Debt Consolidation With New Loan
Q: I'm trying to pull myself out of some severe debt, and have been looking for a way to consolidate my too numerous credit cards. Yesterday I received an offer in the mail from my Union which I think may be something of a boon, but I'm having a hard time understanding what's behind it. I'm offered the opportunity to "ask for a revolving loan..." No collateral needed, no application fee, fixed interest rate, low monthly payments. Then there's a chart offering several advance amounts: RANGE OF ANNUAL PERCENTAGE ADVANCE NUMBER OF RATES & MONTHLY PAYMENTS AMOUNT MONTHS 18.99% 13.25% $ 2,500 36 $ 92.00 $ 85.00 $ 5,000 60 $ 130.00 $ 115.00 $ 7,500 72 $ 176.00 $ 152.00 etc. Now, just to be certain this really is a good deal, can someone explain to me just what the last column means? That the loan company will decide which rate I deserve, so that eg if I take out the 7.500 loan and am fortunate enough to merit the 13.25% rate, then I'll only be paying $152, but if I don't make the cut on that, I'll have the higher rate and payment? Second, how good do these numbers look to people? Finally, my debt is rather higher than the highest amount listed on the offer, but the form suggests that if you call up, you can get a higher amount. Since obviously I'd like the lowest interest rate possible, would asking for a bigger loan jeapordize this possibility? Does anyone have experience asking for this sort of a loan? Like I say, this would be a step towards consolidating my credit card debt and lowering my payments to something manageable as I set to work getting my house in order. But my indebtedness is well over the apparent limit for this loan, so maybe I should just cover one or two credit cards; then maybe down the road I'd be able to increase the size of the loan (if this is possible). While my credit is of course overextended, obviously, my credit history is I believe quite good. Any experience or helpful advice appreciated.
A: >I'm trying to pull myself out of some severe debt, and have been looking >for a way to consolidate my too numerous credit cards. Yesterday I >received an offer in the mail from my Union 18.99 % APR is *not* a good deal. Some credit cards charge less than that. 13.25% looks better, unless there are application fees or loan servicing fees that drive up the cost of the loan. > Now, just to be certain this really is a good deal, can someone >explain to me just what the last column means? That the loan company >will decide which rate I deserve, so that eg if I take out the 7.500 >loan and am fortunate enough to merit the 13.25% rate, then I'll only be >paying $152, but if I don't make the cut on that, I'll have the higher >rate and payment? Yes, that's how I read it. Rather than try to counsel on the specifics of that offered loan, may I offer some general advice? (Remember that it's free, so it may be worth what it costs.) First, I am generally suspicious of debt-consolidation loans. I don't mean that I think the loan companies are scamming you (though some do), just that it's dangerously easy to make your total debt load worse in that way. The effect is to lower the total monthly payment, but at the cost of extending the debt further out in time. There are some circumstances where that is a good thing, and I can't know whether that's a good thing for you. But do be aware that by lowering the monthly payment you will actually end up paying out more money total. Oversimplified example: if you had $100 a month to pay and there was 12 months left, that's $1200 till you're debt free. If you refinanced that loan (through debt consolidation or other means) to a $50 a month payment (half the $100) at the same interest rate, the new time would be more than 24 months (more than twice the 12 months), so that you'd end up paying out more than $1200 till debt free. One very important thing to check, as you know, is the interest rate. Look at the APR on each of your credit-card statements. If you can do a debt consolidation such that the interest rate is lower, then you may be doing a good thing. Just be very realistic about setting your new monthly payment -- not so high that you'll have trouble meeting it, but high enough that your debt won't stretch out far into the future. Be sure to make allowance for unexpected bills -- you can expect to have them, even if you don't know when or exactly what they'll be for. Also resolve to have some discipline and not use the credit cards again until the loan is paid off. (That can be very hard, I know.) You could certainly call up the people who made this offer and ask your questions, in advance of making a formal application. They won't tell you whether you could definitely get the loan at the 13.25% rate. But they should be able to explain, in terms you can understand, how they decide which rate to offer on a given loan. My hunch is that it probably depends at least partly on the term of the loan. Typically, interest rates for short loans are lower than interest rates for long loans. Merely making these inquiries should not have any effect on your credit history -- tell them you are thinking about making an application, you have general questions, and you don't feel comfortable getting into your personal information at this time. It's okay to tell them that the purpose of the loan would be bill consolidation. The questions you ask are good ones, but there are more questions you need to ask. It's good that you recognize your debt is getting too big, and that you are trying to do something about it before it becomes overwhelming. Here's my very strong suggestion: many cities have a free consumer credit counseling service. Sometimes