What is the best way to help my dad consolidate his credit card debt at a lower rate?

Question

So my father and I are somewhat in a sticky situation. He has accumulated roughly $30k debts on his credit cards. He makes decent money now but the problem is paying about $650 a month in interest alone. On the other hand, I have a car loan with about 22k left to pay off. I have 11k in my tax free savings that I have just been saving up with no real idea what to do with it. I also have 4.5k on my own credit card.

Now to resolve my card loan I have just got a new credit card and did a 0% transfer for 12 months. I'm splitting up the 4.5k into 12 payments and will take care of it that way. I save up about $2k a month which leaves me with about $200 breathing room after I pay for my car, insurance, and few other bills.

The thing is I do live with my parents still and we rent, we do not own anything. My dad has gotten into such a bad spot due to trying to put me and my sister through college, and it worked so I am grateful and as such I'm trying to help him out.

My plan was to go ask for a bank loan tomorrow for $30k over 5 years. I figured they would charge about 10% interest which is still far less money than he is giving now on the credit cards. With about $60k/year salary I am hoping I will be able to get it despite my car loan. I am going to another bank for it though. My dad did apply for the 0% balance transfer cards, but he got declined.

My plans are to buy a house hopefully in 2 years, with my current rate of saving I think I can get there, but in the mean time my dad really needs to get out of these debts or he won't be able to afford the monthly housing payments.

Having said all this, am I doing the right thing? Is there a better way to get out of this situation, my goal is to get my dad and me debt free and collect for a down payment for a house.

Answer 1

Are you doing the right thing? Yes, paying back some of the expense of college is a great way to show your gratitude. Could your sister also pitch in a little to help pay the debt down?

Will you get approved for a $30,000 unsecured loan? You don't mention your credit rating but that will have an effect obviously. You might consider visiting a credit union with your father and co-signing a loan since it is his debt that you are assuming. You might still want to write a loan for your dad to sign even if he isn't co-signed on a loan. This could protect you in case of his death if there are other assets to divide.

If you are not approved for a loan, you could also simply join your dad in paying down the highest-rate cards first and have a loan agreement for him to pay back that money if/when it is possible.

You've mentioned that you have no collateral. There aren't many options for loans with no collateral. Your dad's bank or a credit union might consider a debt consolidation loan with you as a co-signer. That's why I mentioned going to a credit union. Talking to a loan officer at a local financial institution will make it easier to get approved. If they see that you are taking responsible steps to pay off the debt, that reduces your credit risk. If you do get a debt consolidation loan, they will probably ask your dad to close some credit card accounts.

Answer 2

I agree with you that you need to consolidate this debt using a loan.

It may be hard to find a bank or credit organization that will give you an unsecured personal loan for that much money.

I know of one, called Lending Club (Disclaimer - I'm an investor on this platform. Not trying to advertise, it's just the only place I know of off the top of my head) that facilitates loans like this, but instead of a bank financing the loan, the loan is split up accross hundreds of investors who each contribute a small amount (such as $25). They have rates anywhere between 5-30%, based on your credit profile(s), and I believe they have some loan amounts that go up to the area that you're discussing.

Regarding buying the house - The best thing you can do when trying to buy a house is to save up a 20% downpayment, if at all possible. Below this amount, you may be asked to pay for 'PMI' - Private Mortgage Insurance. This is a charge that doesn't go away for quite a while (until you've paid them 20% of the appraised value of the home), where you pay a premium because you didn't have the 20% downpayment for the house.

I would suggest you try to eliminate your credit card debt as soon as possible, and would recommend the same for your father. Getting your utilization down and reconsolidating the large debts with a loan will help to reduce interest charges and get you a reasonable, fixed payment.

Whether you decide to pay off your own balances using your savings account is up to you; if it were me, personally, I'd do so immediately rather than trying to pay it off over time. But if you lose money to taxes by withdrawing the money from your 'tax free savings account', it may not be a beneficial situation.

Treat debt, especially credit card debt, like an emergency at all times, and you'll find yourself in a better place as a result.

Credit card debt and balances are and should be temporary, and their rates and fees are structured that way. If, for any reason, you expect that a credit card's balance will remain for an extended period of time, you may want to consider whether it would be advantageous for you to consolidate the debt into a loan, instead.