My wife has a large student loan. The lender said they might discharge the loan for a lump sum payment of around 60% of the balance.
Assume we get a bank loan for that 60% and use it to pay off the original loan. Assume further that we make payments on this new loan for a little while and then inquire about a payoff amount on the new loan. Lather, rinse, and repeat.
What are the chances that we can play this game through several rounds and end up only paying pennies on the dollar amount of the original loan?
My first impression would be that each successive lender would not be willing to settle for a percentage until quite some time has passed, but I could be wrong. Have I stumbled across a workable cheat or will I have to actually, God forbid, pay my debts?
There’s a concept called “time value of money” which states that, in general, people would rather have money now than later. You already knew this; if I offered to borrow $1000 from you and pay you back the same ammount in five years you’d tell me to buzz off. So, we have interest, which actually measures what the time value of money is. There are several places you can find tables that show what X ammount of money today is worth n years in the future at Z interest.
I’m assuming that the offer is, “If you make payments for the term of the loan, you’ll pay out X. Or, you can give us 0.6X right now and we’ll call it even.” If that’s the case, you’d have to check the aforementioned tables and crunch some numbers to see if you actually come out ahead or not.
I can’t speak to the specifics of your get rich eventually scheme, but I suspect that you’d be better off selling other people this insight at twenty bucks a pop.
Taking out a loan to pay off a portion of another one is not uncommon. For example, sometimes people will take out a loan to pay off a balloon mortgage and get a better rate on the second loan than they were paying the mortgage company. But if you do this, you have to be extremely careful and make sure that it’s actually worth it.
It just occurred to me that lenders probably are not interested in settling unless the account has become troublesome. Which, of course, you wouldn’t want to happen in the first place.
I mean, if I were a lender and I had a good account that was paid on time consistently, I wouldn’t have any reason to shortchange myself. However, if I was always calling the borrower and ripping my hair out trying to get paid, I might make a concession just to make the whole thing go away.
So, all the subsequent lenders would probably refuse to settle for a percentage anyway. That’s probably the main point in preventing this brilliant scheme from being feasible.
Plus, I can’t imagine that you’d get a bank loan on terms that are more favorable than the student loans. I consolidated my student loans at something like 4% for a payout period of 25 years; no way a bank loans terms will approach that.
I took back a lease vehicle. They wanted ~$1500 for “wear and tear”. I called BS and offered $623.15 after adding up when “wear and tear” I felt I caused. They accepted and I paid the same day I took the vehicle back.
About a year later, I find that my credit says “Settled, Bad Debt or Unable to Locate”. My FICO score dropped by over 100 points!
I have had numerous credit problem since and almost didn’t get my mortgage because of this. I have tried repeatedly to get this taken off with no luck. If I knew I would be suffering so much, I would have paid the full $1500. So be careful!
It has been 3 years so I have 4 more years of credit hell to endure.