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Will consolidating help?

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Nickie09
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Will consolidating help?  Reply with quote  

I am incredibly new at this so I was wanting some advice on how things work before I go sign the line on a loan application. My fiance and I are living paycheck to paycheck and are just wanting to pull some payments together and have a little extra to buy presents this year. We currently have a car loan which I am fine with as we got a good rate on it. However, we have two credit cards and an unsecured personal loan through another bank that I am trying to see if pulling those all together under another loan will be beneficial.

Current debts are as follows:
Credit Card - $500 @ 19.8% - Minimum payment is $15 - I pay $100
Credit Card - $500 @ 18% - Minimum payment is $30 - I pay $100
Personal loan - $1,500 @ 18% - Minimum payment is $90 - I pay $100

We are putting every penny we have from our checks to all of our bills at this moment and are hardly making any dents other than the personal loan since we aren't adding to it with purchases. We went in and filled out a personal loan app from OneMain Financial and just got approved today. However, I am not really sure on their terms because it sounds like highway robbery to me, but I don't get all of the financial terms to see if it really isn't as bad as it sounds.

We asked for $3,000 to cover the credit cards and the personal loan and leave us with $500 for presents. They approved us for $4,000 at 48 months with pretty much a 26% APR. The lender kept repeating it is simple interest not compounded like credit cards so I really don't know if that is as bad as it sounds. I know how much it is potentially going to run us, but would it pay off to consolidate everything into this one loan. Payments on a 4 year will be around $130 but I know it is going to cost us like $4,000 in interest if we take it all and pay for the full 4 years.

Any advice on this? I don't want to make a huge mistake. Should I go for it? Should I ask for less and just try to pay it off early? Anything at all would be greatly appreciated.

Thanks!
Post Thu Dec 06, 2012 5:17 pm
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oldguy
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quote:
and have a little extra to buy presents this year


Be careful of the 'easy credit' trap, you are going to be in bad trouble soon if you don't pay attention to your spending. The $2500 @ 19% loan that you have means that you are spending money about 2 months before you are earning it. And increasing it to $4000 @ 26% just makes it worse, both on amount & rate. (The interest alone will be over $1000/year.)

What most of us had to do at a young age was learn how to get on the other side of this - eg, if you invested $4000 at 26% you would be getting the $1000/yr, not paying it. And then the power of comounding takes over, in no time you have $10,000, then $100,000 a decad later, and then a million. But the first step is to quit buying 'stuff' and start investing - "a little extra for presents" sounds really innocent, easy to talk yourself into, it only comes once a year, yada. But, if you don't have the money, then you don't have the money - it's that simple.

What is the interest and amount on the car loan?
Post Thu Dec 06, 2012 5:34 pm
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Nickie09
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We haven't gotten ourselves in a hole yet. I have never asked for money that I couldn't pay off. That is why we are at our threshold now. We can't do anything else which is the reason I was trying to see if this would free up some space. I didn't figure it would with how outrageous the interest rate is, but I wanted more information on how the simple interest worked compared to traditional credit card interest.

As for the car, we owe $17,000 on it at 3.9% and we are making $356 payments.
Post Thu Dec 06, 2012 5:38 pm
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oldguy
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but I wanted more information on how the simple interest worked compared to traditional credit card interest


Simple interest means that the rate times the number of years is all added. Say if the $4000 was for 3 years at 10%, that would be $400/yr X 3 = $1200. OTOH, cc interest is only on the amount that you owe - maybe $400 the first year, $300 the second years, and so on.

So avoid simple interest - sounds like they were giving you a song and dance. But by Law they are required to give you the APR, that is the number to go by. But you really need to stop going to those quick-cash loan sharks, 26% APR is almost illegal.

Good job on the car loan, that's a keeper, don't prepay any of that 3.9% loan, that is inexpensive. Modern cars now provide over 200,000 miles of troublefree service, so you are set for many years.

When we got married (1969) we had $500 and spent $10 a week for Kraft dinners and tuna. We switched from paycheck-to-paycheck living and started investing in things that PAID interrest, not things that required interest - that's how we became wealthy. (I've never borrowed money at 19% in my life).
Post Thu Dec 06, 2012 7:21 pm
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Publius
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To answer the most direct part of your post, no, getting that loan will not free up anything. Simple interest means that you multiply the amount of the loan by the interest rate and then by the length of the loan. In your case 4000*0.26*4=4180. This is the amount of interest you will pay over 4 years and when you add it to the loan amount, the payment will be $170 monthly. This means you are trading $135 in minimum payments for $170 in minimum payments and getting a terrible deal on the interest rate. It would be going to wrong direction. The only time you want to use a consolidation loan is to lower the average interest rate you are paying so that the money is "cheaper". Why not focus you energy on one of the credit cards for a few months and pay it off? Then you would have one less debt to have to pay on and the progress on the others would be that much faster.
Post Thu Dec 06, 2012 9:21 pm
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