crazy minimize debt plan
March 16, 2010 8:01 PM   Subscribe

We've accumulated some credit card debt, about $40k - I have a wild idea to buy a cheap block of land in the countryside (rural Australia) that is surrounded by pretty hills - I've found the spot - for about 50k - I would like to borrow $90k - get the block and pay off our CCs at reasonable interest. Is this madness? Is this fraught in some way?
posted by mattoxic to Work & Money (20 answers total)
Who would loan you 90k against land worth 50?
posted by jeb at 8:04 PM on March 16, 2010 [3 favorites]

From where would you get income wherever it is you could buy a $50,000 block of land?
posted by Fiasco da Gama at 8:06 PM on March 16, 2010

What jeb said is right on the point. I mean, IF you can get a loan at a good interest rate to pay off your CC debt, you definitely should take advantage of that opportunity -- irregardless of the land opp. I just don't see why they would unless you're putting something else up as collateral that you haven't mentioned.
posted by wooh at 8:07 PM on March 16, 2010

Are we missing something? I do not see any way to "minimize debt" in this plan. And, I think everyone else is right in pointing out two things: secured debt (where you can repossess something if there is a default) and unsecured debt (like credit card debt) are two different things with two very different sets of assumptions about payback and risk that cannot usually be rolled into the same loan.
posted by Maxwell_Smart at 8:16 PM on March 16, 2010

If you can't pay off $40k, how the hell are you going to pay off $90k? You're just digging the hole deeper.

Focus on paying off the CCs. The interest is likely killing you. Make sure you're paying more than the minimum. Ask your creditor if they can make any deals with you. They might be willing to work out a payment plan with you.
posted by inturnaround at 8:18 PM on March 16, 2010

You can't really "combine" a mortgage and a personal loan. Debt consolidation means consolidation of personal loans only (say, a line of credit, two credit cards and a car loan).

Forget the land purchase. If you qualify for a personal loan to consolidate the debt (that will be a much lower interest rate than the credit cards), do that. Then pay the one regular monthly personal loan payment. It's much easier and you'll see the debt come down a lot faster as you won't be paying so much interest. One caveat: if you get the personal loan, please, please, please cut up the cards. Immediately.
posted by salmonking at 8:18 PM on March 16, 2010 [1 favorite]

Best answer: Are we missing something?

I'm going to guess that the loan will be secured on the equity in mattoxic's original house, and the saving is to be made in the difference between the interest payments on the cards (or an unsecured loan to settle same), and the interest to be charged on the secured loan. That said, some clarification on this might help the thread.

I'd guess that there is a saving to be made here, compared with simply not buying the block, and paying off the CC at CC rates, but this is the sort of thing where you'll just have to sit down and crunch the numbers on the two (well, three if you count just getting a CC-consolidation unsecured loan, and paying off at that rate) options.
posted by pompomtom at 8:31 PM on March 16, 2010

Best answer: If you can't pay off $40k, how the hell are you going to pay off $90k? You're just digging the hole deeper.The poster didn't say this scheme was due to not being able to pay off the $40k.

I think it's possible for $40k in credit card debt to be harder to pay off than $90k in loan debt depending on the interest rate and how long the loan is for. My brief analysis suggests that a credit card with 12% rate with $40k balance will have about an $800 a month payment. A $90k 30 year loan at 6% rate will be about $540 a month. Keep in mind the land value will go up over time and can be sold later while credit card debt does nothing. Also keep in mind that the extra $360 could be invested somewhere. This idea isn't something I'd reject out-of-hand until a more detailed calculation is done. It should also be compared with loan consolidation. Also see about not paying off the entire loan but selling the land after some point in the future. Oh, and you should remember to take taxes into account on that land.

Regretfully I've forgotten most of what I knew about this kind of math (which was never that much) and I don't even know enough specifics like what the $40k rate is and the $90k rate would be or what rate you'd get with loan consolidation and tax rates in rural Australia on land.
posted by Green With You at 8:45 PM on March 16, 2010

So you are $40k in debt and now want to be $90k in debt?? Something looks wrong with that math if you ask me. If you can't pay $40k, you certainly can't pay $90k. Get three jobs, pay off the $40k, save $50k then buy the land with cash. You will sleep better at night.
posted by MsKim at 8:45 PM on March 16, 2010 [1 favorite]

Best answer: FWIW my CC debt has a lower interest rate than my personal loan (unsecured).

The missus and I are currently trying something similar with our house. We're getting the house revalued, then borrowing up to the new value of our house in order to perform renovations, and also consolidate our CC and personal loan debt into the home loan. So instead of paying a mortgage, 2 credit cards and 2 loans, we'll be paying off just the mortgage, which has a much more manageable interest rate than our other debts, and results in less $$$ going out each month.

If you can get the land at 50k, but somehow convince the banks that it is worth 90k, then yeah, you can do it.
posted by robotot at 9:14 PM on March 16, 2010

You're missing a few steps in the plan, namely:

1) Why a company would loan you $90k when you have outstanding debt of $40k
2) How $50k of land becomes $90k.
3) How easy/quick it is to remortgage a $50k loan for $90k

1) Might be feasible if your household income has shot up recently. But a mortgage company will be able to tell you that very quickly.

2) Unless the mortgage company are idiots or land values are rocketing up you're going to have to add value; i.e. dividing the plots up and selling them; getting planning permission that increases the land value; actually building something on the land. It smells like a big gamble, though, for you and the loan company. If it's not, it would be informative to hear your plans.

3) Is partly dependent on the success of 2). Again, a mortgage company or mortgage broker will be able to say how this could work and what criteria/T&Cs they will use.

In essence, though, your plan is a variant on borrowing more to fund the big win - a staple of casino mugs everywhere. Unless your plans are very clear on how to make 2) happen it doesn't look like something a loan company would want to touch, IMHO.
posted by MuffinMan at 10:00 PM on March 16, 2010

Completely aside from the debt issue, do you have any tangible reason for believing that you'll be able to handle the lifestyle of living in the middle of nowhere?

Have you ever done anything like that before?

Could you try renting or something first, to test the waters?

How about just doing that instead - go for the simple life, slow movement thingy, on minimal rent, and use cost-of-living savings to pay off your debt?

Still not sure where you plan to get any income from, though - would it come from rent on an existing property? Remember that there's normally a waiting period before you can claim the dole if you move from an area of low unemployment to one of high unemployment (aka the Byron Bay Deterrent).
posted by UbuRoivas at 11:01 PM on March 16, 2010

What caused you to run up $40K on your credit card?

The underlying cause must be fixed first. It could be psychological or social. Why do you consistently spend more than you earn? Perhaps you have a vision of what your life should be like, without the income to match. Giving this vision up can be painful. Take the time to think deeply about it. Come to an acceptance of what you need to change.

Then make the changes to your spending you have to make. Once you are living within your means, you can look at reducing the debt, perhaps through the refinancing you described.

But unless you fix the underlying causes, you'll just open up another credit card and run up another $40K, and be back where you started.

Good luck!
posted by dave99 at 6:21 AM on March 17, 2010

Don't do it. Pay off your debt.
posted by bunny hugger at 6:24 AM on March 17, 2010 [1 favorite]

Is this madness?

Pretty much. Why would anyone lend you this money? How are you going to pay back 90k when you can't pay off 40k? Do you have some sort of plan besides "this sounds awesome!!!1!!1!111"? This just sounds nuts.
posted by Justinian at 6:45 AM on March 17, 2010

The concern that popped in my head was that your 40k in credit card debt would take 20-30 years to pay off if you rolled it into a mortgage. Even if the rate is less, it is going to be a long, long time paying it off, and that means lots and lots of interest paid.

I'm nthing the votes for knuckling down and paying off the CC debt first (and yes, it sucks mightily to pay and pay on that kind of debt, but it will be a millstone around your neck for life if you don't).
posted by midwestguy at 6:54 AM on March 17, 2010

Incidentally, have you ever asked for a raise? Some people ask for raises, some wait for management to offer. The first technique, if done with appropriate respect, often results in higher income. Which you could use to pay down the personal loan you'll be taking out to pay off your credit card debt.
posted by musofire at 7:03 AM on March 17, 2010

Response by poster: Green With You /pompomtom, thanks, that's my thinking - and the premise is simple I think- ' not sure is any further clarification is warranted, apart from probably stating - I am not asking about securing funds, nor am I unemployed, and I'm not "in a hole"

7% interest on 90k over 20 years vs 18-22% on 40k + land values increase + I get a nice place to run away to.

posted by mattoxic at 7:06 AM on March 17, 2010

I'm not "in a hole"
If you have $40k in credit card debt then, yes, you are in a hole. Meaning, you are in debt. Pay off this debt before incurring another one.
posted by Outlawyr at 7:23 AM on March 17, 2010 [3 favorites]

Borrowing on your home to pay off credit card debt only works if you stay out of credit card debt. I've seen lots of friends and family do something like this, and end up back in credit card debt. Your plan should include a way to keep that from happening.
posted by theora55 at 7:51 AM on March 17, 2010 [3 favorites]

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