Personal Finance

Which debt consolidation option is better?

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  • Feb 26th, 2010 8:56 pm
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[OP]
Jr. Member
May 3, 2009
125 posts
18 upvotes

Which debt consolidation option is better?

My friend owes around $12,000 to 3 credit cards. He hasn't been diligent about paying them off so has pretty poor credit I imagine. His current mortgage with Royal Bank ends in Sept. 2012 and he owes about $135,000 on it(worth around $230,000).

The bank has offered him two options:
1) Refinance his current mortgage from 5 year open variable (-.5% off prime, ends Sept 2012) to 5 year closed variable at 2.15% (so he loses .4% off prime). If he chooses this option, they will pay out the debt for him.

2) Personal loan of 11.9% to pay off credit cards but they're saying he may not get approved for this since the bulk of his debt is with other lenders (MBNA, BMO).

He already got denied for a HELOC because of his poor repayment history so this is not an option.

I don't have the mathematical skills to help him figure out what's best so I figure I could at least help by posting on here and getting some opinions. Thanks.
8 replies
[OP]
Jr. Member
May 3, 2009
125 posts
18 upvotes
Forgot to mention that starting next month, he intends to put $1500 per month towards his debt. He has the income to do so but has been bad with overspending on stupid stuff.
Deal Addict
Feb 4, 2008
3132 posts
177 upvotes
Need more information for an exact calculation. If you could PM me your email address I will send you a form.

On another note, as long as he has made his minimum payments and not missed any he should be able to get a better rate.
www.mortgagecalculatortoolkit.com

Do your mortgage math correctly!
Sr. Member
Oct 20, 2008
873 posts
1 upvote
GTA
FloraC wrote:
Feb 26th, 2010 6:26 pm
My friend owes around $12,000 to 3 credit cards. He hasn't been diligent about paying them off so has pretty poor credit I imagine. His current mortgage with Royal Bank ends in Sept. 2012 and he owes about $135,000 on it(worth around $230,000).

The bank has offered him two options:
1) Refinance his current mortgage from 5 year open variable (-.5% off prime, ends Sept 2012) to 5 year closed variable at 2.15% (so he loses .4% off prime). If he chooses this option, they will pay out the debt for him.

2) Personal loan of 11.9% to pay off credit cards but they're saying he may not get approved for this since the bulk of his debt is with other lenders (MBNA, BMO).

He already got denied for a HELOC because of his poor repayment history so this is not an option.

I don't have the mathematical skills to help him figure out what's best so I figure I could at least help by posting on here and getting some opinions. Thanks.
consolidating debt to pay the least possible interest & to pay down the principle in the fastest possible time is always the best idea (option 1), then of course your friend should consider cutting up two of the three credit cards - just like cutting down on number of cigarette smokes per day without actually quitting .

The friend as you mentioned has a possible wasteful spending habit that can possibly be attributed to swiping the card as well as including the poor repayment record

options available

a) consolidate to manage the debt - no personal loans is my suggestion, because the friend will go straight back & max the cards again [possibly]

b) the friend saying they will put $1500/mth towards the debt is good thinking - but do you think its doable and sustainable?

c) consolidating by adding the $12k to the mortgage may be what it takes - the thought of having more mortgage & possible loss of the home if they dont pay the mortgage, just may do it.

d) forgoing the .4% interest may not be a big deal over the interest they are paying now

Alternatively, if the friend can control the spending to pay down the exisiting loans/CC at the rate of $1500/mth within this year without using the cards again for un-necessary stuff & without taking on other loans from RBC - then I say great, go for this as option 2

all the best & I hope this helps
Sr. Member
Oct 20, 2008
873 posts
1 upvote
GTA
shawn99 wrote:
Feb 26th, 2010 8:11 pm
Think twice before rolling credit card debt into mortgage refinancing
Move may pay in short term but could carry big long-term costs

http://www.creditcards.com/credit-card- ... e-1266.php
unless of course as the OP stated the friend was going to be able to pay $1500/mth towards clearing the debt, which is great & that should clear the $12k by January 2011

so, cut up two cards & pay down the debt as well as controlling wastefull spending habits - this is primary

next option, roll the CC debt to the real low interest mortgage, then pay the $1500/mth as part of the yearly repayment clause in the mortgage to pay off the $12k

Personal loans at 12% does not solve the problem only makes it more managable.

The delta from the mortgage interest to the loan is what 8%. In simple interest terms thats 12K x 8% / 12 months = $80/mth in interest saved

The principle needs to be rid of ASAP, managable controls on the wasteful & cut up the cards spending

self control is all it takes - set the target and do it
[OP]
Jr. Member
May 3, 2009
125 posts
18 upvotes
A few things to clarify:

- 2/3 credit cards have already been cut up, last one is for absolute emergencies
- $1500 is completely doable, he brings in around $4600/month after taxes and has fixed expenses of $1900/month (seems like the more you make, the more you waste in his case...eating out, clothes, the bar, etc)

Knowing this the best options seem to be in order of best to worst:

- start paying $1500/month and just accept the high interest(19% for 2 cards, 26% for 1) and not bother with additional loans and refinancing the mortgage
- take the loan at 11.95% (not sure about penalties for paying off too fast)
- refinance and roll debt into a new mortgage (most unwise I think since the rates are higher and he's stuck with them for 5 years)

OR I was thinking he could get his brother to sign up for the 0%/15 months MBNA card and use the funds he can get from there to pay off some of the debt(doubt he'll get $12000 but anything is better than nothing).

Let me stress that he is very serious about paying this debt and has no plans to rack up his cards again.

Thanks again!
Sr. Member
Oct 20, 2008
873 posts
1 upvote
GTA
FloraC wrote:
Feb 26th, 2010 8:29 pm
- take the loan at 11.95% (not sure about penalties for paying off too fast)
- refinance and roll debt into a new mortgage (most unwise I think since the rates are higher and he's stuck with them for 5 years)
yes possibly one option A or B, the choice is theirs, its what they are comfortable with
OR I was thinking he could get his brother to sign up for the 0%/15 months MBNA card and use the funds he can get from there to pay off some of the debt(doubt he'll get $12000 but anything is better than nothing).
no, no, no - thats a cop out & shifting the burden onto someone else, which may end up the friend not paying his brother

If the friend is determined to do this, then they should get to it and pay $2000/mth to the CC debt (with or without the 12% loan)

No pain, no gain, after all, who is to blame for the friends situation - only themselves right

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