As part of our Consumers ConnectU financial education series, Tim Kosak, our Consumer Lending Manager, is hosting monthly “Ask Tim Anything” chats on our Facebook page. In our most recent chat, he answered several member questions about debt and loans.
Have questions yourself? Stop in any of our offices or give us a call at 800.991.2221 for a personalized answer. And keep an eye on our Facebook page for our next Consumers ConnectU Facebook chat with Tim!
Q: Is getting a personal loan a good option for consolidating your credit card debt?
A: Yes, a personal loan can be a great way to consolidate. This is especially true if you can lower your interest rate.
Another popular method for paying down credit card debt without consolidation is the “snowball effect.” With this method you pay off the lowest balance loan first and then apply that payment to the next lowest balance and so on until you have paid off all debt. This method helps you see your progress along the way, which helps boost your motivation.
Other loans, such as home equity loans, can be an option as well. We recommend talking with a representative who can help you look at the numbers and evaluate the best options for you personally.
Q. I’ve heard I should check how much equity I have in my vehicle. How do I do this and why is it important?
A. Doing a check up on your vehicle’s equity is a good idea because you don’t want to get stuck with a car that’s worth less than the amount you owe on your loan when you go to sell it or it stops working. For instance, if you drive twice what others do for work, you will want a shorter loan term to prevent your car from losing value.
Q. When I’m deciding on a loan, how should I choose between taking a lower rate or a longer term that will keep my monthly payments low?
A. The most important thing is to match the purpose of the loan with the term. I would argue that this is more important than rate. To oversimplify this, you wouldn’t want to take out a vacation loan that you wouldn’t pay off before the next time you want to take a vacation. Likewise, you wouldn’t want to take out a lengthy loan on an older car with lots of miles because the car isn’t going to last that long.
You’re right that generally speaking a longer term means a higher rate. This is worth it when it makes the loan fit within your budget, as long as it matches the purpose of the loan.
Q: What are the warning signs that I have too much debt?
A: Warning signs include:
Using your credit card to pay for daily groceries because you don’t have the cash
Using payday lenders
Total debt growth outgrowing your income growth
If you feel uncomfortable with your debt, know that we can help. Come see us or contact our partner Accel to help you set up a customized budget plan. Accel’s services are free to all Consumers members.
Q: What is a payment ratio and what does it mean?
A: It’s very common for lenders to check your payment ratio when you apply for a home loan or car loan. It calculates your monthly new loan payment compared to your monthly income. While it’s often recommended you stay under 15% for car loans, it’s not a hard and fast rule. Knowing these guidelines can help you decide what you are comfortable with on your next loan.
Thank you to those who shared their questions with us! We are a successful credit union because we have so many successful members. Much of our financial knowledge comes directly from our members. Our goal is to share it with all of you! Please continue to bring us your questions and your success stories. Together we will continue to learn and grow.