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Author: IslandFoolin One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 308881  
Subject: Shopping for a consolidation loan Date: 11/15/2013 5:03 PM
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Hi all,

I'm settling into the idea of applying for a debt consolidation loan to simplify payments and reduce the amount of interest I'll have paid when the debt is all said and done.

I'm currently snowballing payments as cards are paid off, but, I have become frustrated with my high APRs. I call each of my cards once a month asking for reductions in rates / hardship programs. Only one card has so far acquiesced.

I have 4 cards with interest rates and balances as such:

21.24% $4,682.71
13.24% $7,555.59
19.99% $3,813.66
18.99% $2,193.59

$18,245 (Total debt)
18.365% (Average APR)

Over the past 5 years my credit rating has looked like an inverted bell curve and for the past year has been steadily but slowly climbing and now sits on the fence between Fair and Good.

While I'm not new to shopping for loans, I do have a few questions that I hope some of you will be able to help me with.

1) Which sounds wiser: secure a loan for the entirety of my debt or secure a smaller loan for the portion of the debt that costs me the most (highest balance + APR cards)? Why?

2) I belong to only one credit union (Western Federal) and their offerings of Personal / Debt Consolidation / CC consolidation loans are not very attractive. That leaves me to the many lenders out there. I've used BankRate.com to filter through these, but, any recommendations you may have are welcome.

3) Aside from origination and other fees, terms that require you to close your credit accounts, and penalty fees for missed payments, what are some other things to look out for?

Anything else you care to comment on, I'm all ears.
Many thanks.
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Author: Fuskie Big funky green star, 20000 posts Top Favorite Fools Old School Fool Ticker Guide SC1 Red Winner of the 2010 Rule Breakers Challenge Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 307473 of 308881
Subject: Re: Shopping for a consolidation loan Date: 11/15/2013 5:28 PM
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I am confused, are you unable to pay your current cards down as scheduled, or is it that you just don't want to? What makes you think you are going to find a loan with an interest rate lower than the cards you are already paying? To answer your questions:

1) What sounds wiser is to dig deeper to see if there is any more money to pay down your highest rate cards. Borrowing to repay debt just trades debt for debt and punishes your credit score. And it doesn't do anything to address changing the spending behavior that resulted in all this debt to start with.

2) Not all credit unions are created equal, so if you don't like the loan terms of one, find another one to join. You are more likely to get support from a credit union or local bank as opposed to an impersonal national or internet institution.

3) Any fees have to be less than the "savings" you expect to gain or else what's the point? My thinking is that it won't be worth the hassle.

Fuskie
Who thinks being frustrated is not a good reason to borrow money and encourages you to take all emotion out of the equation...

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Author: IslandFoolin One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 307474 of 308881
Subject: Re: Shopping for a consolidation loan Date: 11/15/2013 5:51 PM
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Thanks for the (always level-headed) reply, Fuskie.

I am able to pay my current cards as scheduled ( I have paid off one and rolled those payments over into the highest balance/rate card). The reason for seeking out the loan is to reduce the amount of money I will be paying when all is said and done. Three of my four cards have interest rates higher than 18.99%. If I were able to secure a loan at 15% (as I was quoted today, inclusive of fees) I would be saving money in the end. While it's not piles of money, $500 saved from CC payments and invested at 10% turns into something after 30 years, does it not?

I agree that perhaps it's not worth the fuss. This is why I'm asking questions.

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Author: mtr Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 307475 of 308881
Subject: Re: Shopping for a consolidation loan Date: 11/15/2013 9:49 PM
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According to Western Federal Credit Union Web site. Personal Loans
FEATURES:

Borrow up to $25,000
No annual or prepayment fees
Low fixed rates and minimum payments
.25% rate discount option1
Loan protection insurance available

Members Might Use a Line Of Credit For:

College Tuition
Medical Expenses
High-interest Debt
Income Tax Payments
Home Repairs and Improvements
Unexpected Expenses

"

What the rate Western Federal Quoted you at and what origniation fees are are involved?

I never heard of loan orignation fees except for mortgages.

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Author: MacNugget Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 307476 of 308881
Subject: Re: Shopping for a consolidation loan Date: 11/16/2013 12:46 AM
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I have a few comments:

18.365% (Average APR)

First, this appears to be simply your four interest rates added together and divided by 4 (the number of revolving accounts). While that's technically correct, it's not a truly accurate picture for comparison.

41% of your debt is at 13.24% (go you! that's awesome) not 25%. So you don't want to just average it out per account. Really you want to weight this calculation by the amount owed at each interest rate. Imagine, as a hypothetical, you owed:

20% $1,000
10% $9,000

With an average interest rate of 15%. But not really. That's an average interest rate per account, not an average interest rate per dollar owed. The true average interest rate would be 11% if weighted by debt.

While your debt usage is less exaggerated than that example, it's definitely enough to skew the numbers that you'll need to determine if a consolidation loan make sense.

So, circling back, let's calculate your dollar-weighted average interest rate and see how you fare. It's a bit convoluted, but basically if you multiply the interest rate by the balance for each of the accounts and then add up those amounts and divide by the total balance you can get a much clearer picture...


.2124 * 4682.71 = 994.61
.1324 * 7555.50 = 1000.36
.1999 * 3813.66 = 762.35
.1899 * 2193.59 = 416.56
=======
3717.88

3717.88 / 18245.55 = 17.40%


Your true average interest rate is 17.40%, which is a much smaller delta to the 15% you're looking at with the consolidation loan.

Secondly, don't fall into the trap of assuming that you're interest rate will be at 17.40% for the duration of your pay down. The consolidation loan will be (I assume) locked at 15% from now until you hit your $0 balance payoff date. But where will the credit cards be? We already know that even with no interest rate reductions that you'll be at an average interest rate of 13.24% as soon as you've paid off the three highest-rate cards. 43% of the money you owe right now is at a lower interest rate than the 15% loan you're looking at.

And do you think it's likely that at some point during the pay down you'll be in a strong position to argue for a rate reduction? Perhaps. My crystal ball is in the shop, so I honestly don't have an opinion on that.

I think you've got a lot of tools you can look forward to using over the course of the debt paydown that you've already started. The thing about snowballs is that they get bigger and add inertia every month you keep rolling them. You're just starting to pick up speed and before you know it, it's going to be unstoppable. Just keep up the good work, that's my advice.

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Author: bmillz Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 307477 of 308881
Subject: Re: Shopping for a consolidation loan Date: 11/16/2013 1:02 AM
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The biggest thing to watch out for with a loan vs line of credit is that the payments are more fixed. It's great that you are paying more money on the credit cards then you need to. But it might be wise to make sure that any loan that you take out has more of a "cushion" in terms of total monthly payments. With your credit cards, if a tight month came up, you could reduce your total payments for the month. With a fixed loan you don't have that same luxury.

If you end up decided that you would like to consolidate but have trouble qualifying with a traditional bank, you could consider somewhere like Prosper. I had consolidated credit card debt with them about 7 years ago. And actually the consolidation actually improved my credit score to a point where I could get an even better rate from somewhere else only 2-3 months later. That obviously isn't something you should plan on happening yourself, but it was a nice side effect for me.

But whatever you decide the most important thing is to not add more debt. Most people who take out consolidation loans tend to increase their credit card again soon after.

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Author: Retrograde Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 307478 of 308881
Subject: Re: Shopping for a consolidation loan Date: 11/16/2013 3:14 AM
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I never heard of loan orignation fees except for mortgages.

I have had loan origination fees several times for loans including student loans and an auto loan.

I recall most credit card balance transfers used to (maybe still do) include origination fees, so it is not surprising that a personal consolidation loan (sorta like a balance transfer) would include origination fees.

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Author: Fuskie Big funky green star, 20000 posts Top Favorite Fools Old School Fool Ticker Guide SC1 Red Winner of the 2010 Rule Breakers Challenge Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 307479 of 308881
Subject: Re: Shopping for a consolidation loan Date: 11/16/2013 12:49 PM
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I knew some people really love math, Mac, but wow.

Fuskie
Who also thinks OP should weigh in the cost to their credit score from taking out a new loan product which will have at least a short term effect, even if countered somewhat by an eventual decrease in the debt to credit ratio...

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 307480 of 308881
Subject: Re: Shopping for a consolidation loan Date: 11/16/2013 2:08 PM
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I have paid off one and rolled those payments over into the highest balance/rate card

If your goal is to pay the least amount in interest, be sure you are paying the extra payment toward the highest rate card, even it's a lower balance than other cards. At this point, you should be throwing as much money as possible at the 21.24% card, and only making minimum payments on the other cards.

If I were able to secure a loan at 15% (as I was quoted today, inclusive of fees) I would be saving money in the end.

Would you be saving money in the end? Have you run the numbers to see how much the fees add and what the lower interest rate would save you, as compared to the interest you already pay? Don't use the APR that's quoted by the lender to make your comparison - you need to actually run what your proposed paydown numbers would be, showing the fees as an addition to your debt, and then compare the total cost of paydown with the loan, compared to your current paydown costs.

As was pointed out, the average interest rate that you are paying is currently 17.4% And every time you make a snowball payment on that 21.24% rate, and minimum payments on the other cards, the average rate you are paying goes down a little.

What is the actual interest rate on the consolidation loan? How much do you have to pay in fees? What are your current minimum payments on each card? What is the total you are paying toward your debt each month? What will the payment terms (amount and number of payments) on the new loan be? How does that compare to the amount you are paying on the credit cards you will be paying off with this loan?

My guess is that it may save you money to get a loan for the 2 or 3 highest interest rate balances, IF (1) you have stopped using your credit cards completely, so you won't charge these back up again, (2) the payment on the loan, plus the minimum payment(s) on the card(s) you have left is less than the total amount you currently pay towards your debt each month, so you still have a snowball to apply and (3) the lender will allow you to make additional principal payments on the fixed rate loan. But an analysis needs to be done to confirm that this will actually save you money, based on your actual paydown plans.

A note on being allowed to make additional principal payments - be sure you read the fine print about this one in the contract before you sign - I have heard of lenders not allowing borrowers to make additional principal payments, but just advancing their payment dates and requiring them to pay the total amount of the payments in the original contract. This practice results in the borrower paying a higher effective rate the more quickly they pay off the loan. If you are looking at 'debt consolidation' or 'finance' companies for a loan, I would be much more concerned about this type of policy, vs. if you are looking at a credit union or a bank.

Also, next time you call and ask for a reduction in your interest rates, don't ask for a rate change due to hardship - since you say you can pay, you probably can't show a hardship, and asking for a hardship reduction is actually a red flag. Instead, ask what you need to do for the lender to reduce the rate on your card. If they say something like - make payments of more than the minimum for at least 6 months - then do that, waiting for the 6 payments to be posted to your account before you call and ask again. I would also suggest not calling EVERY month to ask for a rate reduction - if the lender includes costs of customer service calls in their profitability calculations for your account, each call is going to drive the costs on your account higher, making them less likely to decrease your rate.

AJ

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Author: Jeanwa Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 307481 of 308881
Subject: Re: Shopping for a consolidation loan Date: 11/17/2013 11:46 AM
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Are you still using the cards?

Jean

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 307482 of 308881
Subject: Re: Shopping for a consolidation loan Date: 11/17/2013 2:28 PM
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I have 4 cards with interest rates and balances as such:

21.24% $4,682.71
13.24% $7,555.59
19.99% $3,813.66
18.99% $2,193.59

$18,245 (Total debt)
17.4% (Weighted APR)


Well, the good news is, when you go back to the last post where you posted balances and rates http://boards.fool.com/card-apr-balance-intmonth-amex-99900-...

CARD	APR	BALANCE	       INT/Month

AMEX 9.9900% $ 8,036.59 $ 66.90
Citi 19.990% $ 3,954.91 $ 65.88
Apple 22.990% $ 5,441.49 $104.25
US Air 18.990% $ 2,488.21 $ 39.38
Macy's 15.150% $ 324.98 $ 4.10
Student 2.6250% $11,582.19 $ 25.34

Totals $31,828.37 $305.85


your debt on the cards has decreased by $2,0000, and it appears that the balance on each card has gone down, too, including getting Macy's paid off. :-)

The bad news - the APR you are paying has increased a bit, from 16.63% to 17.40% That's partly due to the payoff of the Macy's card, because it was at a lower rate than your overall rate. However, it also looks like the rate on your lowest rate card (AMEX) increased from 9.99% to 13.24%. Did they give you a reason for the increase?

In looking at the amount of debt you've been able to pay off since then, I would be really concerned that the consolidation loan payment, plus any other payments you have left, would be more than you have been paying toward your debt on a monthly basis.

I would strongly suggest determining what the payment on the consolidation loan would be, and add in any other payments that you would have left to figure out what your minimum monthly payments on your total debt would be. If that total is more than you've been paying toward your debt each month for the last 6 or 8 months, you need to see if you can make at least that total payment amount for several months (3 - 6) before getting the consolidation loan, or you could be setting yourself up for missing some payments.

The good news with this strategy is - if you need to increase your payments to be able to make the amount of the consolidation loan payment, and you can do it, you should pay down your debt a bit more, which would require a smaller consolidation loan.

AJ

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Author: IslandFoolin One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 307483 of 308881
Subject: Re: Shopping for a consolidation loan Date: 11/17/2013 6:09 PM
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Thanks for the reply.

It's been some months now since I've had a rate quote from them, but, if memory serves me they approved me for $10,000 at something like 16% APR.

If I decide to go further with this, I'll get back in touch with Western. Like you've stated, their site advertises the best possible amounts and rates for folks with great credit, who typically aren't the ones in need of such loans.

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Author: IslandFoolin One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 307484 of 308881
Subject: Re: Shopping for a consolidation loan Date: 11/17/2013 6:10 PM
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Apologies for the last reply. Forgot to copy and quote to whom I was replying.

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Author: Jeanwa Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 307485 of 308881
Subject: Re: Shopping for a consolidation loan Date: 11/17/2013 7:37 PM
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Copy and paste helps, but clicking on the subject takes me to the post used for the reply.

Jean

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Author: IslandFoolin One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 307486 of 308881
Subject: Re: Shopping for a consolidation loan Date: 11/17/2013 8:34 PM
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"Are you still using the cards?

Jean "

No, I am no longer using the cards for everyday purchases. I carry the AMEX with me for the sole purpose of car rentals (free car rental insurance), but, I pay off anything added to the card before it accrues interest. No other cards are used.

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Author: IslandFoolin One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 307487 of 308881
Subject: Re: Shopping for a consolidation loan Date: 11/17/2013 8:45 PM
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Mac... above and beyond my friend. Really. Many thanks.

"I have a few comments:

18.365% (Average APR)

First, this appears to be simply your four interest rates added together and divided by 4 (the number of revolving accounts). While that's technically correct, it's not a truly accurate picture for comparison.

41% of your debt is at 13.24% (go you! that's awesome) not 25%. So you don't want to just average it out per account. Really you want to weight this calculation by the amount owed at each interest rate.

So, circling back, let's calculate your dollar-weighted average interest rate and see how you fare. It's a bit convoluted, but basically if you multiply the interest rate by the balance for each of the accounts and then add up those amounts and divide by the total balance you can get a much clearer picture...


.2124 * 4682.71 = 994.61
.1324 * 7555.50 = 1000.36
.1999 * 3813.66 = 762.35
.1899 * 2193.59 = 416.56
=======
3717.88

3717.88 / 18245.55 = 17.40%


Your true average interest rate is 17.40%, which is a much smaller delta to the 15% you're looking at with the consolidation loan."


This is the first time I've heard of calculating interest this way and that unnerves me. Your breakdown has me looking at my debt a bit differently. Thanks.

"Secondly, don't fall into the trap of assuming that you're interest rate will be at 17.40% for the duration of your pay down. The consolidation loan will be (I assume) locked at 15% from now until you hit your $0 balance payoff date. But where will the credit cards be? We already know that even with no interest rate reductions that you'll be at an average interest rate of 13.24% as soon as you've paid off the three highest-rate cards. 43% of the money you owe right now is at a lower interest rate than the 15% loan you're looking at."

Very good point.

"I think you've got a lot of tools you can look forward to using over the course of the debt paydown that you've already started. The thing about snowballs is that they get bigger and add inertia every month you keep rolling them. You're just starting to pick up speed and before you know it, it's going to be unstoppable. Just keep up the good work, that's my advice."

Positivity and optimism are always a welcome end to a post.

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Author: IslandFoolin One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 307488 of 308881
Subject: Re: Shopping for a consolidation loan Date: 11/17/2013 8:49 PM
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But it might be wise to make sure that any loan that you take out has more of a "cushion" in terms of total monthly payments. With your credit cards, if a tight month came up, you could reduce your total payments for the month. With a fixed loan you don't have that same luxury.

Very good point. While I'm confident in my ability to make monthly payments, you never know what lies ahead.

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Author: IslandFoolin One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 307489 of 308881
Subject: Re: Shopping for a consolidation loan Date: 11/17/2013 8:53 PM
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AJ... as with Mac, above and beyond.

Would you be saving money in the end? Have you run the numbers to see how much the fees add and what the lower interest rate would save you, as compared to the interest you already pay? Don't use the APR that's quoted by the lender to make your comparison - you need to actually run what your proposed paydown numbers would be, showing the fees as an addition to your debt, and then compare the total cost of paydown with the loan, compared to your current paydown costs.

As was pointed out, the average interest rate that you are paying is currently 17.4% And every time you make a snowball payment on that 21.24% rate, and minimum payments on the other cards, the average rate you are paying goes down a little.

What is the actual interest rate on the consolidation loan? How much do you have to pay in fees? What are your current minimum payments on each card? What is the total you are paying toward your debt each month? What will the payment terms (amount and number of payments) on the new loan be? How does that compare to the amount you are paying on the credit cards you will be paying off with this loan?


After I've finished replying to these threads, I'll be answering each of the questions you posed for myself. This is exactly the kind of hand-holding advice I was hoping for.

Also, next time you call and ask for a reduction in your interest rates, don't ask for a rate change due to hardship - since you say you can pay, you probably can't show a hardship, and asking for a hardship reduction is actually a red flag. Instead, ask what you need to do for the lender to reduce the rate on your card. If they say something like - make payments of more than the minimum for at least 6 months - then do that, waiting for the 6 payments to be posted to your account before you call and ask again. I would also suggest not calling EVERY month to ask for a rate reduction - if the lender includes costs of customer service calls in their profitability calculations for your account, each call is going to drive the costs on your account higher, making them less likely to decrease your rate.

Great advice for anyone who has learned to call the card companies and ask. Many thanks.

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Author: IslandFoolin One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 307490 of 308881
Subject: Re: Shopping for a consolidation loan Date: 11/17/2013 9:05 PM
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Well, the good news is, when you go back to the last post where you posted balances and rates http://boards.fool.com/card-apr-balance-intmonth-amex-99900-......


You are thorough and that is appreciated. Your harking back to my previous post from a year ago has gotten me wondering about the positive correlation between autumn and my heightening concern for my finances.


However, it also looks like the rate on your lowest rate card (AMEX) increased from 9.99% to 13.24%. Did they give you a reason for the increase?


Good eye... the 9.99% was a special rate during my AMEX hardship program (lower APR for 12 months, plus missed payment forgiveness). It jumped back up to 13.24% after the program expired.


I would strongly suggest determining what the payment on the consolidation loan would be, and add in any other payments that you would have left to figure out what your minimum monthly payments on your total debt would be. If that total is more than you've been paying toward your debt each month for the last 6 or 8 months, you need to see if you can make at least that total payment amount for several months (3 - 6) before getting the consolidation loan, or you could be setting yourself up for missing some payments.

The good news with this strategy is - if you need to increase your payments to be able to make the amount of the consolidation loan payment, and you can do it, you should pay down your debt a bit more, which would require a smaller consolidation loan.



The realization of fixed payments and (potentially, probably) larger penalties for missed payments with the consolidation loan has slowed my shopping. I'll need to work out the figures, but, you and the others have given me much to think about. Now, when weighing the potential savings of a consolidation against the risks to credit score and potential increase in overall APR... the benefits and costs are falling in favor of staying the course with my current plan.

I'm not sure why, of late, I visit these boards less frequently, but, I'm feeling that I need to give back from all that I've just received. Hello new boards.fool.com start page.

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Author: IslandFoolin One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 307491 of 308881
Subject: Re: Shopping for a consolidation loan Date: 11/17/2013 10:09 PM
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One more question if I may...

21.24% $4,682.71
13.24% $7,555.59
19.99% $3,813.66
18.99% $2,193.59

2.63% $9,875.87

When I listed my credit card balances and APR's, I listed only my credit cards. I un-foolishly left out my student loan. I've always treated this line of credit differently due to the low APR; any extra income I should have after all other debts are paid, would be better suited in an investment with a return of at least 2.63% (after fees and capital gains).

So, is that line of thought correct or should I include this debt in my recalculating of my "true" average APR as instructed by Mac and AJ (inclusion of the loan drops my average APR to 12.2% from 17.4%)?

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 307494 of 308881
Subject: Re: Shopping for a consolidation loan Date: 11/19/2013 11:11 PM
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When I listed my credit card balances and APR's, I listed only my credit cards. I un-foolishly left out my student loan. I've always treated this line of credit differently due to the low APR; any extra income I should have after all other debts are paid, would be better suited in an investment with a return of at least 2.63% (after fees and capital gains).

So, is that line of thought correct or should I include this debt in my recalculating of my "true" average APR as instructed by Mac and AJ (inclusion of the loan drops my average APR to 12.2% from 17.4%)?


Either, or both - it's kind of up to you what you want to look at, and which way would provide you with more motivation. To me, it would be valuable to look at the rates on credit cards separate from any other debt. This is probably especially true if you are planning on investing, rather than snowballing your student loan.

Another thing that you appeared to be looking at previously was your monthly interest cost. From a cash flow/expense perspective, that's probably as important as the rates.

AJ

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