Despite the benefits of debt consolidation loans, relatively few Texans seem to be taking advantage of them. This week a prospective loan applicant approached us interested in consolidating his debts through a single $30,000 loan and we were happy to help. This client had a number of things going for him that most of our applicants lack – he had a fair credit rating, a small amount of accumulated equity built up in his home, and he had a stable job. Clients like this are the type of dreams – it’s almost too easy. When clients like this approach us they expect to do better than they could do on their own, and so we don’t just try to obtain financing for these people, we try to obtain the best possible financing. With multiple avenues open to us we needed only consider each one carefully and pick the very best. This loan demonstrates how to pick the best option when there are multiple seemingly equivalent options available to you.
We approached several banks with this man’s borrowing information and received a huge amount of offers. Citibank, Bank of America, and Wells Fargo in addition to two major credit unions. The interest rates presented were all quite similar, roughly 6.5% APR uniformly. There are far more differences between loans than simply the interest rates so we needed more information to make our final decision. The information we collected has been consolidated, processed, and is presented in the table below:
|Debt Consolidation loan||6.5% APR||6.7% APR||6.1% APR||6% APR||7% APR|
|Length of Term||5 Years||5 Years||5 Years||4 Years||4 Years|
|Amount to be paid||$35,219.07||$35,387.94||$34,882.80||$33,818.44||$34,482.59|
|Total interest paid||$5,219.07||$5,387.94||$4,882.80||$3,818.44||$4,482.59|
|Paid per Installment||$586.98||$589.80||$581.38||$704.55||$718.39|
As you can see, APR clearly isn’t the only factor influencing the amount of interest you have to pay. If it were, the clear choice would be the loan in the fourth column but the situation is made muddier by the length of the term. In fact, the length of the term has a larger effect on the amount of interest paid than does a 0.5% change in the interest rate of the loan. Watch out for this and if you can afford to, always take a loan with a shorter term. It may cost you more on a monthly basis but you end up saving a lot in the long term. Our applicant saved over $1,200 by avoiding a 5 year loan and opting for one with a 4 year term.
The data in this table make it very clear which lender we decided to go with (4th column), but if you don’t lay it out this way it may not be so apparent to you. One lender may promise an interest rate which is far lower than the state average and then turn around and try to set the term for 7 years or more. This is something to avoid – remember, minimizing term length and interest rate while maximizing down payments is the formula for keeping money in your pocket.
For the sake of simplicity I have excluded down payments from this table as they were not required by the lenders for this particular applicant. In those cases one would simply need to subtract the down payment amount from the total loan principle and perform the same calculations.
For those who don’t know, payment is easy to calculate using Excel on your computer. Simply use the payment function (PMT) and enter data in the form [APR/12, number of payments, principle]. The output will be your monthly payment which can be multiplied by your number of payments to determine total amount to be repaid. This number can then be subtracted from the principle to determine total amount of interest paid over the term.
With this simple tool those of you with fair to good credit should have no issue whatsoever in sifting out the good loans from the bad, and as ever happy loan hunting.
Standard Find Texas Loan’s Borrower Information :
Loan Amount : $30,000
Type of Loan : Debt Consolidation Loan
Loan Processing Speed (Time frame when money is needed) : Within one month would be nice. I would like to beat the next credit card payment if possible.
Bank Name and Branch : Wells Fargo Bank in Northwest Houston
Where do you live (City/Town, State) : Houston, TX
Zip : 77024
What is your field of employment? : Financial industry
Employment Position : Accountant
How often are you paid? : Biweekly
What is your credit like (Good, fair, bad)? : It is far, I believe it is a Fico score of around 670.
How did you find us? : Online, of course.
Are you paid in direct deposit or paper check? : Direct deposit
Gross Amount Per Paycheck : $3,000 per check
Do you agree to have this information published online? : Yes sir
Extra information : Some may tell you that debt consolidation loans are only for those who are deeply indebted and are a last resort. In reality, they are simply a good way to save money in the long term. As a person grows and develops with their family they must make sacrifices, and that often involves spending money. Some of that time that means spending money that you don’t actually have at the moment. For me this meant accumulating $20,000 in debt on my credit line in order to make several purchases which my family thought were incredibly important at the time. My wife, for example wanted new kitchen cabinets – $3,000. My daughter crashed her car and was in desperate need of a new one to commute around the sprawling metropolis that is Houston, Texas. This was an additional $10,000 on top of the insurance money from her totalled old car.
The remaining $17,000 of this debt consolidation loan went towards paying for vacations and towards buying food we probably couldn’t afford. Based on what I have learned, this is what it means to be a man. To provide for those around you even when, strictly speaking, you cannot do so. I live beyond my means, and for an accountant that is a very scary thing to do. I can see my bankruptcy around every corner. Fortunately for me, the company I work for needs me quite badly and so my job is very secure. Unfortunately, companies in need tend to not have very much free cash flow with which to provide raises to current employees.
I am in the classic catch-22 of my generation. I can’t leave my job because I need the money, and asking for more money may result in my being fired. I am trapped in this job and the only way I can stay afloat is to take out this debt consolidation loan and to greatly trim back my spending until the loan is repaid in full. That means no more vacations, no more fancy grocery stores, no more new cars for at least 4 years time. Providing for a family is expensive, and I cannot make it seem like I am unable to do that.
Note to Lender : Based on my calculations we should be able to repay this loan exactly two months ahead of schedule without sacrificing financial security in the mean time. By taking some risks we could repay this loan within three years, but I am unlikely to take this road. I am an accountant, we are not exactly known for our unreliability. Repaying your money should pose no issue to me whatsoever, but nonetheless I thank you for agreeing to lend me funds on the most reasonable of terms.