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If I have a monthly payment of $804.54 and an APR of 29.8%, does that mean that, each month, 29.8% of my $804.54 goes to paying the creditor?

My situation...

I have 3 credit cards and am thinking about consolidating the debt through Lending Club in order to easily manage the payments. The cards total ~23,000 in debt. They have three different APRs currently (14.99 / 14.24 / 18.99) - ~16% average.

In order to consolidate through Lending Club, they are offering me an APR of 29.8 with a 36 month, monthly payment of 804.54. This is obviously a worse deal, but I am confident that consolidating is going to help me attack this problem, as paying them off individually so far has not.

My question is the one above -- does that mean that 30% of my monthly payment goes to interest?

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    I, as with many others, have been where you are. If you know that you can afford $804.54/mo for 36 mos, you'd be much better off setting up auto-payments totaling that amount to the 3 cards. And, most importantly, STOP USING THOSE CARDS. That can be the hardest part. The strategy I found most beneficial (from a psychological perspective) was choosing the card with the lowest balance and paying that one off first. So the bulk of the $804.54 goes to Card A, with minimum payments made on B and C. Pay off A, then do the same with B, etc. Getting 1 card paid off provided a real "win" feeling.
    – BobbyScon
    Commented Feb 15, 2016 at 20:53
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    Killing the 19% card and never using it again would be the best win, in my opinion. The Dave Ramsey low balance first payoff scheme is a symptom of the financial innumeracy I encounter every day. "I'm glad I paid off my 9% card with low balance but still owe a ****load at 18%" ---said no one ever.
    – JTP - Apologise to Monica ♦
    Commented Feb 15, 2016 at 21:39
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    @JoeTaxpayer The OP is considering doubling his interest rate to get rid of his credit card debt. Do you think he is concerned about optimizing the math? No, he needs some psychological wins. He would be well served to pay off the first one as quickly as possible, giving him a jump start on his debt elimination. IMHO.
    – Ben Miller
    Commented Feb 16, 2016 at 20:48
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    "I am confident that consolidating is going to help me attack this problem" - why? What leads you to this conclusion?
    – Joe Strazzere
    Commented Feb 16, 2016 at 21:00
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    @BenMiller I don't think that. I don't think he knows what math is, if I can be blunt.
    – JTP - Apologise to Monica ♦
    Commented Feb 16, 2016 at 21:01

5 Answers 5

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does that mean that 30% of my monthly payment goes to interest?

No, it's much worse then that. The APR is the annual percentage rate. An APR of 30% on $23,000 in debt that means you'll be charged $6,900 in interest for the year. You'll actually owe slightly less since you are reducing your principal slightly over the course of the year. If your monthly payment is $800, $575 of that will be going to interest. That means that over 70% of your monthly payment is going just to interest. This deal makes no sense at all! You'd be better off simply transferring all of your balances on to the credit card with the highest interest rate. You'd be paying almost $200 a month for the 'convenience' of writing one check rather than three.

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  • On Prosper, I just got offered a 23K loan with an interest rate of 12.8% and an APR of ~16%. This is basically the average of all 3 of may cards now. Does that change anyone's opinions? Seriously...
    – InDebt
    Commented Feb 15, 2016 at 21:19
  • Maybe. You've gone from making your situation worse to re-arranging the deck chairs on the Titanic. Taking a loan at an equivalent interest rate to pay off your credit cards only makes sense if you are committed to cutting up the credit cards when you get the loan. Otherwise a year from now you'll have the loan AND new credit card debt. Also, watch out for fees associated with the loan. Lenders may charge processing and origination fees which are separate from interest. Good luck!
    – Charles E. Grant
    Commented Feb 15, 2016 at 21:30
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There's a cliche, "out of the frying pan and into the fire". I've never had the occasion to use it till now. I understand some people find they have a dozen cards and struggle to keep organized. An extra percent or two seems worth the feeling of just one payment to make. In your case, 3 checks (or online payments) per month shouldn't push you to a bad decision. Twice the interest? No thanks. Just make the minimum payments on the two lower rate cards, and pay all you can to the highest rate. Do all you can to cut expenses. The only way out of this is to change your habits avoiding what got you here in the first place.

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  • On Prosper, I just got offered a 23K loan with an interest rate of 12.8% and an APR of ~16%. This is basically the average of all 3 of may cards now. Does that change anyone's opinions? Seriously...
    – InDebt
    Commented Feb 15, 2016 at 21:19
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    @InDebt - probably, although remember that you're using an unweighted average so we're assuming you have 7666 on each card. If one card has significantly more, the true "average" isnt' 16% (the sum you need to do is basically the same, but multiply the % by the balance of each card, then divide at the end by 23,000). If more than a third of your balance is on the 19% card, it's probably a good deal... otherwise I'd only go for it if you can't afford the minimum payments on 3 cards but can afford the single payment. Otherwise, minimums on the low rates and hammer the 19% with every cent you can
    – Jon Story
    Commented Feb 16, 2016 at 0:20
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No, it means that each year (Annual Payment Rate) you are accruing interest at 29.8%.

If your principal is $10,000, that means you are gaining $3,000 of debt per year in addition to this, excluding payments you make/interest on interest.

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Your question indicates you really don't have a good grasp on personal finance. you might want to read a book or two. I'd recommend attending Financial Peace University, but my buddy Joe Taxpayer would throw an egg at me for that. Please take some sort of class.

In the mean time, here is your plan:

  • Cut the cards. You've proven that you cannot use them responsibly.
    • Only spend on basic necessities. If your undies get a hole in them, use a needle and thread. No clothes, movies, video games, coffee, etc. When I say no coffee, I mean I would not buy foldgers at the store and make it yourself.
    • Get 4 extra jobs, work like a dog. One of those jobs would be selling anything you don't need.
    • Here is your goal: Shoot to clean this up in 10 months. Say you sell 2K worth of stuff, you can already afford 800/month, say if you cut your lifestyle you can find another 500/month. You then only have to earn 800 per month to meet that goal. You can do that waiting tables on the weekends.

Pay this off do not borrow more.

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  • Should I take 23K out of my 401k to pay this off? There's a balance of around $110K in there now. I know early withdrawals and penalties can be a bitch...
    – InDebt
    Commented Feb 17, 2016 at 23:40
  • NO! It is the same as consolidation, only worse. In that case you are "borrowing money" at 25-40% interest rate in the form of taxes. Read my post again: Cut up the credit cards, work more, spend a lot less, make massive payments to your credit cards. This is not a math problem. You need to change your behavior.
    – Pete B.
    Commented Feb 19, 2016 at 11:01
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No. It means each month the total amount you owe goes up by a factor of (1+0.298/12). So if you owed $23K at the beginning of the month, at the end you owe a total of 23K*1.0248=$23,571. Then subtract the $804 you are paying. If you want to think of it in terms of interest and principal, you are paying $571 a month in interest and 233 toward principle, I guess.

Paying off debt with a lower interest rate using debt with a higher interest rate is throwing a lot of money away and impoverishing yourself needlessly. Psychology can't get around that. If you want a psychological aid, decide how much you are going to pay toward these debts and have it automatically deducted from your paycheck so you never see it.

Make the minimum payment on every debt you have except the one with the highest interest rate. Pay the very most you can toward that. Then when it is paid off, move to the next highest. Do all your spending out of the lowest rate card, or avoid using these credit cards until your financial discipline and resources allow you to pay all credit cards off completely at the end of each month.

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