I am woefully undereducated in matters of finance. What can Dopers tell me about banks giving you a personal line of credit? I’ve looked around at websites that talk about it, but I’m realizing that what I need is to have the concept, and the attendant pros and cons, explained to me as if I’m a 4-year-old.
Background: I got laid off over 2 years ago, and Mr. Horseshoe was laid off about a year and a half ago. I’m working now, he’s not. In the meantime, we racked up a bit of debt on our credit cards - unemployment money was enough to pay rent and bills, but we have this annoying habit of also eating every day. So groceries went on credit cards. Needed gas to go to a job interview? Credit card. Etc. After a while, the unemployment money ran out, which made a bad situation worse.
Anyway, I was on the phone with my bank the other day about a wholly unrelated matter, and the banker mentioned that I’m paying quite a bit in interest now that the balance on my card has gotten so high. (Me: “Yeah. I know.”) So she offered me this personal line of credit thingie, and explained that I could use it to pay down the credit card debt, and that somehow, the interest rate would be lower. It’s that “somehow” part that totally confused me.
I’m a visual person, and if I need to absorb new and unfamiliar materia, I need to read it, not be told it over the phone. But the sites I looked at assume some basic familiarity with financial matters, terminology, etc. and I really do need this explained to me as if I’m an idiot, because in this area, well, I truly am.
I would very much like to pay down this debt faster, and certainly, lower interest payments would be great. Will opening a personal line of credit help me accomplish that? Any alternative suggestions?
A line of credit is a pre-arranged ability to borrow up to a certain amount. Unlike a traditional loan, nut like a credit card, you don’t need to borrow it all at once; you can take out as much as you need and pay it back. Usually they have lower interest rates than credit cards, but are harder to get. If your bank is offering to move your credit-card debt to one, by all means check it out.
The line of credit I had was at the prime interest rate, which is variable but much better than credit cards. It was also secured against my house, which may or may not be desirable depending on how confident you’ll always be able to pay the payments on it.
If the line of credit is secured against your house you’ll likely need to close it before selling or refinancing your house, so that’s another consideration. I refinanced last year and my line of credit was closed, I think without my permission because I don’t remember signing anything about it. But now the terms have changed and my bank wants $75 per year for me to have a line of credit. Me pay you to borrow money? No thanks.
By the way, on the credit cards, balance transfers often work pretty well for keeping the wolves at bay. They generally charge you 4% or so to do the transfer, but it’s 0% interest for a year or so.
We have a line-of-credit that we use to buy shares in my husband’s employee-owned company. It is not secured against our house, and I’d strongly advise against doing that - losing your house for a $10,000 debt sounds ridiculous to me. I should say, that’s what we use our l.o.c. for; it can be used for anything you want to use it for, like consolidating high-interest credit cards. Our loc requires only the interest to be paid each month (which comes out automatically); we can pay any amount over that that we want to pay, or pay the whole thing off at once if we wanted. Our loc is also the prime interest rate plus (I believe it is) two percent, which kicks the stuffing out of our 19% credit cards (the loc is currently at 6%).
We tried doing the balance transfer thing between credit cards, and it was a big pain in the ass with no particular benefits. I wish we’d never gotten Mastercards; the bastards won’t leave us alone now, even though both cards are cancelled and have been for years.
I have one that I use for big purchases. I just went on a vacation and spend a little over a grand on it all on my credit card. So I used my LOC to pay off the card and I’ll keep transferring it back and forth until I get it payed off, since I get free transfers I can avoid interest for the two months that it will take to pay off.
Balance transfers sound good on paper but usually come with risks: a single day late on one payment and POOF goes that lovely 0% (or whatever) intro rate. Plus if purplehorseshoe and spouse have high enough balances, your credit rating may not be good enough to get such an offer anyway.
Of course, it might - there’s a lot I don’t know.
To me “personal line of credit” sounds like an unsecured loan (presumably with drawdown capability as another poster mentioned, but maybe it means just a regular signature loan). In any case it sounds like a signature loan - i.e. not one that is secured by anything.
If, as another poster suggested, they’re talking about you using a home equity line of credit (HELOC), tread carefully. It’s rarely a good idea to turn unsecured debt into secured debt; if you default on the unsecured debt, they can hound you, get judgements against you etc… if you default on the secured debt, you can lose your house.
It’s not true that you have to pay off a HELOC if you refinance - we’ve kept HELOCs open during refis several times. The HELOC bank has to sign a subordination document saying their claim is secondary to the primary mortgage’s claim; this is something they should be fine with doing since they’re already secondary. Obviously you do have to pay it off if you sell the house.
I didn’t know my housing situation would come into play when I asked all this, but FWIW, we currently rent. No mortgage, no house to secure a loan against. But that’s good to know for the future, as we do plan to someday own our own little fixer-upper…
Am I understanding this correctly: a LOC is basically like a loan that charges some certain interest fee, and if that interest is lower than what my credit card is charging, then I should take out the lower-interest loan to help pay off the higher-interest card? Is that right? Or am I oversimplifying things?
Ah - then ignore everything anyone said about the home equity, as that doesn’t apply.
Yes, the LOC is a loan. Depending on how it’s set up, it might be something you can draw down, repay, draw down again on an ongoing basis (like a credit card only you’re getting cash rather than food etc.) - or it might be a one time disbursement to you (or to your credit card company) then you have a fixed payment for a fixed period of time.
If the former, you might have a floating interest rate that could increase as the prime rate changes.
Basically, you need to ask the banker what sort of options you’d be looking at regarding terms, rate, payback period, etc.
Are you eligible to join a credit union? They tend to have great rates, more lenient policies, and really look after their own so to speak. If you don’t have a direct link then maybe you have a family member that does. I joined through my mother in law. She works in the same building that has a credit union in it (I guess her employer is affiliated with the CU).
I am in a very similar situation now where my husband is laid off and we ran up quite a bit of credit card debt. The rates on the cards range from 15.9% to in the 20s :eek:. I called up my credit union and they got me an unsecured loan for the total amount of my cards with only a 10.5% interest rate. Not bad compared to what I had researched. I did all this over the phone in about 20 minutes.
I am a bit leery of having an open-ended loan as it’s just too tempting for me to run up more debt later. It’s kind of like a credit card in that sense. On the other hand it’s nice to have if you really need it.
People always mention this the moment the topic of BTs and 0% interest deals comes up and it boggles me because I’ve taken advantage of plenty of these offers, juggled balances, and have never paid a dime of interest in my life (in fact, I’ve made money by earning interest on the loans I took at 0%). I mean, how careless are people that they just - oops! - forget to pay their bills one month? If you have even the most rudimentary system and are responsible it should never be an issue.
Something to watch out for is unlike you credit card limit which usually goes up and up when I obtained a LOC last year the was an interesting line in the fine print that it could be withdrawn at anytime. It didn’t seem a big deal at the time till I needed money and the bank had closed my LOC because I hadn’t made use of it for three months. This was a real financial disaster I’d run down my savings in the the months after to gaining the LOC and had a real hard time convincing the bank I was still credit worthy
A credit card is one type of personal line of credit, the most common one. It lets you borrow money and pay it back again and again so long as you don’t reach the limit: so do other personal lines of credit, but you generally need to go to the bank to manage these. The difference with a normal loan is that, so long as you don’t reach the limit, you request the money you need rather than ask for a loan (no new credit check, it’s money you’ve already been authorized to borrow; you already have the loan but choose to use it or not).
As has been mentioned, other types of lines will have different conditions; for example, and much in the way as a mortgage offers better rates than a personal loan (because it’s secured by the house), a credit line that’s secured in some way will give better rates than a credit card.
