Paying off debt with debt

My sister got one of those Kabbage loans for $4000. The monthly payment is $1098! Predatory, sure, but apparently was the only company that would loan that much unsecured, but whatever, that’s not the point.

She has a Discover credit card with a $5000 credit limit, she uses only in emergencies. I told her she should pay off the Kabbage loan with her credit card. I figured short term it would save her almost $800/month. Long term, probably not the best move, but i think if she pays off the card within 3 years it wouldn’t cost her anymore in interest.

Should she take my advice?

Sure. Beats paying $1,098 a month (assuming that’s not just for four months).

People “pay” debt with debt all the time and it can be a smart move. A card offers 15 months interest free transfers and it can make sense to offload your other cards at 15% to the interest free one. Obviously you have to be smart (no opening ten credit cards to bounce debt around) and getting a reduced rate only really helps if you’re going to pay it off in that time but what you’re describing sounds like a smart move.

One consideration: can she easily pay the loan directly with the card or does she have to hit Discover up for a big cash advance to pay it? Cash advances can be killer.

I believe it was 6 months.

But even at 6 months, the potential savings would be $4800

At six months, wouldn’t that only be $2,588 in interest total on the Kabbage loan? Heh, “only”.

I’d also naturally doubt the ability of someone who needed a $4,000 blood rate loan to reliably have $1,098 a month which would be a factor. Not that I would recommend making minimums on the card but paying $40 because it’s all you had and making the payment beats missing a $1,098 payment and getting all sorts of extra penalties and rate hikes. And if she COULD make a grand a month, making it to Discover is no worse than making it to Kabbage.

Why wouldn’t you?

I thought Kabbage only did business loans. I do have a LOC for my business and have used it a couple times when I knew an invoice or contract was being paid soon and I had a crunch. It’s not hard for a business to come up with a $1000/mo to pay off a (max) 6 month loan

All the cards I’ve seen in the last decade that offer interest free transfers also charge an upfront fee to do so. Like 3% of the amount transferred.

It still beats 15%, but it isn’t zero. If you held the money for a year you’d only be paying 3% APR. But if you held the money for just one month then paid it off you’d be paying in effect 36% APR.

Bottom line: as you say there are lots of good ways to refinance debt to a lower interest rate. There are also come-ons offered by even mainstream credit grantors that look like good deals but aren’t. Knowing the difference and complying with the fine print is up to the consumer.

A hole in the OP is not stating how many months. Just checking Kabbage’s site a close example would be a $4,000 loan for 6 months at a ‘fee rate’ of 10%. You pay down 1/6 of the principal, $667, monthly plus a ‘fee’ of $400 the first two months and $40 the last four months, so 24% in ‘fees’, front loaded, therefore >48% APR. So yeah, almost any credit card will beat that at the start. And a card would likely still beat it after you’d made the first big payment. But it’s probably not better to pay it off with a card once both the big payments are water under the bridge.

Seems these loans only make sense to begin with when there’s a do or die need for cash to keep a business from collapsing that’s bigger than the (new or unused) line the owner could get personally on a credit card. IOW if the person had an open $5k line on a credit card, it wasn’t true ‘Kabbage was the only one that would make a loan that big unsecured’.

I don’t get it.
If you have easy access to $5 grand, why take a very painful route to access $4 grand?
Is there something here that I’m not understanding?

Not to speak for OP’s sister, but a lot of people have heard all these terrible things about credit cards, and credit card debt, and assume they must be terrible without doing the math.

“Oh, Susie got in trouble with the credit cards, now she’s losing her car!” “Oh, Bob got in trouble with his cards and had to declare bankruptcy” “Did you hear about Steve? He’s got 100k in credit card debt”.

You heard a lot of stories like these, and you start avoiding the credit card without really asking WHY the people in these horror stories are getting ‘hosed’ by the credit card. So when you do need money, instead of crunching the numbers to see what works best, you go out and get a loan shark instead of touching the much more sensible option of the credit card.

It’s a psychological thing, not a financial thing.

To be very charitable, some people are not naturally good with simple arithmetic or even basic long term planning. There are whole industries in place to make money leveraging that fact.

I want to chime in and point out that the OP contradicts itself - Discover was willing to loan her the same amount plus another thousand unsecured. Why didn’t she just use the discover card to cover the $4k in the first place? Even if the card has a 60% interest rate, she can pay it off in 5 months at the $1000/month (less in the last month) that the Kabbage loan costs. I don’t know whether she’s be better off transferring the money to the discover card now without looking at the actual terms of the loan, but it seems like she would have been massively better off to just use the card in the first place, or to ‘shuffle’ debt onto the card.

I also don’t understand what you said about how the credit card would be worse in the long term - why couldn’t she just pay off the credit card using the same monthly amount as the Kabbage loan, which she’s apparently going to completely clear in six months? This doesn’t sound like it’s really a financial question here, I think you will need to figure out what’s going on with her attitude towards the credit card to really fix the problem.

Yeah, I agree with Pantastic. It kind of sounds like stupidity got her into the mess, and she’s counting on stupidity to get her out. She really needs to assess her situation and figure out how she got into such a fix. Intuitively, taking on debt to solve debt is like a boat taking on water to solve sinking, but I guess there are rare cases where in an emergency a boat needs to take on ballast to adjust trim, so maybe taking on debt isn’t always dumb.

Perhaps the better nautical analogy would be, patch the biggest holes in the hull first.

If you pay the same monthly amount, this is a no-brainer. But with credit cards the danger is the temptation to pay the minimum amount due each month for like 7,000 years.

That would be better than what she’s proposing, sawing a hole in the hull to get a patch for the existing hole in the hull.

I wonder if the OP will be back to explain this a bit more. He’s a regular, but a very sporadic regular; it may be awhile before we see him again.

In this case though, just on the face of it, she’s not taking on more debt. She’s moving debt from a high interest loan to a lower interest loan and thus slowing the leak. Now, if she was defaulting on her Discover card unless she took out a loan at 60% APR to cover it, that would be more like “taking on debt to solve debt”.

That is, of course, just on the face of it. Other circumstances like the terms of the Kabbage loan or why she didn’t use the Discover card in the first place may change things and make it a less attractive option.

When you are dealing with debt issues like the OP discusses there are both financial and psychological factors. Several years ago a friend had the choice between paying off either a fixed loan or a credit card balance. I advised him to pay off the credit card balance as it had a significantly higher interest rate. He did–and a few months later the balance was up as high as it was before he paid it off. While if he had paid off the fixed loan it is doubtful that he would have taken out another fixed loan.