Help my friend stay away from the Loan Tree!

December 17, 2005 11:48 AM

I am seeking some unbiased advice on personal loan consolidation. Search engines are too spammed by commercial outfits of dubious value to be of any help. But MeFi knows everything!

I am asking this for a friend (yes, really) who has fallen on hard times financially and is asking me for advice. I can certainly help her with things like budgeting and planning and so on; however I feel it may be in her best interest to get her high-APR loans consolidated. Problem is, I don't know very much about how this process works.

The situation in a nutshell is this: she has a new steady but not highly-paid job - for argument's sake, let's say $12/hour takehome - and maybe 10K of loans overall. I haven't seen the full financials yet so this is my guesstimating. Of that, about 3 thousand is ridiculously high-APR credit card loans that need to go; the rest is more reasonable but still way above market rate. She also has an immediate backlog on bills that she just doesn't have the money to pay (rent and utilities) amounting to something like $800.

The question is thus: what is the best way to get all her loans consolidated into one, with a reasonable APR? Also, is there a chance of taking out an additional personal loan (said $800) under the same rate at that time? I want to emphasize that my friend is overall fiscally responcible and I am confident in her ability to make timely payments once she gets out of the immediate hole. I feel confident enough about it to offer to put up some cash as collateral on her loans (which she's refused to accept so far but is still an open possibility as far as I am concerned). All advice is much appreciated!

posted by blindcarboncopy to work & money (19 comments total)

She'll get a lower APR if she has something of value that can be secured against the loan, like a house. If the loans are unsecured (e.g., Credit Cards) then the APR will be higher. So, find out what she has that's valuable (basically, cars and homes). Then go to a bank and take out a loan, securing it against that asset, whatever it is. Pay off all of the other loans, then never use debt again, ever, unless it's to buy a house or possibly an education.

But, all interest is evil - and the easist way to reduce effective interest rates is to pay significantly more than the minimum payment on all debts. So, if she has nothing of value, then figure out a way to double-pay. This has the same effect as reducing APR.
posted by crapples at 12:55 PM on December 17, 2005

I have heard that it is possible to call credit card companies and say "Listen, I need a lower interest rate and if I can't get it from you I will get it elsewhere and transfer my balance."

It's a start, anyway, and it will allow breathing room to arrange something more permanent in the way of consolidation.
posted by ilsa at 1:05 PM on December 17, 2005

echoing what crapples said: a secured loan is the way to go. for a loan of around 10k, yr friend could take out a secured bank loan based around her car, if she has one.

have her walk into the bank with copies of her credit card and other debt receipts, her last two pay stubs, and her car (or home) registration info. she should also have total amount in mind for the loan, and an approximate breakdown of what it's to be used for.

as always, shop around. have her go to at least a couple of banks to see what kind of APR they have to offer.

in the meantime, she can call her credit card companies, and ask to speak with someone who can help her manage her payments. most credit card cos. will allow accounts to be "frozen," where no new charges can be made, while setting up a minimum monthly payment at a lower APR. some of them will even give several months of no payment, to allow time for yr friend to get stuff together to make payments.

in short: secured bank loan, and call the credit card cos. up and basically ask for help!
posted by herrdoktor at 1:07 PM on December 17, 2005

Not a great option but a low-effort possibility: Is there any chance one of her existing credit cards has an attractive balance transfer rate? The last time I called to report a lost card they went out of their way to give me the "great news" about this "special offer," and I recall the rate as being very, very low. She could consolidate her debt by transferring it all to the card with the lowest balance transfer rate.

And if she's considering mortgaging her house for debt consolidation, (please say no!) on a 10K loan the fees will probably destroy any rate advantage. And many second mortgage lenders flaunt the tax benefits of their products, but mortgage interest payments aren't a tax shield unless she itemizes her deductions, and at this level of debt she probably won't be doing that. Finally, if she gets into trouble with that loan her house is on the line (and some of the scummier lenders will foreclose for a 10K debt -- in fact it's part of their business plan.)

As for the personal loan thing, I don't know. Good luck with this but do try calling your state's Consumer Affairs Department for tips -- you've already paid for the service so you might as well use it. Even if they don't directly deal with issues of consumer debt they should be able to point you to the office that does.
posted by Opposite George at 1:10 PM on December 17, 2005

Unfortunately if she's got this $800 of uncollected debt she'll probably have really bad credit at the moment, and will be ineligible for any type of loan beyond a payday loan type of place. Thems the breaks.

If you have good credit you might be able to get a loan yourself with the understanding that she'll have to make payments. If you're not willing to do that then you're not really sure of her ability to pay back a loan, are you?

That said, there are 'free credit counseling' services that can help out with this sort of thing, however, these companies are paid for by the credit industry and don't really have your interests at heart. I think getting credit counseling also goes on your credit report, although I'm not sure.
posted by delmoi at 1:22 PM on December 17, 2005

Be aware as well that the one impact of the new bankruptcy is that credit card companies can now raise their minimum payment requirements and it's widely expect that all minimum payments will DOUBLE in the next year. This might have an impact on which direction you lean.
posted by donovan at 1:24 PM on December 17, 2005

blind, I really think that you're barking up the wrong tree on this. A personal loan consolidation can make sense, but ultimately isn't going to make it any easier to pay down the debt. First, a secured loan is a very bad idea, because I suspect all your friend can secure is something s/he needs to live, like a car. There's a reason that car title loans are considered predatory.

A new loan will have some associated fees, too, and if a few hundred dollars is a problem for your friend, the loan benefits aren't worth the costs (and risks).

I think the route to try is looking for any way to get the debt holders to work with her. If they have proof s/he's working, they may be willing to work with her (keep the customer on the teat).

Have your friend create a repayment budget, with minimum payments for all loans -- except the one with the highest interest. Then pay that off as fast as possible. This will reduce the amount that the debt continues to pile up, and reduce the debt load. If your friend can then CANCEL that high-interest credit line, her credit score will improve (less potential to go back into debt), and she will be increasingly eligible for either reduced rates from existing creditors or new low-rate cards (less desirable given the history).

You can also look into consumer credit counseling services. Beware, though -- some of them are predatory non-profits, if that makes sense. The respectable ones will help you with the lenders, who will give people breaks if they stick to a payment plan. The bad ones will pretend they can erase your debt and other unrealistic goals.
posted by dhartung at 1:33 PM on December 17, 2005

What dhartung said on the credit counseling services thing, emphasizing that you tread with caution. The Better Business Bureau can actually be somewhat helpful in giving you advice on what to expect from a CCS, as can your state's Department of Consumer Affairs or Attorney General's office.
posted by Opposite George at 1:46 PM on December 17, 2005

Incidentally: these are the credit counselors approved by the USDOJ under the new Chapter 7 bankruptcy rules.
posted by dhartung at 2:31 PM on December 17, 2005

Is "unbiased advice" even possible?
posted by vanoakenfold at 4:31 PM on December 17, 2005

If you have good credit you might be able to get a loan yourself with the understanding that she'll have to make payments.

Never loan money to friends. Ever.

If you have the funds and really want to help, then you might consider just giving them some money. But never, ever loan money to friends.
posted by I Love Tacos at 4:56 PM on December 17, 2005

Oh, and I agree with dhartung's advice almost completely.

The only exception I'd have is if you know somebody who does enough business with a bank, that they could convince the bank to offer a reasonable credit line, without a co-signer.
posted by I Love Tacos at 5:05 PM on December 17, 2005

I would recommend that she look for a credit union and not a bank to see if she can obtain a consolidation loan. I inquired with a credit union located in the building of one of my former employers, and they have been, without a doubt, the most kind-hearted, non-monolithic financial institution I've ever seen, almost to the point of surrealism. My state of financial affairs would be much worse off without their assistance. (A credit union might even be willing to incorporate the $800 she needs into said consolidation loan.) Banks seem to be more interested in those who are already financially secure, especially now that they are more multinational corporate monoliths than little mom-and-pop outfits. (To make it seasonal, remember It's a Wonderful Life? The Bailey Savings & Loan was a credit union, if I remember correctly.)

I would, by the way, emphatically disagree with dhartung about personal loan consolidation. If you find the right lender, a lower interest rate allows you to pay off your loans much more quickly than you would at higher interest rates. It's simple math: you're paying more principal and less interest with each payment. And the credit card consolidation loan I obtained had no startup fees. If she find herself "shopping" for such a loan, that can simply be one of the things she considers while shopping.

My e-mail address is in my profile, and I'd be willing to advise you of the name of the credit union if you e-mail me; I believe they have several national locations.

If she cannot consolidate her loans, I would second the advice to call each of her credit card companies and have her swallow her pride and just be very blunt. I would suggest she approach the call, though, from the point of view that she is calling to cancel her account unless they can lower the rate. By that simple switch in emphasis, I bet you she can get a drop, because the companies then seem to approach it from a perspective of "I need to prevent us from losing this business" and enter it in a more negotiating state of mind. I lucked out, and managed to get DiscoverCard to drop my rate a whole 9%, if you can believe that.

The $800 she owes to utilities — if she will have to pay that out of her own money, I suggest she contact each of the utilities and essentially propose a payment plan that she can keep to. Have her say to PowerCo and PhoneCo, "Listen, I owe you $125. I am dealing with several large bills due to some bad personal circumstances. I can put a check for $30 in the mail to you from my December 15 check, $65 from my January 15 check", etc. Essentially, have her call them with a preplanned payment schedule. That level of preparation will convey to these CSRs that she is serious about paying her balance, and often, that will make a difference.

One conceptual thing I suggest you mention to her, so that she does not slip as much, is to tally up all of the finance charges on all of the bills, and point out that this is how much her outstanding debt is "costing" her each month. Let's say she has five cards, and the finance charges are $30, $50, $65, and $15. Point out to her that maintaining these credit cards is costing her $160 a month and over $1,900 a year — money that could go towards whatever important thing she'd prefer it to go to in her life (savings, a new TV or computer, her child's college fund, whatever). It really makes a conceptual difference when you realize that you're essentially spending a large portion of money to have the right to keep paying those minimum balances.

There used to be a fantastic program called Debt Minder, by iThink Solutions, which allowed you to work out a very detailed debt repayment plan. The author unfortunately seems to have disappeared, and his site now redirects to a spammy sort of MasterCard "Debit Freedom" website, ironically enough. If you can find a copy anywhere, that's the way to go — or see if you can have Quicken do it, or something else.

By the way, if part of her $10,000 debt you're telling us about is student loans, you should not consider that part of her "consumer debt," IMHO; someone told me once ancedotally (so I don't know if it's really the case) that rapidly paying off your student loans is actually a bad idea, since it's good to have at least something on your credit history that you're making regular payments on, under the theory of "no credit history is bad recent credit history."

Also, I have an Excel spreadsheet which I've used to handle my per-paycheck budget for years. It's served me well, and a few friends who I've passed it along to have spoken well of it as well. I'd be happy to e-mail you a copy (scrubbed of my own data, of course) — again, shoot me a line if you'd like a copy.
posted by WCityMike at 6:32 PM on December 17, 2005

More on credit unions versus banks from a Consumerist reader.
posted by WCityMike at 6:43 PM on December 17, 2005

The $800 she owes to utilities — if she will have to pay that out of her own money, I suggest she contact each of the utilities and essentially propose a payment plan that she can keep to.

And given the season, she may have some extra bargaining power since it might be against company policy or against the law to shut off power in the winter without offering a "lifeline" plan.

And definitely she should at least talk to a credit union if she's seeking a personal loan (and more than one -- some are run more like traditional banks, that is, more strict in their underwriting, than others.) I've been a credit union customer for 20+ years and can't say enough good things about them.

ThriftEsotericaFilter: I always thought the Bailey Building and Loan was a traditional Savings and Loan, and given the sentiments of the film, I always assumed it had a mutual structure. In any event, George's heart was in the right place but he wasn't really that great as a banker (which is why the Bank Examiner's visit was so worrisome.) Maybe he would have been better off running a credit union!
posted by Opposite George at 7:02 PM on December 17, 2005

OG: building and loan associations, mutual savings banks, and savings and loan societies were all slightly interchangeable, but before the Great Depression were distinguished from banks. Today's credit unions retain some of the features, but after Congress deregulated the S&L industry in the 1980s, it got heavily cross-fertilized with the banking industry, and since the S&L crisis Congress erased almost all remaining distinctions. Many B&Ls were co-ops rather than corps.

WCityMike: I was mainly concerned about predatory consolidation loans. If she's able to shop around, and shops smart, that's an argument in favor -- but someone with this much money trouble probably doesn't have good enough credit and the effort may well be wasted. It's preferable to leaning on friends, though.
posted by dhartung at 9:16 PM on December 17, 2005

since the S&L crisis Congress erased almost all remaining distinctions.

That may be technically true (in the sense of insurance and regulation), but it is most definitely NOT true in terms of how banks and credit unions treat their customers. Credit unions don't have owners who expect profits - the members ARE the owners. Credit unions don't try to figure out how to nickle-and-dime their way to profits, like BofA or Wells Fargo and Chase are often accused of doing. Consumer Reports has repeatedly advised using a credit union rather than a bank - credit union fees are (on average) consistently lower.

On a slightly different note, $11,000 of debt at (say) 8 percent interest is equal to about $75 of interest per month, which seems managable. Obviously it's important to start paying off the principal as well; as the principal shrinks, more and more of that $75 can then be used to further reduce the principal.
posted by WestCoaster at 9:54 PM on December 17, 2005

WestCoaster,

I don't think dhartung was suggesting that Credit Unions' regulatory status changed as drastically as that of thrifts in the post-80s restructuring.*

Credit unions don't have owners who expect profits - the members ARE the owners. Credit unions don't try to figure out how to nickle-and-dime their way to profits

Kinda sorta. As someone who's spent far too much time working with thrifts and Credit Unions as well as (just) "banks," I notice when my Credit Union tries something they might have read about in American Banker. Usually it's the appearance of a new kind of fee or some ill-fated cross-selling attempt, and it kinda gets on my nerves for a minute. And then I remember that in spite of that my CU still treats me better than the local banks would and I forget about it.

I'm not saying all Credit Unions pull that kind of stuff, I'm just saying that sometimes it seems like the folks running mine want to behave a little more like the big boys. It really isn't a big enough deal to complain about -- in fact, it's kind of cute, like when a 2-year-old stands up to his parents. You know the kid's out of line but you've got to admire the chutzpah.

and dhartung, I'm sorry if I gave the impression that a Building and Loan was anything but an entity slotted in with other kinds of thrifts -- that certainly wasn't my intention. I am far too familiar with the differences, having spent my formative years involved in cleaning up the S&L fiasco of the 80s. If I oversimplified for the sake of expediency I apologize. But even though Credit Unions are (I think) structured as co-ops and some B&Ls were too, I think the B&Ls would have been under the eye of thrift regulators whereas the CUs had a different set of rules and regulators they answered to. Like I said, it's been a while, so nobody go using any of this in a term paper on U.S. Banking Law, but I'm pretty sure that's the way it worked.

*And now, for a ridiculously drawn-out history of how I remember the drama playing out (not that my memory is infallible) that will either straighten things out or get me in even more trouble. 1991: You. Are. There:

FCUs were, and still are, subject to oversight by the NCUA and as far as I know the NCUA insures pretty much all credit unions, Federally or State Chartered, regardless of whether they're their primary supervisory agency.

On the other hand, the non-CU community-oriented, primarily mortgage-writing group of institutions called "thrifts" (that is, S&Ls, B&Ls, Savings Banks, Mutual Savings Banks and some other flavors I'm sure I've missed) answered to an alphabet soup of Federal and/or State agencies depending on details of how they were chartered and were mostly insured by FSLIC, an insurance fund that was bankrupted by the S&L debacle and whose function has been taken over (I think) by SAIF, which is administered by the FDIC (again, it's been a while.)

I'll use the term "S&L" from here on instead of "thrift," even though some of what follows may not be technically, exhaustively correct thanks to the replacement. As we used to say at the time, "close enough for government work!" Man, we were a really unfunny bunch of smug losers... Anyway,

A very simplistic explanation of what happened is that S&Ls historically operated under fairly restrictive regulations, which in the high-interest-rate environment of the late 1970s seriously hampered their fitness as a competitive alternative to banks. So, the S&Ls lobbied for, and got, an easing of some of these restrictions. The result was that historical lines between banks and thrifts blurred significantly, at least in terms of what kinds of products they could offer and what kinds of business they could engage in. But thrifts still answered to the same regulators they did before the ease of regulations and not the regulators that oversaw banks.

Unfortunately, neither the attempted remedies, S&L managers nor the regulatory agencies were entirely fit to properly deal with the S&Ls' new-found freedom, and a metric buttload of money was either gambled away, mismanaged, improperly hedged or stolen. The end result was that most if not all of the existing thrift supervisory system was declared a sick horse, taken out back and shot, and a new supervisory structure was set up, with existing banking agencies taking over the bulk of the job. And oh yeah, an almost-incomprehensibly huge amount of public money went into dealing with the resulting mess to minimize the impact on the banking system (as bad as things got, if the government had just said, "Well, our insurance fund has run out, tough luck" an unprecedented disaster would have been the result, perhaps one we'd still be recovering from.)

Credit Unions, having operated under a different supervisory structure, and not subject to the shock of operating under a new set of less-restrictive oversight, didn't run into these problems and weren't involved in the S&L debacle. At least I don't remember having to dispose of any of their assets at auction.

That's how I remember it, but my memory is not what it used to be and researching this would have taken weeks. So don't grade me on details -- I was going more for a feeling here...
posted by Opposite George at 3:56 AM on December 18, 2005

Everyone, many thanks on the advice. I read through it all with great interest, and passed much of it on. As the immediate first step, my friend will be calling credit card companies and trying to bargain them into lowering the loan rates tomorrow. We will be doing other things as well in short to mediate timeframe. All of this has helped incredibly! You can practically mark the entire thread as "best answer".
posted by blindcarboncopy at 10:38 PM on December 18, 2005