 Dumping
an old, high-interest debt
|
 Dear
Dr. Don,
I have a loan with USDA-Rural Development. The balance
is $23,334. I got the loan in 1987. They say I still have 22 years at $278
per month left to pay on the loan. This does not seem right.
Citi has offered to pay it off, pay off another $6,000 loan and
also give me $10,000 cash for $354 per month at a 6-plus percent
fixed interest rate for 21 years. What is best? Keep the loans I
have or restructure my debts?
-- Ray Restructure
 Dear
Ray,
As I figure it, the interest rate on your outstanding loan is right
around 13.5 percent. It might have been a reasonable rate 20
years ago when the 30-year U.S. Treasury bond was yielding about
8.59 percent, but it's not much of a rate today.
 |
| Restructuring debt | |
|
| It's easy to see how getting
out from under that double-digit rate can allow you to
carry more debt, but I don't see how the new offer is
getting you anywhere close to 6-percent interest. Here's
how I see your current loan and the proposed debt restructuring: |
|
| |
I'll be the first to tell you that there can be a
lot going on in these loan agreements that you haven't shared in
your message. Still, you need an explanation for why a lender
quoting you 6-plus percent is showing you a loan with an effective
rate over 9 percent.
A good tool in evaluating the loan offer is Bankrate's
mortgage
payment calculator. You put in the loan amount, loan term
and interest rate and it solves for the payment. It won't solve
for the effective interest rate given the payment, but you can use
trial and error by inputting different interest rates until you
get a rate that matches the payment to solve for the effective rate.
Getting out from under debt that you're carrying at
13.5 percent is a great idea. It's possible that because of
the size of the loan, your credit history, income or other factors
you aren't able to get 6 percent to 7 percent on a 21-year loan. That's
OK, as long as you understand the effective rate on the loan and
what you're paying in fees and expenses that makes the effective
rate that much higher.
As for refinancing the other $6,000 loan and taking
an additional $10,000 out in cash, you have to decide if you want
to spend the next 21 years paying off that $16,000. With the
loan, you could end up paying a lot more in interest than you would
have if you kept the original loan.
To ask a question of Dr. Don, go to the "Ask
the Experts" page and select one of these topics: "financing
a home," "saving & investing" or "money."
|
