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Convince me not to get a personal loan to pay off my credit cards.
March 26, 2013 6:22 AM   Subscribe

Should I take out a personal loan to consolidate my credit card debt? Does anyone have any experience with personal loans through Discover?

A couple of my creditors (and Mint!) are offering me personal loans to consolidate my debt. I don't really know what I'd be committing to and how it's different then credit card debt. Tell me why this is a bad idea, please.

Details:
  • Total credit card debt is less then $12,000
  • I make about $20,000 annually I am single with no children and do not see this changing for the foreseeable future.
  • $700/month of that goes toward (evil!) student loans. Total student loan debt is $42,000. I will be in student loan hell forever, I know. This is a fact I've accepted. Would probably not take out a larger personal loan to pay part of this off unless someone convinced me it's a good idea.
  • I currently pay about $250/month toward my credit card debt
  • I have very little in savings
  • If I consolidated, I would be closing out two of my cards and deep freezing the others. This is mostly because they are too easy to use. (Amazon store card is bad. BAD I tell you)
I would like to get to the point where I can use a credit card to pay for my utilities, and then pay that balance off every month. I want to take charge of this! I made a lot of bad choices for my debt this past holiday season and I need to nip it in the bud.
posted by royalsong to Work & Money (29 answers total) 7 users marked this as a favorite
 
You don't mention interest rates at all. What are the interest rates for the credit cards versus the interest rate for the loan?
posted by EndsOfInvention at 6:26 AM on March 26, 2013 [3 favorites]


Can you get a deferment on the student loans until the CCs are paid off? That's how I did it (due to income and other bills) - paid off my last CC in 2009 and just finished paying off my student loans.
posted by getawaysticks at 6:29 AM on March 26, 2013


The way you decide is to compare the interest rates. Credit card interest rates are usually sky high. You need to read the fine print on the loans to make sure the interest rate doesn't go up at a future date. If the interest rate on the loan is lower, it makes sense to consider consolidation.

Why will you only get rid of your credit cards if you consolidate? If you find it difficult to spend within your means with the cards, you should get rid of them either way!
posted by treehorn+bunny at 6:38 AM on March 26, 2013


EndsOfInvention: That's hard to answer. The lowest cc interest rate is 16.90%. I have others that are significantly more then that (amazon is 25.99% for instance). I haven't applied for the loan to tell you what they will actually give me. They keep advertising 6-7% though.

getawaysticks: Great idea! Unfortunately, it won't work for me - I used up all my deferment options when I was unemployed.
posted by royalsong at 6:39 AM on March 26, 2013


Yeah, it really gets down to the interest rates on the consolidation loans.. Folks are offering you those loans because they intend to make money off of you.

In any case, if it all seems a bit overwhelming, I highly recommend the snowball approach instead. This is the main part of Dave Ramsey's plan, which includes first setting aside some cash as an emergency fund so that you can avoid hitting the credit cards at all for stuff.
posted by jquinby at 6:40 AM on March 26, 2013 [5 favorites]


NO, don't do it!!

Cut up the credit cards now. Trust me, you can't wait until they're paid off. Get it all sorted out now and get out of debt, THEN get a credit account with great rewards for monthly expenses when you're disciplined enough to do it right.

First, contact your student loan lender about income-based repayment. My income is double yours and I pay less than half monthly -- while I focus on killing my credit card debt.

Once you've got a new student loan amount, put the difference between that amount and the $700 you now pay to your credit cards, as well as the $250 you already pay. If your payment gets even as low as mine, you could be putting as much as $750 per month toward the credit card debt, which would kill it in about a year and a half. You could even play around with the numbers and start saving some of it, too.

A new personal loan is a bad idea because it's more debt, more interest and a longer road for you to live free. Your creditors and the advertisers through Mint are not your friends and they don't have your best financial interests at heart, otherwise they'd be telling you to kill the debt you have now instead of redirecting your interests payments into their own pockets! Chant this to yourself: they only want your interest payments, they don't want your life to be easier!!
posted by mibo at 6:40 AM on March 26, 2013 [4 favorites]


First of all, you should absolutely reduce your payments on your student loans to match your income level. If you are making 20k a year you should be able to reduce the loans significantly. This is a no brainer, as the interest on those loans are undoubtedly much, much lower than your CC interest. Then, if you can afford to keep paying the same amount, put the rest of the money you would have otherwise thrown on the student loans on the credit cards.

I hate to tell you, but an offer of credit does not actually mean you qualify for said credit. You sound like you probably don't have great credit unless you have a huge chunk of change in the bank. Focus on changing the easy things... student loans.
posted by ancient star at 6:43 AM on March 26, 2013 [2 favorites]


I consolidated my credit onto one card by transferring my debt onto a new, lower interest card through my credit union and closing out the other cards as part of the deal (as in, they were going to be verifying that got done and otherwise would rescind my credit).

It worked well for me mentally to have one larger bill instead of several smaller ones. If you would feel better about your debt by having it all in the same place, then consolidating it could help you pay it off faster.
posted by DoubleLune at 6:48 AM on March 26, 2013


Would probably not take out a larger personal loan to pay part of this off unless someone convinced me it's a good idea.

Well, if you can fully transfer the loan to an unsecured creditor, then it becomes dischargeable in bankruptcy (unlike a student loan) and you might not need to pay it all back, if any of it.

But a creditor having to write off debt is going to ruin your credit regardless of what happens, so I'd leave this as a last resort, if you really can't pay all your debts.
posted by kindall at 6:55 AM on March 26, 2013


What is your credit score? If it's not great, there is no way you will get 6-7% on an unsecured personal loan. If it IS great, your credit card companies are more likely to agree to lower your rate and you won't have to mess around with applying for a new loan and transferring balances.

So call your card companies first. It takes hardly any time and you have nothing to lose.
posted by payoto at 6:56 AM on March 26, 2013 [1 favorite]


You can keep track of your TransUnion credit score for free by signing up with CreditKarma.
posted by payoto at 7:00 AM on March 26, 2013 [2 favorites]


It really depends on the comparative interest rates, but really, if you're still using your BAD Amazon card, the problem isn't who has your loans but you need to stop shopping online when you are this deep in debt. Full stop. That's your problem. You should also look into ways that you can increase your income to get out of debt - take a second job, get a promotion.

My grandfather had a saying which I've slowly learned to accept is true - he was poor before he grew up in the depression, so he knew what it was like to go without basically everything.

His advice - the only things you should borrow money, outside of an absolute emergency (health, car broken down), for are things that you can't possibly pay for by saving for three years. So, your education and your house. If you want a new outfit, start saving today and when you have saved enough money, you can buy whatever the hell you want.

In our society, the idea of waiting two whole years to buy new furniture is unheard of, but two and three generations ago that's what people did.

This may sound harsh, but you are poor and in a lot of debt and you need to start acting like it if you're ever going to financially get out of this mess. Take a really hard look at what you've bought on Amazon and think about whether paying two or three times its worth (over the period you'll hold it in debt) is really worth it.
posted by Rodrigo Lamaitre at 7:08 AM on March 26, 2013 [10 favorites]


I don't understand how your student loan payment is that high. I have about double the amount of student loan debt and my monthly payments are almost half the amout you pay. You definitely need to look into that to figure out how to lower that payment. Then you take that extra money and use it to pay down your other debts.

It's a slow process but you'll get there. Don't worry about paying off your student loans anytime soon either. The credit card debt comes first.
posted by joan_holloway at 7:14 AM on March 26, 2013


I appreciate the tough love! I assure you, the credit card debt is not increasing. I have control of my spending habits and budget. Amazon is bad because of past decisions, not current ones.

I will call Sallie Mae and see if I can't get my student loan payment reduced. Last time I tried, all they did was put my federal loans in deferment. I will ask specifically about income-based repayment.

I think part of what appeals to me, in taking the personal loan, would be to have the single bill and single creditor to pay. Less stress about making sure I paid everyone.

Is it possible to apply to see what my interest rates would be on the loans without actually agreeing to the loans?
posted by royalsong at 7:24 AM on March 26, 2013


Yes, absolutely. The only downside, AFAIK, is a query to your credit score.

Consolidating onto one credit card (which you never never use; I like the idea of keeping it literally frozen in a block of ice) is probably the way to go. I can't imagine you'd qualify for anything better than a usurious personal loan. You may even be able to consolidate at a lower rate than your lowest card, but definitely check with them about consolidating first if you've been with them for a while.
posted by supercres at 7:34 AM on March 26, 2013


I suggest you take a look at peer-to-peer lending site LendingClub. A very high percentage of borrowers there are doing credit card debt consolidations and possibly you'll find better rates there (depending on your credit rating and other factors).
posted by Dansaman at 7:44 AM on March 26, 2013 [3 favorites]


I can't weigh in on the student loan aspect of it, but I have that Discover consolidation loan, and am just about to pay off a huge chunk of credit card debt with it. In my situation, the interest rate ended up being about 1/4 of what the credit cards were charging, so it really did make sense to pay it off this way (it also reduced my monthly payments as well so I was able to throw more at the remaining card debt.)

I'm not enough of an expert to weigh in on your particular situation, but I'm somewhat surprised at the answers here.
posted by pixiecrinkle at 8:15 AM on March 26, 2013 [1 favorite]


Is it possible to apply to see what my interest rates would be on the loans without actually agreeing to the loans?

You don't need to apply - what I learned relatively recently is that creating a relationship with a bank (through a mortgage specialist, personal banker, whatever) is incredibly valuable. It's not as easy as filling out an online form - but they are experts in their field. The Discover loan may not be the best deal you can necessarily get.

You sit down, chat about the weather, compliment their kids and sometimes they find a way to make your life a little easier. Plus, you can go through various scenarios with them without having to get your credit score dinged by credit checks.

At the least, call Discover up and talk your situation through - they should be able to give you an idea of your interest rate without a formal application.
posted by Rodrigo Lamaitre at 8:39 AM on March 26, 2013


Apply for a loan and see what interest rate you get. Then it's just a matter of mathing it out to see if it would be cheaper long term to pay off the cards in full then pay off the loan with payments and interest or to just keep your cards as is. When you apply fo rhte loan they will check your credit. If you have too many credit checks in a time period it can negatively affect your credit in the short term so if you are going to make a big purchase (car or house) or try to rent at a place thath credit checks soon, just be aware of that.

Alternatively, you can try just plain old calling the credit card issuers to see if they'll lower your interest rates.
posted by WeekendJen at 8:46 AM on March 26, 2013


Yeah, I'm with pixiecrinkle's surprise at overall tenor -- sure, they're "trying to make money off you," but they do that by charging interest; it doesn't matter whether that interest is higher or lower than what's on your current debt, because they'll pay that off in one chunk. Just like a mortgage, the interest they charge you is related to the interest rate they can get (+ some assessment of the risk you represent), and they make plenty along the way on even a low rate. Probably any rate they offer will be a huge improvement on the usurious rates that credit cards offer, especially since the Fed is keeping its interest rates so low. Add in the value of having just one bill to pay, and this could be a life-saver in getting your debt paid down fast.

There's no problem with having them run the numbers for you -- they have to show you the rate they're offering before you sign anything final. Find out! (And if other advice to get your student loan rates down pays off, you may actually find a little breathing room! yay!!)
posted by acm at 9:51 AM on March 26, 2013


$700/month of that goes toward (evil!) student loans. Total student loan debt is $42,000.

Well there's your problem. I have almost three times that in student loans and pay only $1,000 a month.

I don't really know what I'd be committing to and how it's different then credit card debt. Tell me why this is a bad idea, please.

In essence, you would substituting a high-interest line of credit for a fixed, lower-interest loan. I think your problem is going to be that you're paying off your credit cards very slowly, and no bank is going to extend you a consolidation loan for that length of time. True, the interest is lower, but that might not be enough to offset the accelerated repayment schedule.

You're currently paying $250/month towards your credit cards. For a $12,000 loan at 8% (you're unlikely to qualify for 6-7% with your credit status), you'd need a 5-year repayment period to maintain that monthly payment. That's just about the longest term I've seen for one of these loans, and you may not be eligible. But if you knock it down to a 3-year term and you're up to $375 a month. In terms of debt service over time, this is awesome. You'll wind up paying a mere fraction of the interest you'd pay to the credit card companies. In terms of monthly liquidity, that's going to sink you unless you can cough up another $125 a month. At $20k a year, that's, what, 7-8% of your annual gross? A huge hit, in other words.

Now you might be able to swing that if you can extend the repayment period on your student loans, which would lower that payment amount. But if not, you may find that consolidating your debt is beyond your grasp. You'll have to look very closely at the loan terms before going through with this. But if you can find a way of replacing credit card debt with a consolidation loan while maintaining your current liquidity, it might not be a bad idea, provided you cut up your cards.
posted by valkyryn at 10:11 AM on March 26, 2013


"A new personal loan is a bad idea because it's more debt, more interest and a longer road for you to live free."

Whoever said that is wrong. IF you can limit your new loan to the amount outstanding on your current cards, and IF the interest rate is lower this is a no brainer. The danger is when they say well we only loan a minimum of X when X is greater than you need. Of course there are ways around that. You can take a loan of X without any pre-payment penalties and simply send them the amount over what you actually need as part of your first payment.
posted by Gungho at 10:13 AM on March 26, 2013 [1 favorite]


A lot of the advice about dealing with credit card debt - snowballing, paying down the smallest ones first, gamify-ing it - comes down to setting up plans that are easier to stick with. Since it sounds like you're serious about getting rid of your debt, I don't see anything wrong with a loan that consolidates all your debt at a substantially lower interest rate.

Yes, Discover (or whoever) will still make some money off of you at 8%, but right now they aren't getting any of it while you pay 24.99% to Citi (or whatever). So this isn't necessarily a deal that's too good to be true, and I definitely agree that a single payment is easier to track and not miss by accident.

1. BUT: Do you have the self discipline not to go on a spending spree once your debt payment is down to a more manageable size or just a single payment? Are you *sure*? If not, maybe the transfer is dangerous.

2. Do check the fine print about balloon payments and adjustable interest rates. Low interest for 6 months isn't a great deal if you're left holding the bag at 25% for years afterwards. (Obviously. But a lot of this is restating the "obvious".)

3. You may very well get a better consolidation rate from your local credit union, especially if you have things like direct deposit with them. Do call and ask. (6% for them is more money that they get than if you paid 8% to Discover. But not all credit unions are created equal.)
posted by RedOrGreen at 10:13 AM on March 26, 2013


STOP.

Seriously. Don't do anything until you figure out what kind of student loans you have.

If you have Federal student loans, you WILL qualify for Income Based Repayment (IBR) on those loans. Read through that information very carefully. Ask for help if you need it. Don't trust Sallie Mae. Through some combination of incompetence and malice, Sallie Mae may or may not give you correct information. The Federal Student Aid site is authoritative for Federal loans, not what Sallie Me tells you.

I ran the numbers, making a number of assumptions that may not be true, and if all of your loans were Federal loans, you'd pay $41 per month under Income Based Repayment under your current salary.

Unless you got the loans recently, under IBR you'll pay Federal loans based on your income for 25 years (submitting annual documentation) and the remaining balance will be forgiven. Under current law, you will owe income tax on the forgiven amount at the end of the 25 years. This might be a lot of money, but it will be far, far less than paying the full amount.

If you work for government or a non-profit full time, you may qualify for a separate Public Service Loan Forgiveness program, which forgives your loan after 10 years with NO tax penalty. You can be in both Income Based Repayment and the Public Service Loan Forgiveness program, but you do not have to be in PSLF to qualify for IBR.

Here's the wrinkle - Private loans do not qualify for IBR. (Private loans are often the loan amounts you take that are over the yearly maximum Federal loan amount for your school, or for schools that are not accredited, or that don't offer Federal loans). It sounds like you might have some combination of Federal and Private loans. Just because Sallie Mae services your loans doesn't necessarily mean they're all Private loans.

Find out which are Private and which are Federal. If they're Federal, run, don't walk to Income Based Repayment.

(There is a second program called Income Contingent Repayment that's generally more per month than IBR).

One last thing, especially if some or all of your loans are Private: The Consumer Finance Protection Bureau is working to regulate and/or provide relief to Private Student loan borrowers. They're taking feedback on this initiative now. No guarantees, but this might provide some addtional relief.

You're paying $700 per month in student loans, which has to be absolutely killing you at your income level. I would address the student loans first - especially the Federal loans and Income Based Repayment, and only then proceed from that point.
posted by cnc at 11:27 AM on March 26, 2013 [2 favorites]


Have you considered a debt management plan through a credit counseling agency? They can negotiate amazing interest rate reductions and structure a manageable payment amount. Get an agency that is a member of the NFCC to avoid scammers.

Also nthing you need to look into income-based repayment for your student loans. This is not the same as income-contingent repayment (I made that mistake). Punching the numbers you gave above into the calculator here (presuming max interest rate of 6.8%), you would pay about $30/month. I strongly advise you look into this.
posted by calistasm at 11:37 AM on March 26, 2013


Step 1: Join a credit union.

Step 2: Take out a personal loan through the credit union to reduce your debt. Cut up your current credit cards and accept a single low-interest one from the credit union for emergencies. (Use it ONLY for emergencies.)

Step 3: Pay off the loan.

Credit unions usually have very low interest rates. My wife and I took this approach after finishing college; I was making ~17k at the time, we paid off our entire credit card debt from our student days in a few years. It was one of the smartest moves we have ever made, credit-wise.

After we had it paid off, we transferred that monthly payment to another need: It was already budgeted, so we knew we could afford to pay it. In our case, that need was a new car. In your case, it may be something else. But definitely get rid of the credit card debt; however, under no circumstances would I ever take a loan out from a credit card company to do it. Credit union or nothing. You are very likely eligible to join one somewhere.

We did this circa 2008, and STILL only have one major credit card, from the same credit union.
posted by caution live frogs at 2:45 PM on March 26, 2013


nthing income based repayment. It is a blessing, even if you only have a few federal loans. It brought my wife's payments down by about 75%.
posted by furnace.heart at 5:47 PM on March 26, 2013


As an anecdotal data point, my SO had a personal loan from Discover and his interest rate was 9% (not the 6% they advertise) - and he has a great credit rating. Before you consider using any loan to pay off your CC debt, find out what rate you'd actually get based on your credit score - don't base your decision off the advertised rates. You can get the rate before committing to the loan, but they will run a credit check in order to determine your rate. This can impact your score if you try shopping around (having multiple lenders running credit checks).
posted by youngergirl44 at 9:42 PM on March 26, 2013


I took out a personal loan through Discover to pay off past credit card debt that was hanging over my head. Honestly, it's the smartest financial thing I've probably done and I wish I hadn't resisted it for so long. My resistance was the idea that it would take three years to pay off the debt. I was mad at myself and wanted the debt erased so that I could stop being mad at myself. Stupid pride.

I did the dance many times of limited-time zero-interest transfer offers and promising myself I'd keep an incredibly strict austerity schedule. I had no problem at all with austerity -- I can eschew vacations, cut out indulgences, happily cook like I've got a ration card, etc. But I have a professional job, and that means a wardrobe that requires a certain amount of drycleaning, or buying new clothes that can be machine-washed, but the former is more cost-effective...and by the way it takes time and energy to calculate that. There are all kinds of little costs that derail those austerity goals, like toothpaste and prescriptions and oil changes for the car.

There is no contest between the interest I paid on that loan and the interest paid on credit cards. I understood the differences in calculation well enough at the time to make sure that I wasn't getting screwed over, but I'm out of my league i explaining, hopefully someone else can chime in? I set my monthly payment to a realistic amount that I could sustain by being frugal, but not CRAZY AUSTERITY, and I threw more money at it when I could. I had no penalty for paying it off early, and I paid it a couple of months early. The not-quite-three years flew by, and since then I've never carried a balance for more than a month or so.

/My credit-card debt and income proportions are roughly analogous to yours, though I did not have the loan burden that you do.
posted by desuetude at 11:23 PM on March 26, 2013


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