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.
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 it's a private non-profit organization,
sometimes it's government sponsored. This organization works with
consumers and creditors to help work out repayment plans. A good debt
counselor will also educate you about how debt works, how to understand
your options better, how to make informed choices, and so on. Look in the
phone book, or call your city department of consumer affairs, and ask.
Also check with your union: access to such a service might be part of
your union benefits. Be careful to get only an actual credit counseling
service: some unscrupulous loan companies operate as pseudo-counseling
services but their real goal is to steer you into taking out a loan with
them.
