Author Topic: Should I take a loan from myself to paydown high rate debt?  (Read 14554 times)

wagonwheeljr

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Should I take a loan from myself to paydown high rate debt?
« on: October 10, 2012, 05:41:59 PM »
Brand new to the Mustachian Revolution and trying to start implementing changes. I am currently deployed with my wife and 1.5yo daughter at home. Having a hard time getting the wife to start while I am away so I am trying to do everything I can from a distance. Once I am back home it will be much easier to lead her into a reformed lifestyle. Currently our finances are as follows:

DEBT:
mortgage = $248,500(5%APR) $1580/mo
CC= $22,500(7.9APR)  ~$400/mo
Car loan = $13,000(4.5%APR)  $321/mo
Personal loan = $7400(11%APR)  $200/mo
Student loan = $3000(5%) $200/mo

Savings:
TSP = $24,000
IRA  = $3585
MMSA = $1100
CD = $975

Income:
Me= $56,000(net)
wife= $13,000(net)

My situation may change considerably in the near future, as there is some uncertainty with my continued active duty status( though this maybe a blessing in disguise). I am in the process of trimming down monthly expenses and as I am sure many of you can understand my wife is not real open to cutting back she has a lot of attachments to certain luxuries, i.e. cable, smart phone, etc... Now to my real question. I can borrow up to ~$12k @ 1.3% over 5yrs from my TSP to to consolidate some of my debt thereby reducing monthly expenditures which I can then turn on to bringing down the rest more quickly. also looking to do a streamline VA to VA refi on our house to free up even more cash to pay down CC debt. There is a possibility of a severance that could potentially wipe out most of our debt and allow me to repay the TSP loan in short order thereby regaining that benefit. I know that most of you are going to recommend getting other monthly expenses down to something more Mustachian and that is definitely in the works but many will take me being home to initiate them. So that being said what are your thoughts? I do have a thick skin and welcome all advice. Thank you all in advance.
« Last Edit: October 10, 2012, 05:45:55 PM by wagonwheeljr »

gooki

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Re: Should I take a loan from myself to paydown high rate debt?
« Reply #1 on: October 10, 2012, 06:57:07 PM »
Welcome.

If I was in your shoes, yes, I'd do it, as the interest you are being charged is well above expected investment return rates.

Provided:
1. The money is instantly used to pay down the high interest, non deductible debts (that's you personal loan and Credit Card).
2. You do not borrow any more money for the foreseeable future

My plan would go a little like this:
1. RUN AROUND LIKE YOUR HAIR IS ON FIRE
2. Take the loan against your TSP.
3. Pay off personal loan in full.
4. Reduce CC debt with remainder
5. Balance transfer to a 0% interest CC for 6 months (12 months if you can find one). Cut up all credit cards you have. You can't allow yourself to let this credit card debt expand. It must be aggressively shrinking over the next 6 to 12 months. And must be paid off in full come the end of the 0% term
6. Refinance that home.
7. Sell the car, buy something used, safe, economical and cheap.
8. Once the above is complete you can stop RUNNING AROUND LIKE YOUR HAIR IS ON FIRE, and start JOGGING.

I'd expect the above plan to take 6 to 12 months to execute. At which point you can then breath a sign of relief, and look forward to the choice of investing for your future, or continue to pay down debt (Accelerated mortgage repayment), or both.

PS there's no reason why one can't have cable, and a smart phone, and still be badass at paying down debt, just make sure you're not overpaying for any service you deem to be essential.
« Last Edit: October 10, 2012, 07:01:03 PM by gooki »

Lars

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Re: Should I take a loan from myself to paydown high rate debt?
« Reply #2 on: October 10, 2012, 08:16:12 PM »
Before you proceed, I would recommend addressing foreseeable issues that could make the loan turn out to be a bad idea. Possible issues I see:

- If you leave federal service, the balance of the loan is due within 90 days. If not paid, it is removed with penalties. How likely is this route? What are your odds of severance if active duty status ends?

- Credit card and loan balance begin to grow again shortly after loan so you're soon in a worse spot than you are currently. Have you fixed the problems that got you to the current debt?

- Loss of important source of emergency funds This is an significant source of emergency funds that does not depend of credit rating that will be gone if you take the loan. Will you still have enough to handle emergencies without it?

wagonwheeljr

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Re: Should I take a loan from myself to paydown high rate debt?
« Reply #3 on: October 10, 2012, 08:54:23 PM »
Quote
- If you leave federal service, the balance of the loan is due within 90 days. If not paid, it is removed with penalties. How likely is this route? What are your odds of severance if active duty status ends?
-if I leave the service then almost positive will be moving direction into GS job as a civilian.
-chance of severance 50/50

Quote
- Credit card and loan balance begin to grow again shortly after loan so you're soon in a worse spot than you are currently. Have you fixed the problems that got you to the current debt?
-yes the majority of CC debit was assumed debt from a divorce then some due to short term cash flow problems but that has been fixed. That CC is no longer being used nor are any other CCs.

Quote
- Loss of important source of emergency funds This is an significant source of emergency funds that does not depend of credit rating that will be gone if you take the loan. Will you still have enough to handle emergencies without it?
-I understand that and am not considering it lightly.

twinge

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Re: Should I take a loan from myself to paydown high rate debt?
« Reply #4 on: October 11, 2012, 09:11:56 AM »
There's always the option of a partial plan: Take out a loan just enough to cover the highest rate debt--the 7400 personal loan to wipe that out. That will create $200/ month extra cash flow to pay the minimum on the 1.3% loan AND to pay down the next highest credit card debt. BUT if you're honestly sure the debt is under control, I would go ahead and take out the loan to wipe out the personal loan AND some of the credit card debt.  If the worst situation arose where you were immediate forced to repay the 401k loan and didn't have the funds, you could get another personal loan at probably a lower rate anyway--or put it on a low rate cc. But first look at the fine print on the loan and what will happen if you lose active duty status in terms of having to pay back right away and have a plan in place for how you would fund that. 

Regardless, you and your wife's hair should feel on fire for the period of time it takes to clear this up.  I think if you think in terms of "6 months projects" (e.g., we will go without x, y and z for 6 months) most people can get on board.  Often by the end of 6 months the habit will be well enough established that it's not a big deal to keep going, but it's often easier for reluctant/ambivalent people to start if you have a delineated end point in mind.

wagonwheeljr

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Re: Should I take a loan from myself to paydown high rate debt?
« Reply #5 on: October 11, 2012, 10:38:56 AM »
Definitely feeling like hair is on fire and trying to impress upon DW that she should feel the same way! As soon I can get back home I think I can really take control of things and start living a much more Mustachian lifestyle!!!

trammatic

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Re: Should I take a loan from myself to paydown high rate debt?
« Reply #6 on: October 11, 2012, 10:55:01 AM »
I did the same thing to pay off a crappy 2nd mortgage (8.5%!!) out of an 80/20 scheme when we bought our house.  (Although the 8.5% is deductible, it's still 7% after taxes, and a guaranteed 5.5% return now is fine by me.)  We want to move in the next few years (to a cheaper house), but we need to pay off enough of our mortgage to be able to sell.

It's a great plan, so long as all of the initial symptoms are fixed.

SpendyMcSpend

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Re: Should I take a loan from myself to paydown high rate debt?
« Reply #7 on: October 11, 2012, 11:14:35 AM »
I would not do this.  Your wife still hasn't learned how to save.  Until you change your behavior, taking a loan is just putting a bandaid on your situation.

tkaraszewski

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Re: Should I take a loan from myself to paydown high rate debt?
« Reply #8 on: October 11, 2012, 11:17:48 AM »
Until you change your behavior, taking a loan is just putting a bandaid on your situation.

Is this not still better than just bleeding all over everything?

SpendyMcSpend

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Re: Should I take a loan from myself to paydown high rate debt?
« Reply #9 on: October 11, 2012, 11:52:47 AM »
Until you change your behavior, taking a loan is just putting a bandaid on your situation.

Is this not still better than just bleeding all over everything?

Oh you will continue to bleed after a month or two.

gdborton

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Re: Should I take a loan from myself to paydown high rate debt?
« Reply #10 on: October 11, 2012, 12:05:56 PM »
Quote
Oh you will continue to bleed after a month or two.

I agree, the eliminating the high interest personal loan makes a lot of sense, but a low(er) balance credit card just looks like head room to someone with bad spending habits.

twinge

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Re: Should I take a loan from myself to paydown high rate debt?
« Reply #11 on: October 11, 2012, 12:15:03 PM »
Quote
I agree, the eliminating the high interest personal loan makes a lot of sense, but a low(er) balance credit card just looks like head room to someone with bad spending habits.
Quote

I would agree with that, but the OP says:

-yes the majority of CC debit was assumed debt from a divorce then some due to short term cash flow problems but that has been fixed. That CC is no longer being used nor are any other CCs.

which suggests to me that they've stemmed the flow of debt, and now it's just cleaning up the mess in the most efficient and safe way possible. Sure,  the OP acknowledges that they could be doing better on spending but it doesn't seem to be in the "racking up more debt" problems now.

wagonwheeljr

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Re: Should I take a loan from myself to paydown high rate debt?
« Reply #12 on: October 11, 2012, 02:03:47 PM »
yes we have staunched the bleeding and just trying to recover as quickly as possible. Shopping for a CC with 0% on balance transfers as the $500-600 service charge is cheaper than a years worth of finance charges. This is an emergency to me and not something I want to continue to carry. It is just a little difficult to institute austerity measures from 6k miles away. Currently working on lowering cable/internet/phone bill, researching VA-VA refi, researching increasing FE via EcoModder.com, researching route to bike to work, reducing grocery expenditures, frivolous spending and phone plans. I know that once I am back on land monthly expenses will drop at least $500 all of which I will be stacking to get rid of debt. The hardest part will be convincing DW that she doesn't need a new car all the time! With me being around more I think that will be easier than it has been in the past.

As for the order with which to pay things of would it not make more sense to pay off personal loan and student loan then use that payment to stack onto lowering CC?

Thanks for all the feedback so far.

twinge

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Re: Should I take a loan from myself to paydown high rate debt?
« Reply #13 on: October 11, 2012, 02:32:21 PM »
Quote
As for the order with which to pay things of would it not make more sense to pay off personal loan and student loan then use that payment to stack onto lowering CC?

Mathematically you're always better off paying the highest interest down first. So personal loan than cc (unless you do some balance transfer thing that changes the interest rate).  Some people like the psychological boost from getting rid of loans, but that comes at a cost in interest payments.  The only non-psych reason to pay off the student loan first would be to free up cash flow, but since you're  wanting to get more "mustachian" you're probably better off keeping less cash flow as it will help things feel tighter.

wagonwheeljr

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Re: Should I take a loan from myself to paydown high rate debt?
« Reply #14 on: October 12, 2012, 11:21:49 AM »
Yeah I was thinking of it less as freeing up cash flow and more as increasing the amount I could put toward the CC. Then use altering spending habits and reducing monthly expenses to freeup cash flow..
« Last Edit: October 12, 2012, 12:09:09 PM by wagonwheeljr »

Catbert

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Re: Should I take a loan from myself to paydown high rate debt?
« Reply #15 on: October 12, 2012, 12:17:56 PM »
I'd take out the TSP loan just to cover the personal loan because there is a 50% chance that you will not get a buy-out.  The taxes and penalties if you can't repay after leaving the military are just too high to take enough to pay off credit cards.  Getting another personal loan won't be cheap when you're unemployed.   Don't count on getting a GS job quickly.  (I say that as a retired Navy HR Manager who knows how sloooowly things can move sometimes.  And how billets get cut and a variety of other problems can prohibit hiring someone even when the supervisors wants to.)   When/if you get that GS job then borrow enough to pay off credit cards.

I agree with the other things other have suggested.

wagonwheeljr

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Re: Should I take a loan from myself to paydown high rate debt?
« Reply #16 on: October 13, 2012, 07:31:44 PM »
So I am currently shopping CC's for a balance transfer to a lower rate. I just came across the PENFED Defender card which offers no balance transfer fee and a life time lock on interest of 4.9% the other options I have come across are Citi or Discover w/0% for 12-18 months but ~$700 in transfer fees!! I would really intend to get the card paid off in about a year if the severance doesn't come thru( if it does then it will happen much sooner!!!). if nothing unforeseen happens then it would seem that the 0% w/high transfer fees would be the best bet but I am thinking that the safer route maybe to go with the lifetime APR. Anyone better at the math of figuring this stuff out have an opinion? Once this card is paid off I have no intention of ever using it for anything that would be paid off at the end of the month. Thanks

lhamo

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Re: Should I take a loan from myself to paydown high rate debt?
« Reply #17 on: October 13, 2012, 11:56:30 PM »
I would go with the Penfed CC immediately, since there are no fees involved.  That will bring your interest rate down quite a bit and allow you to be putting more of your monthly payment toward the balance, rather than interest, on the CC.  You can still shop around for 0% CC options, may find better than what you are seeing.  If they allow cash advances or check writing against that account, you could potentially use that to pay down the personal loan more quickly, as well.

The refi is also important to get going, if you can.  5% is pretty high in the current market.  Dropping down the interest rate could reduce your monthly payment, freeing up more cash to put toward the higher interest debt. 

How new is your wife's car and are you above water on it?  Understand it may be a challenge that needs to wait for your physical return to deal with, but it is extremely silly to be paying so much for a car given your incomes.  The car should be sold and an older model used to replace it, at least until you get your consumer debt paid off.

Is your wife open to tracking expenses at all?  Convincing her to cut things may still be difficult, but if you can at least help her see where the holes are that is a start. 

Given the uncertainty of your job situation, the fact that severance is only a 50/50 proposition, and the 90 day payback requirement if you leave federal service, I would NOT take out the loan at this time.  Too risky, in my book, even though the interest rate is compelling.  I would focus on getting the personal loan and credit card paid off at a minimum, adopting the strategies outlined above to move it along more quickly, and then take another look and reconsider in light of where your are with job security at that point.  If it is clear you are staying in the service, you could reexamine the TSP loan at that point to pay off the car loan (if you still have it -- hopefully you won't) and the student loans.  I would keep student loans last on the payoff list as there is more flexibility with those if you lose your job and can't find another quickly.  Similarly, if you lose your job the car is an asset you can sell.

Most important thing is obviously getting the spouse on the same page, so that you are working with each other to attack this debt rather than at cross purposes.  The new car comment is a huge red flag.  People who think they need new cars every few years are generally buying into mainstream consumerist mentalities, and with that frequently comes a large heap of other feelings of entitlement.  The baby "needs" a new outfit, she "needs" a manicure every week, etc.  This isn't exclusively female, obviously -- lots of guys have their "must haves" as well.  But when someone insists they need something as major as a new car that they can't afford, it is a sign that they aren't thinking very hard about the long-term costs of that choice.  Might want to put it in terms of something that would be meaningful for her, like an investment in your child's education (if she feels that is important).  So you can either be paying $300/month on a car payment for the next 16.5 years, and go through X number of vehicles and still be in debt at the end of that road, or you can make a commitment to buy no more car than you can afford and replace only once, and put the difference ((($300* 12 months * 16.5 years) * estimated annual appreciation on the investment)) - cost of replacing one used car with another used car once) into a college fund for your kid.  The result would be an impressive figure, maybe enough to convince her. 

Good luck and keep coming back here for support -- and get her to come over, too, to learn, if not to convert.

caligulala

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Re: Should I take a loan from myself to paydown high rate debt?
« Reply #18 on: October 14, 2012, 09:38:54 AM »
Rather than focusing on the 'hows' of eliminating your debt while you are still deployed, it's probably more beneficial to discuss the 'whys' with your wife. For what reason are you suddenly interested in changing your lifestyle? Figuring out what motivates both of you is needed for long term success. What seem like commonsensical changes to you, the newly converted and full of zeal MMM lifestyle emulator, will likely be interpreted as deprivations enforced by a skinflint if you aren't on the same page as to your goals.

But if you are in agreement about the end goal, those changes can be a source of inspiration rather than continual conflict.

Looking at the nitty gritty details of this balance transfer or that loan should wait until you and your partner are working together as a team. It's time to dream together so you're working to the same purpose. Strategy can wait!

wagonwheeljr

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Re: Should I take a loan from myself to paydown high rate debt?
« Reply #19 on: October 14, 2012, 10:43:15 AM »
Thanks guys. I think I am going to try and go with the PenFed card tonight. The refi I am only shopping around right now as I will need to be in town to actually take care of that one. As for the car it is almost 3 years old still probably upside down in it right now, seems like that is how they try and make it so that once you get caught in that trap they keep you there. I am working on getting the wife to go with something older and reliable that we can just own out right. That is going to take some face to face conversations!! It is going to take a while because she has been brought up that it is better to have a new car so that you don't have to worry about anything breaking or whatever. If I end up shore bound in the near future I am sure I can convince her but it is going to take me being around to take care any problems that might arise. I have been talking with here quite a bit about what my plans are and how we can make things work. Some of it would seem like deprivation to her if I try and implement it from out here but once I am back I can make them without it seeming so Spartan.

Things are still in limbo right now as far as jobs go and whether there will be a severance or not. I am not banking on the severance as of now so I am not planning on having that. I am fairly confident with the GS job.

TomTX

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Re: Should I take a loan from myself to paydown high rate debt?
« Reply #20 on: October 15, 2012, 03:45:08 PM »
Almost three years old? That's a brand-new car to me! Heck, my more-than-3 years old 2009 car is brand new to me.

I have a 1995 and a 2009 (which replaced a 1993 a bit early, but the new car was effectively half price due to the .gov and .tx clean air incentives at the time. Yes, I stacked them.)

fidgiegirl

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Re: Should I take a loan from myself to paydown high rate debt?
« Reply #21 on: October 15, 2012, 05:53:17 PM »
Be careful with your spouse that you are also making changes and "doing your part."  It will be a lot easier for her to follow by example than to be pulled along kicking, screaming and scolded.  Not saying that's what you're doing, but just a little something (not sure what) struck me as important to put it out there.

P.S.  Hi lhamo.

wagonwheeljr

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Re: Should I take a loan from myself to paydown high rate debt?
« Reply #22 on: October 16, 2012, 03:58:52 PM »
@fidgiegirl - absolutely agree with you on that. That is why most of the changes will have to wait until I am back home as I want this to be as smooth a process as possible. She is up for it, just doesn't know how to go about a lot of it. Also anything that involves any "tech" will require me to be there to make sure it runs smoothly and doesn't cause frustration.

@TomTX - Yes it is pretty new. The wife bought it shortly before we were married and while I was out of town for work. As soon as I can convince her that she doesn't need a new car I would like to sell it as she really doesn't like it at all! Again going used will require me to be home at least in the beginning due to distrust in older cars.

wagonwheeljr

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Re: Should I take a loan from myself to paydown high rate debt?
« Reply #23 on: October 16, 2012, 04:18:51 PM »
also my wife did call COX today and got our cable/internet/phone bill lowered by $40/mo with no obligations

gooki

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Re: Should I take a loan from myself to paydown high rate debt?
« Reply #24 on: October 16, 2012, 05:22:32 PM »
Nice stuff.

lhamo

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Re: Should I take a loan from myself to paydown high rate debt?
« Reply #25 on: October 17, 2012, 05:43:42 AM »
also my wife did call COX today and got our cable/internet/phone bill lowered by $40/mo with no obligations

Good for her!  Be sure you give her tons of positive reinforcement for being willing to take this kind of initiative.


wagonwheeljr

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Re: Should I take a loan from myself to paydown high rate debt?
« Reply #26 on: October 17, 2012, 12:02:33 PM »
Yes I am very proud of her! Today she took care of an overcharge from AT&T . She really hates dealing with people over the phone but she is doing it and she asked me if there was anyway to get her phone bill even lower! She has also agreed to cancel cable as soon as I get home. Baby steps to FI!!