Dear Mary: What do you think about the idea of refinancing my credit-card debt with a loan from one of the peer-to-peer lenders out there? It seems like a good idea to me, but I don’t know that much about it. I’d really like to know what you think of this. Thanks. Tom
Dear Tom: First, I want to make sure you are talking about P2P (peer-to-peer) loans, NOT payday loans (they have NOTHING in common other than both start with the letter P). I am a huge fan of the idea you mention using a P2P loan (NOT payday), but with a few very strong cautions!
Basically, P2P lending offers a fixed-rate, simple interest, fully-amortized unsecured loan with which a person can, as you state, refinance their credit-card debt by taking the proceeds and paying off those accounts.
The interesting thing is that P2P loans offer rates that are often much lower than the variable rates on most credit cards, but only to folks with good credit, verifiable income and reasonable debt-to-income ratios who can qualify. So far, so good!
But it can get tricky. In fact, without knowing what you’re doing it would be like walking though a minefield blindfolded. There are lots of ways you could blow yourself up. For example, let’s say you get a P2P loan, but then don’t handle those paid-off accounts well. You could end up with double the trouble if you run your credit-card accounts back up—because you have the P2P loan as well. That’s only one of the things that could go wrong.
I suggest you not even think about tip-toeing into the world of peer-to-peer borrowing until you get some help.
You may want to take a look at a new eBook I have just written and made available at DebtProofLiving.com, “The Complete Guide to Refinance Your Credit-Card Debt.” It will answer all of your questions, help you figure out which P2P lenders are reputable, where all the “land mines” are hiding in that minefield and how to avoid them. Once you have the right information, I think you will discover that a P2P loan just might be a great way that you can repay your credit-card debt cheaper, better and faster.
Dear Mary: I recently joined your Debt-Proof Living community, and I am learning a lot from your newsletters and daily emails!
I have a question regarding interest on a student loan vs. a home-equity line of credit (HELOC). We currently have a $9,500 Parent PLUS Loan which has an interest rate of 7.650%. We have a $25,000 HELOC currently with $21,000 in available funds which has an interest rate of 5.95%.
Does it make sense to pay off the Parent PLUS loan with the HELOC since the interest rate is lower on that account? Do you know how that will affect any tax deductions we’ll be able to take? I appreciate any information you can give me about this. Have a great day! Carolyn
Dear Carolyn: There are several things you need to consider that have to do with unintended consequences of moving a PLUS loan to your home’s equity.
1) By moving the debt to your home’s equity, you are putting your house at risk. If something happens and you fall behind on your HELOC payments, you will be facing foreclosure and that’s no small matter. If you fall behind on a parent PLUS loan, the consequences are significant, but they cannot take your home.
2) If you move the PLUS loan to your HELOC, the entire amount becomes due and payable should sell the home, at the time of closing. If you have a PLUS loan and sell your home nothing changes as the PLUS loan would have nothing to do with the sale.
3) The interest on your parent PLUS loan is fixed—it cannot be adjusted regardless what happens to the economy. Most HELOCs are subject to variable interest. Should interest rates go up (many experts are predicting this will happen in mid to late 2015), that triggers an adjustment to all variable rate loans that are tied to an index, like the prime rate. You could start out at one rate and then watch that interest zoom higher and higher, and you would have no recourse but to pay the balance in full
4) PLUS loan interest is tax-deductible up to a certain limit, however as of 2010, the most you can deduct in a single year is $2,500. The interest on a HELOC is tax-deductible just like traditional mortgage debt.
You have a lot to consider. It is important to consult the Internal Revenue Service Publication 970, entitled “Tax Benefits for Education.” This document will provide insight into which of your expenses are deductible and up to what amount. You should also get some input from your tax advisor before making your decision.
Thank you for your kind words, and welcome to my DPL family!