by Tricia
Remember how I mentioned a little while ago that I landed a paid writing gig? Well, I used Prosper.com to help me consolidate our debt and not too long ago I was asked if I would like to contribute to their blog. Extra money is nice, and I like Prosper, so I said yes.
My first article was published today and it illustrates what can happen if you choose to pay a fixed payment to your credit cards versus only paying the minimum. It was sobering after looking at the graphs I made because for many years we used to only pay the minimum payment on our cards. I think if I saw the total amount we have paid in finance charges for the past 12 years I would go into shock. I’m sure it’s a lot.
Anyways, there are quite a few great bloggers writing over there, so you might want to check out the Prosper blog. While people-to-people lending is discussed quite a bit, there are also articles about general personal finance.
Thanks for the lead, and congrats on the excellent post! I’ve been a fan of Prosper since it launced because I like anything that can take a small bite out of the big banks.
Congrats on the blogging job through Prosper.
I haven’t read anything from a Prosper borrower (only lenders), so it’s a new side to the story.
Sadly it isn’t rocket science that if you pay more than the minimum payment, the debt is paid off faster. Great post though to point this out over at Prosper. I like to use the calculators over at Bankrate.com to see various payoff strategies and time periods. While fixed payments seem like a good idea, if you had a fixed amount going to pay off credit cards, it would make more sense to pile on one card and pay minimum on the rest, then move up to the next one. There’s no magical quick fix though, you always have to make bigger payments to get out of debt faster.
I really love your blog, and I feel great sympathy for your situations since my family and I are in much the same shape. Still, we have decided to take the plunge and cash out some savings to pay off our credit card debts–all $40,000 of it. Our financial adviser said it was just plain dumb to live with that kind of debt and pay the interest. We’ll be paying strict attention to our expenses, and hope not to get into the same mess ever again. I’ll continue to read your blog. You always have great personal finance info or links to it. Good luck to you.
Love the blog…
Thought I’d throw in my $.04 worth (have to adjust for inflation) based on what I’ve learned paying off debts….
We didn’t have any real “bad” debt but just over two years ago, after my wife and I got married, we decided to pay off debts because we didn’t like what we had. At the time, we owed approximately:
$184,500 on a primary mortgage (6% fixed 30yr)
$25,000 on a second mortgage (7.5% fixed 15yr)
$8,500 on a student loan (4.75% fixed 15yr)
$12,500 on a student loan (3.875% 10yr)
$3,000 on a student loan (0%)
$500 on a car loan (6%)
$1600 on a furniture loan (0%)
——————-
$235,600 total
We wanted to get rid of everything but the primary mortgage, so naturally we started with the second mortgage. Here’s where lesson #1 comes in.
LESSON #1) NEVER, EVER take the interest rate you live with as a fixed rate that you can’t do anything about. Always feel free to call and ask for a lower rate. If there’s a bank that can give you a better rate, ask the one you’re with to match. If they value you as a customer, they’ll want to keep you. If you have a good record with them, they may bend over backwards. And don’t accept no for an answer… keep trying with supervisors, etc.
You see, we called the bank and asked about lowering the rate. Other banks were asking us to switch to them, and we let them pull credit reports. That scared our bank for the second mortgage. They lowered our rate to 6.75% (a good rate for the time) with no fees, no paperwork, nothing.
We then paid on that loan in advance. We started with a set extra monthly amount. Then as our safety net was built, we paid even more. (Lesson #0: If your interest rates are reasonable, be certain to build a safety net and save for things such as replacing cars). We set a monthly target for savings, and anything over that went towards paying the loan.
LESSON #2) Debt snowballs can be awesome.
When we started, 60% of each required payment was interest. Changing the interest rate and paying in advance changed this quickly. After two years, the loan was gone. At the same time, we managed to dump the furniture loan, get the 0% student loan forgiven and get rid of the car loan.
LESSON #3) When times are good, don’t let off the gas.
I’ll admit… we’ve been blessed to let us do this AND save. But with every bit of extra cash that comes in we’ve focused on two things: More charity and faster debt repayment. Once the second mortgage was paid off, we COULD have used that cash for spending cash, a nice vacation, etc. Instead, every cent of that required payment went towards the next loan. Maximize the debt snowball as much as you can. We then attacked the 4.75% student loan. It is already gone.
That left us with just two loans after barely more than 2 years:
$179,000 on the primary mortgage (6% fixed)
$11,500 on the student loan (3.875% fixed)
LESSON #3) When the banks see you’re paying on time, or even ahead of schedule and they see that you’re looking for lower rates, they may reconsider a prior decision
When interest rates dropped before, the banks refused to offer us a good deal for refinancing to lower rates. They all wanted to roll the second into the primary and charge PMI, effectively taking the long term costs higher.
Well, interest rates dropped again, and this time our balance sheets and credit reports looked even better.
I called the bank and asked about lowering the interest rate (not extending terms). I got rejected. I called again. I got rejected. I got another bank to give me a formal offer, then I called again. Success! Without fees of any sort (nothing rolled into the mortgage), that 6% was reduced to 5.5%. Doesn’t sound like much? Well, that was equal to the 5.2% APRs that other banks were offering that had all sorts of refinance fees attached. This way I do not pay for an assessment, title, paperwork, nothing…. not even points.
I told the bank to keep the payments exactly where they were. In other words, $90 of what I had been paying per month that was interest just became principal.
We’re still pushing the last student loan, and now have lower interest charges on the house.
What does this mean?
Just like the minimum credit card payments, just accepting the loans we had would have been expensive. In two years, we wiped $45,100 in debt off the books.
Better yet, we have guaranteed ourselves a TON of savings. We have already guaranteed ourselves $13,500 in savings on interest on the loans we’ve been aggresively attacking. By the time we’re done in just a few more months, we should have avoided $16,000 in interest charges on those loans.
And because we didn’t take no for an answer and worked hard on those loans, we now have guaranteed ourselves over $34,000 in interest savings on our primary mortgage, and have cut at least 3 years off our mortgage. The bank admitted that without having paid off the second mortgage, they never would have given us the lower rate.
Net, we’re looking at at least $50,000 in interest savings alone because of just barely over 2 years of hard work. And these weren’t even high interest rate loans or abnormally large loans.
This really doesn’t fit with other posts, but if just hit me for the first time… Prosper is just like banks of 150 years ago. Someone had some money and would lend it to who they saw fit. There was no federal backstop, no regulators… just a guy with money in a safe.