it in the freezer. You then have to judge if the purchase is worth taking the time to thaw out the card(s).

 

[Jay Heyl]

One thing I would suggest in addition to what has already been mentioned -- make a budget. It's not a lot of fun, but it's the only way you're going to know for sure how much you can afford to pay on your debt. In the past I've gotten into trouble trying to pay more than I could really afford. I'd pay extra on one card and then find I was short when the bill for another card came in and be forced to take a cash advance. I was trying to do the right thing, but just ended up being depressed because it felt like I was going backwards.

When you make up your budget, be sure to include ALL your expenses. You mentioned some of the basics, but you also need to buy clothes, pay for insurance, taxes, etc. Also include some personal "mad" money. (If you don't have money to occasionally do something fun, you're just going to cheat and end up going backwards.) When you have all this down on paper you'll at least know where you stand and will be able to make informed choices about where to cut back.

It may be hard to face, but it's quite likely it will take you years to pay off what you owe. The sooner you accept that fact, the sooner you'll be on you way to a reasonable repayment schedule.

I found Debt Analyzer to be useful when paying off what I owed. It will help keep you on track and will definitely assist with targeting which debt to pay off first.

 

[David Preston]

I didn't read all the post above word for word but hopefully someone will correct me if they disagree. You can call your cc company and ask them for a interest rate reduction. It works often. When ever I want to make a big purchase I call them and say I want 0% interest for 6mo for purchases. Haven't been turned down yet do it every 6mo even if I don't plan on a big purchase. It benefits me for everyday purchases to. If anyone thinks this next statement is wrong please let him know. Next time you get a credit card offer for 0% interest on balance transfers apply and take it. You can transfer your higher interest cards to this and get out faster. See if they can do it with out a fee. I know its one more cc but if it saves you interest I my self would go for it. Good luck. David

 

[DaveGTP]

You are not the first person to treat credit scoreing as some sort of mystic calf.

This is not superstitious behavior. This is a FACT. You are talking to an engineering student here. I am very logical, scientific person. I would suggest you please do some research if you would like to post a rebuttal. And please keep the derisive tone to yourself - thanks.

 

[Bryan X]

DavidGTP is right about closing old accounts. Closing the accounts will not help your credit score and can actually hurt it. Closing an account lowers the amount of credit you have available which makes any outstanding balances you have with other credit cards factor more in your credit score calculations.

However, if you find the temptation to use the cards irresistible, get rid of them. Lack of self-control could get you into trouble quickly.

The main thing is to get your debt under control. If you can do that AND manage not to do any damage to your credit score that's great. But don't do things which will make it more difficult to reduce your debt, or possibly get you into more debt, just because you're afraid to hurt your credit score.

Did I say close your store cards? You must close them so that they can not be used for more purchases. You don't have to pay them off to do that.

If you do decide to cancel some of your cards, ONLY close those with a zero balance. Some card issuers will jack up your interest rate if you try to cancel while you have a balance