Archive for the ‘Debt’ Category

Is Loan Consolidation a Bandaid?

Tuesday, February 9th, 2010

Once upon a time there was a man that tried juggled knives.  Unfortunately he couldn’t quite manage it without cutting himself and bleeding horribly.   It got so bad that we was at risk of bleeding to death.   Would you advise him to stop playing with knives or just get a bigger bandage?  The man’s root problem wasn’t that he was bleeding- it was that he was playing with knives.  Is your debt really the root problem, or is there some other underlying problem?  Do you have a mortgage you can afford with your income?  Do you habitually overspend?  If you don’t deal with the root problem no bandage will stop the symptoms from reoccurring.   Once you have dealt with the root problem then deal with the debt.

Danger Ahead

I would proceed very cautiously, a quick Google search turned up a lot of horror stories- outright scams, bills being paid late, and fees increasing during repayment.  If you do go with a Loan Consolidation Company you need to be extraordinarily careful who you choose!

Alternatives

I thought of a few possible alternatives:

  • Get a consolidation loan from a credit union.  They generally have pretty good rates and great customer service not to mention it won’t be a scam!
  • Get a consolidation loan from a peer to peer lending site.   You may be able to get a lower rate.
  • Do a balance transfer to a lower rate card- be very careful about transfer conditions as many charge a transfer fee or change rates after a short time.
  • Negotiate the rates with your creditors- they may lower your rates if you just ask… especially if you mention you had been looking at the rates from another company.  It never hurts to ask for a lower rate.

    Guest Post: Benefits of Availing Online Debt Consolidation Services

    Tuesday, February 9th, 2010

    The following is a guest post from Diana Perkins,  be sure to check out my response.Online debt consolidation is gaining prominence owing to the benefits it offers. The fact that online debt consolidation doesn’t require the maintenance of brick and mortar structures has made it an inexpensive way of offering help to debtors. Debt consolidation whether you do it online or by walking into a debt consolidation clinic yields the same result. However, debt consolidation services online gives you the opportunity to explore the debt consolidation market from the comfort of your home or office. If debts have been troubling you lately as they are piling up and getting out of control, don’t let the problem linger. Instead opt for debt consolidation as it will allow you to condense your multiple debts into a single debt account. This makes your debts manageable. And you are also able to keep track of the debt payments. In your search for a suitable online debt consolidation firm, you will come across many. Don’t settle for the first one. A bit of due diligence can help you go a long way and you will certainly come across a genuine debt consolidation firm. In fact the incidence of debt relief scams has escalated to such an extent that the Better Business Bureau has urged consumers to deal with debt relief firms with utmost care. Make use of the online facility as it enables you to compare services offered by online debt consolidation firms. You can also compare their rates. You will get online help round the clock. It is much faster and you need to furnish information about your debts. Make sure you don’t divulge all your personal details as it can lead to identity theft. Online debt consolidation can be done in case you are registering for a debt consolidation program or taking out a consolidation loan. In case you are planning to take out a loan, you have to give details of your bank account into which the loan amount gets credited. In both the cases (debt consolidation program or consolidation loan) you have to make a single payment each month. If you are enrolling for a program, you have to make payments as per a repayment schedule. It helps you to enjoy better interest rate due to which your monthly payments also get lowered. In due course your credit score improves too.

    Which Wins, 401K Match or High Interest CC Debt?

    Friday, October 30th, 2009

    Dave Ramsey advises people to not contribute to retirement accounts while repaying credit card debt.  This advise seems sound because credit cards charge high interest rates and your investments may not make 10 or 20%.  But is this idea still correct when there is a company match, after all an immediate 50% or 100% return is pretty hard to pass up?

    Your Choices

    To simplify a bit I want to look at two choices: You could put $1000 dollars in 401K with a 50% match or you could take the $1000 pay 25% in taxes and put the remaining $750 toward your credit card.  After your credit card is paid off you take the monthly payment and contribute that much to your 401K and getting the employer match and a tax deduction.  Because of the tax break you can afford to contribute 25% more without lowering your income.  After five years which option earns you more?

    And the Winner is…

    It depends on the interest rates, but here is a graph that simplifies a lot of complex math:

    It turns out that the expected interest rate on the credit card has to be a few percent higher than the expected interest rate from the 401K.    I tabulate the numbers below, an example if you expect to get a 6% return on your 401K investment then you should pay off a credit card that is 8.72% or higher.

    Interest 401K Interest Card
    1.00% 3.59%
    2.00% 4.62%
    3.00% 5.64%
    4.00% 6.67%
    5.00% 7.69%
    6.00% 8.72%
    7.00% 9.74%
    8.00% 10.77%
    9.00% 11.80%
    10.00% 12.82%

    What about 100% Match or 0% Match?

    The results are the same- I was actually a bit surprised but the match % cancels out of the calculations.  The above chart does not depend on how much your employer matches- or if they match at all!

    The Math

    For anyone interested, I can send you a spread sheet with the calculations.  It’s a bit of a mess because the solution can’t be solved algebraically.  You make an initial guess and do repeated iterations that get an ever improving result.