My sister in law had to do some major household repairs, so she put almost 9K on her CC. (She has excellent credit). She can’t pay off the whole amount owed like she usually does and says she can pay it off in 3 months by paying $3K a month.
I’ve offered to loan her the money so she doesn’t have to pay interest on the unpaid balance. How much interest is she going to pay if she does pay off the CC balance in 3 months? I imagine the interest rate is between 20% and 25%, but I’m just guessing.
Plug in the numbers to a calculator like this one…$9000 at 20% APR paying $3000/month results in total interest of around $311.
~$300 is between 3.5 and 4% of the loan taken. You could help her but if she can afford to pay it off in 3 months then she can likely afford the interest.
It’s ok to pay interest, you know. We all do it sometimes.
(Waits for barrage of posters to come in and tell me how they have never ever paid interest before and those who have are FOOLS!)
Thank you!
Interesting…
You’re correct, and this made me chuckle. I’m one of those FOOLS!
Since the OP is looking for financial advice, let’s move this to IMHO.
Colibri
General Questions Moderator
It looks more like a request for help with a calculation.
If she has excellent credit as you say, she can probably call her credit card issuer and ask for a lower rate. That will make it a little less painful to pay off.
There’s nothing wrong with paying interest, as ZipperJJ says. Credit is a tool and like everything else it can be used for good or for epic stupid. Sounds like your SIL is doing things in a reasonable way. But it never hurts to find out if you can pay less.
If she has reasonable equity in the house then a home equity loan at a very low rate might be an option to pay off the cards, as well.
$9,000 is a lot of money. If you want to help her, GIVE her an amount that you can part with, no strings attached, and then stay out of it. I don’t know how she got herself into that level of debt, but if she can’t pay her CC back at the ungodly interest rate that they charge, then it’s going to be quite a long time before she pays you back. IF she does pay you back.
If she has other resources, such as credit card offers for cash advances at very nice rates, she should take them up on it. Every other week, I get checks mailed to me inviting me to take out a cash advance for 12 or 18 months for a very attractive rate (no interest or 1%). Or if she has equity in her home, she can take out a home equity loan. Rates are in the 3% range right now.
As a rule, don’t lend money to friends or relatives. I promise you that it will change your relationship for the worse.
She got in to that amount of debt by doing household upgrades which she seemingly planned. She will pay it back in 3 months.
Did you read the OP or did you just come here to tell about other people’s money habits?
Its especially alright to pay the interest in her case because the appliance she bought as part of the project had a $2000 rebate that was expiring soon. So instead of getting the 2K back, she’ll be getting around $1700. And as soon as the rebate arrives, she’ll apply it to the CC debt.
Apparently neither of us read the OP closely because it wasn’t for planned household upgrades but rather “major household repairs,” which makes it more likely that it was UNplanned.
My advice remains the same. If she has equity in her home, she should take out a home equity loan and save on interest. Or she should put the balance on a lower interest cash advance, if one is offered to her. I don’t really see an urgent need for the OPer to bail her out if she is truly able to pay it off in 3 months.
But let’s be honest here. If she has $3k extra per month, she should have been socking at least a third of that away each month for a rainy day.
Did you read the OP? It says she “had to do some major household repairs”, not “planned upgrades”.
$9,000 - 24% (let’s say) works out to 2% per month.
First month - $9,000x2% = $180 then she pays $3000
Second month - $6,000x2% = $120 then another $3,000 down.
Third month - $3,000x2% = $60 and she pays off the balance.
Total interest $360
The real stupidity is when someone runs their credit card to the max, then can barely afford to pay the minimum and current purchases. SO they go for years with a full balance, barely keeping their nose above water so to speak.
Imagine, $9,000 is $180/month interest. For a full year, that hurts - $2160. That’s a lot of money just to rent $9000.
OTOH, a one-time extra $360 to cover $9,000 of home renos is not bad if the renovations were worthwhile… If she can pay out an extra $3000 a month, she’s doing good. She should be saving some of that for a rainy day. Someone with that kind of spare change should be working on a Suzy Ormand recommended 6 to 9 month’s living expenses nest egg, and/or saving big time for retirement. It’s scary that she can afford the payback but hadn’t saved ahead of time… or did she just not want to disturb her investments?
I bought a house using a mortgage, so paid interest on that. (Of course I then didn’t pay rent and had an appreciating asset.)
I’ve never paid interest on a credit card, because I had cheaper ways to borrow (e.g. bank overdraft.)
I wouldn’t call all people who pay interest fools.
Just check you need to do it, can afford the repayments and that you’ve got the best deal.
I once worked with a guy who called me a fool for saving up to buy things. He told me he ran one credit card up to the max, then used a second card to pay the interest on the first one. Apparently his plan was to pay the interest on the second card by getting a third one…
My posting won’t be so popular, but I think it’s the best course of action. Don’t loan her any money. Here is why, once you start to loan someone money you are now their banker. And with it being family, they feel they don’t have to be in a hurry to pay you back. Long-term it is a very bad idea, because she knows now in the future any time she gets into a financial situation like this, she can come to you to bail her out. My advise, is not to do this.
However, I would help her figure out how to get better finance options for what she is doing, but I wouldn’t give or loan her a cent, because you are going to end up ruining whatever relationship you have with her. I know you think you are helping her by loaning the money, but it isn’t likely to work out. It will be very easy to come up with other excuses not to pay you for other unexpected expenses.
Speaking of unexpected expenses, that’s what an emergency fund is for. She should have been saving money and arranging better credit option for herself all along. A HELOC is a much better way to get a loan if the cash isn’t available, for example.
I’m in a similar position as the OP’s sister. My major household issue was replacing a chimney I didn’t know needed replacing. I hate using my CC for stuff like this but I had no choice because they repair guys were right there and my husband kept saying, “So so so so what are we gonna do?”
I’ve never taken out a HELOC because I’m petrified of putting the house up as collateral as well as petrified of not being able to pay back whatever I use. I had it pounded into my head as a kid to never get involved with anything like that. It would explain why my parents never did a whole lot of remodeling and their repairs were…quirky, to say the least (I inherited the house where I grew up, btw).
A typical HELOCs maxes out at 80% of the equity that you have in your home. So let’s say the bank values your home at $200,000 and you’ve paid off $50,000. You can take out a HELOC for $40,000 and the current interest rate is in the 3% range. And you’ll have some built-in protections: 1) The banks have gotten very conservative with their home valuations, so they often low ball the number; 2) You still have 20% of equity left, or $10,000.
If you tackle the debt as aggressively as you would had you borrowed at 25% interest, then you’ll come out way ahead. Plus, if the loan is related to your home, you can deduct the interest on your taxes.
There’s also nothing that says you can’t borrow a very modest amount instead, such as $5,000. Just make sure that the annual fee isn’t too high to make that low amount worthwhile. $5,000 will give you a little emergency fund, at very good rates, should an emergency come up, plus protect the bulk of your equity.
Now, if you fear that you won’t be disciplined about paying it back aggressively, or if you fear that you’ll look at the line of credit as a windfall, then I agree that HELOCs are not for you.