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I have some credit card debt across 3 accounts. Currently they're all at 0 APR, but the promotional rates are set to end soon, and I don't want to open any more accounts. In this situation, I'm aware of only one option: debt consolidation. And I'm afraid my understanding of debt consolidation might be too simplistic:

  1. Secure a personal loan at lower APR than debt.
  2. Use said loan to pay off debt immediately.

Is that really all there is to it? I'm proficient with numbers, but I'm afraid there might be things "in the business" I'm not aware of—things perhaps only a professional would know.

Currently, I get mail from entities like "Lending Club," offering attractive rates that make it seem like a no-brainer to jump on board. Which is what makes me skeptical—why on Earth would anyone pay credit card rates when rates for personal loans seem drastically lower across the board? I mean, there must be people out there who are paying those ridiculous rates, right?—otherwise credit card rates couldn't be so high since they'd have to compete with personal loan rates. (These aren't my real questions—just explaining my reason for skepticism.)

Here are some example questions I have based on one of my mail loan offers:

  • "Low fixed monthly payments with flexible terms." Are certain loans not "flexible" in some way that I should watch out for? What does "flexible" mean here—compared to what?
  • "No prepayment penalties or hidden fees." That just means the earlier I pay the loan off, the more money I save in interest, right?(—unlike, say, most auto loans, where prepayment doesn't help you save.) But what other penalties might exist? What are some example hidden fees?

And here some questions I have in general:

  • I've never heard of Lending Club—I see it listed on Bankrate, and mentioned in this thread, but is there some other site through which I can check the reputation of these entities?

  • Are there kinds of loans other than a "Personal Loan?" (I don't know if that's an umbrella term for non-business loans, or a very specific thing.) Are there other options in general I should look into?

I'm afraid I appear to be asking too many questions, so let me summarize—in my mind, what I'm seeking is coherent: I'd like to know what I might be missing by accepting one of these loan offers and paying off my higher-interest debts on my own, without the aid of a professional, given that I do read the fine-print, but I lack the experience to compare various term- and fee-structures.

("Go ahead. There aren't that many hidden 'gotcha's," is a valid answer, if that's indeed the case.)

Thank you in advance to those with experience able to provide any advice.

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  • Could you tag with your country? (it might matter.) My first thought is that you probably don't need debt consolidation. Is there is a circumstance not presented here that compels you? So far, you have typical credit card debt, which should be paid off. What is your goal? Protect credit score? Pay the least in interest, Have zero debt? Another?
    – MrChrister
    Nov 2, 2013 at 17:06
  • @MrChrister - Done; sorry. I racked up sudden and unexpected debt due to unfortunate family events coinciding with a move across the country, which already had me somewhat tied up. I wasn't prepared to pay such debt down, immediately. It'll take me 4 to 8 months to pay down that debt (the large range of uncertainty's due to it depending on whether/when other family members might secure a source of income). My goal is to minimize interest while I work back toward zero debt over the next several months; but of course, I wish to protect my credit score, too. (How does a loan affect credit score?)
    – Andrew Cheong
    Nov 2, 2013 at 17:55
  • @acheong87 - Am I right in how I read this? You will be able to pay the cards off in full in 4-8 months? If so, MrC's answer below is it. No need to do anything else, just pay more toward the card that will go non-zero soonest.
    – JTP - Apologise to Monica ♦
    Nov 3, 2013 at 18:33
  • @JoeTaxpayer - Sorry, I should have clarified my repayment plan; hard to tell what's TMI and what's relevant sometimes. Much of my repayment depends on lump sum payment in March---see comment on MrChrister's post.
    – Andrew Cheong
    Nov 3, 2013 at 18:39
  • Do the 0% APR introductory rates you have on your card have a "balloon" interest charge at the expiration of the introductory term? Some intro rates simply expire & begin charging interest, while others will charge you ALL the interest retroactively if you have not paid in full at the expiration of the introductory period.
    – Jacob
    Feb 24, 2014 at 14:38

2 Answers 2

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I don't think any kind of consolidation loan is a good idea in this case. Your time frame is just so short.

I sympathize with your feeling about the debt. I myself have had period of carrying a large credit card debt because of a surprise expense. It wasn't fun, but it really isn't the end of the world. 4 to 6 months isn't worth panicking about. You will pay some interest charges, but it will be gone in a very short time period.

If you visit a "loan consolidator" outfit that specializes and advertises that, you run the risk of hurting your credit in the long term depending on their tactics. If you qualify for a bank loan, there is a chance the rate will be higher than you expect. And as you said, you don't want to open another card with a balance transfer (although that is a good idea; open pay it off and cut up the card and never use it again.)

You will be better served with an actual budget and a plan to pay off your cards:

Paying off Credit Card Debt

Lastly, because you worry and fret about money, that means you will are careful. Just apply your logical mind to the situation and realize your credit standing was a good cushion during a time of trouble. Pay of the debt, get that emergency fund rebuilt and go forward knowing you have done a good job. Remain vigilant and be confident.

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  • Thanks for the insight. This might change my strategy. I'm still curious, though, are "consolidation loans" and "personal loans" different? Do either (or both) potentially hurt your credit? One problem is that I won't be able to pay off most of the debt until I receive my bonus in March (it's one of those "guaranteed" 10%-of-salary arrangements), so until then, I'd be paying almost $200 a month in interest (the cards range from 18 to 25 APR). Given that circumstance, would you say it's worth getting a loan to save ~$700, or still not worth it?
    – Andrew Cheong
    Nov 3, 2013 at 18:35
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    @acheong87 Personal loan - a bank loaning you money. Consolidation loan - a company that promises to help you solve your debt issues.
    – MrChrister
    Nov 3, 2013 at 19:55
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You did ask quite a few different things here. The Prospers and Lending Clubs have a range of interest, so that those with good credit can get a decent rate when compared to a credit card. For those stuck paying off debt at credit card rates, they offer a good way to use the card responsibly, cycling just to get rewards, but paying in full, while paying down the debt in a defined timeframe. They are reputable, and really, this risk is for the lenders, those who are investing in these loans hoping to get more than what the banks are paying.

In your case, you can see what the rate is that you'd qualify for and check what the consequence is for an early payoff. Borrowing at 8-9% vs 25% is worth it even for a short time. But not if it means a fixed 36 month term. Not sure how those lenders handle early payoff.

Do you have a 401(k)? Seems that might be a good compromise, a low rate, and no problem paying most of the loan when the bonus comes in.

And no, you don't need a professional for this situation, you're not even close.

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