“More ways to recycle your debt. Use with caution!”
Chapter Overview• Understanding unsecured personal loans: why such loans are considered riskier and come with higher interest rates.• Getting a personal loan: how to find a reputable lender and what to watch for.• Credit card consolidation: switching deck chairs on the Titanic for most people, but it can work if you’re VERY careful.Recycling is all the rage, so let’s talk some more about recycling your debt by using two other types of debt to retire old debt. To repeat, this technique is risky and can get you in deeper trouble since you’re merely shuffling debt with the added peril of paid-off credit cards begging to be run up again (You can almost hear the cards in your wallet saying, “Just look at all this available credit! You know you want to charge me up!”)
Personal loan financing and credit card consolidation are two common means for debt consolidation. They should only be used as a last resort and with an exit strategy—and a proper burial for the credit cards you pay off.
Understanding Unsecured Personal Loans
In describing personal loans, it’s important to examine the term “unsecured,” because that’s the big differentiator between certain personal loans and other types of lending such as home loans and car loans. Unsecured means there is no collateral to back the loan in case of default. Secured loans are based on collateral.Secured loans give the lender a measure of protection. If you don’t pay your mortgage, you go into foreclosure and lose your house (an outcome America knows all-too-well these days). If you don’t pay your auto loan, the repo man hooks up your ride and tows it away. The lender takes possession of the collateral—the property you have purchased with the borrowed money—and sells it to recover as much of the loan balance as possible.
Unsecured loans have no collateral. The lender gets nothing from you but a promise to pay. Should you default, the lender can take various collection actions; however, there is no tangible property to seize and liquidate. This is why unsecured personal loans usually come with higher interest rates than mortgages or auto loans to help lenders mitigate their increased risk.
Getting A Personal Loan
A wide array of lenders offers unsecured and secured personal loans. Use services like the Better Business Bureau and social media such as Yelp to determine the reputation and trustworthiness of lenders.You’ll go through a qualification process similar to getting a mortgage or car loan when applying for a personal loan. The strength of your income, job history and credit score will dictate whether you can get a personal loan and the interest rate you’ll receive.
You should ONLY consider a personal loan as a debt consolidation method under the following conditions:
• The interest rate on the personal loan is lower than the debt you’re retiring.• The term (length of time you’re making payments) is shorter than the debt you’re retiring, giving you the chance to save money on interest payments.• The interest rate is fixed (best case scenario) or adjusts in a manner that you COMPLETELY UNDERSTAND.• You COMPLETELY UNDERSTAND and agree to any fees, pre-payment penalties, late-payment penalties or balloon payments (large payment at end of term).• You can realistically afford payments on the loan.• You ditch the credit cards you’re paying off. (How many times can I say this? Never enough!)
Credit Card Consolidation
If you think other forms of debt consolidation seem dicey (and I hope you do by now) then credit card consolidation is truly “switching deck chairs on the Titanic.” It can be done, but you must be extremely attentive and disciplined.Credit card consolidation involves transferring balances from your current credit cards to a new credit card. In fact, this is the marketing pitch that credit card companies frequently use to get you to sign up for new plastic. “Transfer your balances now at a super-low interest rate!”
Is it too good to be true? Often, yes. That “super-low rate” is frequently temporary, good for perhaps 12 months. After that, the rate can go up to the typical double-digits seen on many credit cards. And there you are: the same pile of debt throwing off big interest charges. Also, such balance transfers often have fees of 2 to 3%, adding to the financial downside. Some consolidation!
You should ONLY consider credit card consolidation as a debt consolidation method under the following conditions:
• The interest rate on the new card is lower than what you’re paying on your current cards.• You COMPLETELY UNDERSTAND and agree to any fees related to the balance transfer.• You COMPLETELY UNDERSTAND any triggers that might boost the interest rate during the introductory period. Such triggers may include late payments or exceeding a certain balance limit.• You can pay off the new credit card before the interest rate goes up. This will require paying more than the minimum amount, perhaps a lot more (see Chapter 4, Paying Additional Payments).• You can realistically make the monthly payments on the new card.• You ditch the credit cards you’re paying off (I told you…can’t say this enough!)• You ditch this new credit card once the transferred balance is paid off and the card’s job is done.
How Can They Get Away With Those Insane Interest Rates?
Credit card interest rates drive millions of Americans to financial ruin. Aren’t there laws to keep them low? Actually, there are laws in numerous states across the country to limit interest rates. Then why do we have such high rates? Could it be…a loophole?!? Darn right, and it’s a doozy delivered by no less than the United States Supreme Court! Want to find out more? Read the last chapter of this book! (“Oh, the suspense!”)
