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Wednesday, June 07, 2006

Revisiting Consolidation Loan Scams

An Anonymous reader argues a common counter arguement,

But Kevin, if you can get a better rate, borrow to pay. You're saying everyone who refinanced their mortgages over the past few years were wrong? Nonsense. If a person has debt, they may have already changed their habits. Now they have to pay off the debt. And they should always, let me say that again, ALWAYS work to get the lowest rate possible.


My reply of course was to use John Cummuta's and Dave Ramsey's response.

1) Actually you are using faulty logic. But don't feel bad, most people do and that's why they don't get out of debt. (94% of American retirees can not afford to retire without social security.) Refinanceing your mortgage is stupid because you have to pay for charges again, such points and loan origination fees.
However, my post was not about refinancing a mortgage, but avioding loan consolidations, so that brings me to my 2nd point.
2) As anyone who listens to Dave Ramsey or John Cummuta knows, the reason you don't get a consolidation loan is 2 fold. One you may get lower intrest rates, but people tend to roll all their debts into it, including those with even lower interest rates. Two, consolidation loans usually take unsecured debt and secure it with your house. It is just plain stupid to gamble your house that way.
Posted by Kevin Surbaugh at 6/07/2006 02:00:00 AM
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1 comments:

  1. In the 1980's mortgage rates broke 20%. Now they're around 6%. You're saying someone should stay at 20%?

    Some people refinance far too easily. I agree with you there. Yesterday I counselled a friend about debt. He wanted to refinance, because his ARM has begun to float, and I couldn't talk him out of it. But I was able to discourage him from rolling his cc debt into his mortgage. This is because the cc debt is at 0%! And with my assistance he has brought $30k down to %10k! Lowering his rate from 17% to 0% was just a part of that.

    I am not advocating "consolidation" as a solution to anything. In my own case, I moved my $25,000 in debt down from 10% to 0%, and then paid it off. What does $2,500/yr fee vs. $0/yr fee mean to you? It means $2,500 extra dollars to me. But I still maintained multiple accounts, and saw no financial advantage to rolling them all into one line. In fact, maintaining multiple lines can facilitate competition among lenders to keep you at a low rate. Nor did I ever say anything about moving unsecured debt into secured debt, though obviously the tax advantages are real. Finally, nobody ever discussed gambling but you. If a mortgage rate (especially with deduction) exceeds the available CC rate, then take it, especially if income is tight and the lengthened amortization on a mortgage is useful.

    Incidentally, I deposited $9,600 today. It's a loan at 0% for 10 more months. I am going to buy a 9 month CD at 5%. I will earn $270 on this deal. Not a lot, but it's a profit. This will not cost me a cent.

    People in debt must focus on changing their cash flow, and expenses are usually the thing they can influence most. Interest on their debt is one such expense. Please stop denying it.
    ReplyDelete

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