Tag Archives: car loan

Consolidation Loans – Don’t Do It

What are the first three letters in consolidation? It’s con – and that’s how you should think of it. The most important factor is that you need to change your thinking from percentage rate to dollars of interest! You get sold (or sell yourself on the idea) that you’ll have a lower payment, pay less interest, and get out of debt faster. Right – wrong – wrong…

If I borrow five dollars from you and you charge me 80% interest for two days, I’m going to owe you the $5 and two cents interest on Friday. Big deal – who cares, right? OK, but if I borrow $5,000 at 80% interest and owe it to you for a year, and not just two days, that interest is $4,000. Now it’s a big deal: $4,000 interest on a $5,000 loan!

What matters is always how much you owe and the length of time you owe the debt. The rate is only the third most important factor. What do banks push in their ads? It’s the rate, and never the term or amount. That’s like the magician who has you looking over there while they trick you over here.

On the surface a consolidation is really easy to sell to you and seems like a win-win: One payment, combining all the debts and at a better interest rate. But since it’s not the rate that matters, you will almost always pay:

-more in total interest

-over a much longer term

-and be in debt a whole lot longer

-and in debt for a whole lot more money, too.

If you owe $3,000 on a credit card at 20%: If you want out of that rate trap and consolidate, it stretches it to five or ten years. That option will cost you a lot more in interest – not in interest rate but in interest dollars! Or just pay $250 a month and get rid of it in a year, at a cost of $600 interest.

Your car loan may have three or four years left. Make the payments and you know the end comes sooner, rather than later. A consolidation won’t get you a much better rate, but will trap you into stretching the loan another five, seven, or ten years. It quickly doubles the interest you’ll pay, not to mention you aren’t going to own the same car for t10 or 15 years!

But those aren’t even the biggest drawbacks and traps. The biggest one is that 90% of the time you will now be putting up your house for collateral. Everything up until the consolidation was either no security, such as credit cards, or was borrowing that only had something specific for collateral, such as a car. Now, in combining it all, you’re changing all that and putting up your home for security. Right now, the worst that could happen is that the credit cards will write off what you owe them and your car may be repossessed. After the consolidation – you’ll lose your home.

And the worst trap: Over 80% of people who consolidate run up their credit cards again within two years! No, you’re not the exception. Stop kidding yourself unless you cut up all the cards that got you to the edge of the cliff in the first place or you’ll be in debt for twice as much as you started with. After that, the next step is bankruptcy.

Any ‘con’ solidation should only be done as a very last resort…and even then, there are better alternatives. What seems like an ‘easy’ way out makes things worse – much worse. Don’t do it – list your debts smallest to largest and attack the smallest one with every dollar you can free up. Then move onto the next smallest. That do it yourself plan will save you thousands of dollars and a lot of years!

Getting Started Establishing Credit

If you’re 18 to 21 or so and want to establish credit, there are a couple of things you need to think through first. Once you do establish some credit, how sure are you that you can pay it off each month without fail? Just hope and optimism aren’t enough, and nothing kills your credit rating more than going past due even just once.

Yes, building up credit can cost you some fees and interest. If you’re smart about it, paying some of these is probably a worthwhile investment in building a solid credit foundation. There are five common ways to get started. All of them are based on the assumption that you’re employed, have sufficient income, and have no previous credit problems:

Joint Visa or MasterCard. If you can get your parents to apply for a joint card with you, you’ll be able to use their good credit rating to get one with a decent limit. If your parents read this, the advice would be to never actually give you the card – period. It’s meant to establish credit and not to give you permission to spend. The card reports to the credit bureau and starts a great track record for you, but it should stay in your parent’s possession and only get used twice a year for $20 or so, just to keep it active.

Secured Visa or MasterCard. Secured simply means a cash deposit in the amount of your credit limit is placed on deposit as collateral. Other than this deposit, the card looks and charges exactly the same as unsecured cards, and also comes with the usual late and over limit fees like all others. The deposit stays in place until the credit card is closed or changed to a regular account. It’s an excellent start and doesn’t need a cosigner. You want to confirm that the fine print states that they’ll switch you to a regular card after 18-24 months of on-time payments.

Department store cards. You’ll generally be approved without previous credit for a very modest limit of around $250 or so. It’s not much, but it’s an excellent start. Who knows? It may get you 10% off the day you apply, just make sure it’s one of the last times you actually use the card! Huge rates and a tiny limit means you’ll want the credit rating and not use the card.

Co-signed loan. This is the most common first loan for younger people. The co-signer, usually a parent, is equally responsible for the repayment as you are. It’s the reason lenders almost always want a family member. If your parents are looking for advice, it would be to never co-sign anything for anyone. That isn’t a double standard – it just depends on who is asking for feedback. Often a smaller loan, or an increased down payment, can eliminate your need for a co-signer.

Car loan. Assuming it’s a reasonably priced used vehicle, a 30 to 50% down payment through a reputable dealer may get you financing without a co-signer. A family member is better protected by giving you a portion of the down payment instead of signing on the entire loan with you. But car loans are still the most common way most young adults establish credit. You just need to assure it requires the world’s smallest payment and that you know the price of your insurance up front.

Just be really clear that you’re wanting to establish credit and NOT establish debt! There’s a big difference and not realizing that will be very very expensive. Be careful out there.