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Consolidation Questions

LaOsLaOs SaskatoonRegistered User regular
edited October 2008 in Help / Advice Forum
I live in Canada (Saskatchewan, if that also makes a difference) and have been thinking some things over.

A number of my friends have recently switched their bank to RBC. From the tales they tell, they have received royal deals for switching over. At the very least, it sounds like they're being treated a lot better and like their business actually matters. This is in direct comparison to TD, where I bank now, and where at least one of my friends was banking previously. I don't have any specific problems with TD right now, but I'm also not really getting anything special from them--nothing to keep me loyal (I'm basically still banking here because that's where I've always banked).

Among a number of other benefits or perks to switching to RBC (account fees for the accounts I would be using appear lower, there's actual incentives to using RBC instead of someone else, free better than better-than-nothing interest savings accounts, etc.) I am thinking this might be an all right time to look at consolidating and re-financing. This may be a false belief...

So, let's say I have four debts. One is an auto loan, one is a previous consolidation loan, one is an inactive student line of credit (just paying it off now), and the other is a VISA card.

1) $17,100 @ 8.30% (fixed)
2) $6,000 @ 12.25% (fixed)
3) $7,000 @ 5.00% (variable, Bank Prime +1.0%)
4) $2,200 @ 19.75% (fixed)

Now here's where I want to make sure I'm doing my calculating correctly. Using these numbers, because they are annual interest rates, I figure that in a year, I pay close to the following amounts of interest on each debt:

1) $1,419.30
2) $735.00
3) $350.00
4) $440.00

Now, I know that those numbers are probably not going to bear out that way, because as I make payments, the amount that the interest is calculated on goes down... anyway, I don't know that that really matters for this exercise.

When I add all the debt up and all the interest payments in one year, I get $32,300.00 debt and $2,944.30 in interest payments. So, to me, it looks like for my overall debt I pay 9.12% interest annually. Is that right? Or, have I made some error in how I've been looking at it?

The reason I ask all this is because while I can see that I do have some attractive interest rates for some individual debts, from my friend's experience I know that RBC will basically give me a lump-sum loan to buy out all the debt from TD, thus consolidating my entire debt. What I'm thinking is that if I can get an interest rate lower than 9.12% (which may not be likely--not the point) for the entire debt, that would make the whole transaction worthwile?

I'm not in a position where I need to do something to get out from under this debt--I've got a handle on it and am relatively pleased with how things are going. I'm not so pleased with my current bank, so if I can get out from there and enjoy some perks from RBC and possibly come out even more ahead of my debts, I'd like to consider it. I may not be able to get a rate that low, and I may not have been approaching the numbers correctly in the first place. Overall, though, I'd appreciate if you could let me know if I'm on the right track or completely bonkers. Thanks.

LaOs on

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    CauldCauld Registered User regular
    edited October 2008
    I would be surprised if you are forced to consolidate all of your loans into one. You should talk to them with all of your loans and they'll likely allow you only to consolidate the loans you want, you can then leave out any with lower interest rates.

    Other than that, you should obviously pay off the ones with higher interest rates first.

    Cauld on
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    LaOsLaOs SaskatoonRegistered User regular
    edited October 2008
    Cauld wrote: »
    I would be surprised if you are forced to consolidate all of your loans into one. You should talk to them with all of your loans and they'll likely allow you only to consolidate the loans you want, you can then leave out any with lower interest rates.

    Other than that, you should obviously pay off the ones with higher interest rates first.

    While that's true, that's not what I was asking.

    It may be that RBC won't want to or won't force me to buy out all the TD loans with one larger loan... I will be talking to them about this situation sometime shortly. The only information on the process that I have right now is from a friend who did this exact thing a month ago, moving from TD to RBC, and they gave him one large loan and he used that to wipe out the TD loans.

    But, if that's how it played out, have I run the numbers properly so that I will know if the rate I can get will be worthwhile or if it's something that I should refuse?

    LaOs on
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    Dunadan019Dunadan019 Registered User regular
    edited October 2008
    there is a loan consolidation thread stickied at the top if you want to look through it. its not for canada though i think.

    as far as interest goes, you have to watch how you calculate it. sometimes how its done is the loaner takes the total money loaned calculates the entire amount of interest for the life of the loan and then divides that up into payments which go to interest first.

    thats why your payments dont decrease on something like a college loan (mortgages are different) and why you want to pay off extra if you can as that DOES decrease the principle.

    so in your case if that 17,100 was a 10 year loan that means you would owe a total of 37956 or 20,856 in interest. so your total payment per month would be $316 and you wouldnt be paying off the principle for 5 and a half years.


    thats how it was explained to me. someone correct me if im wrong.

    Dunadan019 on
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    Dunadan019Dunadan019 Registered User regular
    edited October 2008
    i just noticed my math is wrong so just disregard that and take it as approximations

    Dunadan019 on
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    ThanatosThanatos Registered User regular
    edited October 2008
    While your math is correct, LaOs, what you're not taking into account is selective payment.

    Right now, you can focus entirely on paying down the $2200 that you've got at 19.75%. Then, you can move on to the $6,000 at 12.25%. Then on to the 8.3%, etc. Once you pay down that first $2200, your average interest rate drops to 8.3%. If you pay down $2200 on a consolidated loan at 9.12%, you're still going to be paying the rest of it at 9.12%. So, while a 9.12% consolidated loan looks good now, $2200 later it's going to look bad. As you pay down the next $6,000, it's only going to get worse.

    You should look into what they offer, and absolutely give a shot at consolidating those higher-interest loans. If they insist on a combined loan, make sure you take this into account.

    Thanatos on
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    LaOsLaOs SaskatoonRegistered User regular
    edited October 2008
    Dunadan019 wrote: »
    there is a loan consolidation thread stickied at the top if you want to look through it. its not for canada though i think.

    as far as interest goes, you have to watch how you calculate it. sometimes how its done is the loaner takes the total money loaned calculates the entire amount of interest for the life of the loan and then divides that up into payments which go to interest first.

    thats why your payments dont decrease on something like a college loan (mortgages are different) and why you want to pay off extra if you can as that DOES decrease the principle.

    so in your case if that 17,100 was a 10 year loan that means you would owe a total of 37956 or 20,856 in interest. so your total payment per month would be $316 and you wouldnt be paying off the principle for 5 and a half years.


    thats how it was explained to me. someone correct me if im wrong.

    The thread at the top isn't for Canada, no, but thanks.

    Unfortunately, I'm not quite following exactly what you said in the rest there. However, I believe that Loans 1 and 2 were calculated over a set time, and their original totals already included the interest that would accrue that those rates over that time period. How does this affect the calculations? Because the debt already factors in the interest that should be paid to it, would my thinking that I pay $1,400 and $735 in interest each year be incorrect?

    LaOs on
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    LaOsLaOs SaskatoonRegistered User regular
    edited October 2008
    While your math is correct, LaOs, what you're not taking into account is selective payment.

    Right now, you can focus entirely on paying down the $2200 that you've got at 19.75%. Then, you can move on to the $6,000 at 12.25%. Then on to the 8.3%, etc. Once you pay down that first $2200, your average interest rate drops to 8.3%. If you pay down $2200 on a consolidated loan at 9.12%, you're still going to be paying the rest of it at 9.12%. So, while a 9.12% consolidated loan looks good now, $2200 later it's going to look bad. As you pay down the next $6,000, it's only going to get worse.

    You should look into what they offer, and absolutely give a shot at consolidating those higher-interest loans. If they insist on a combined loan, make sure you take this into account.

    Okay... that makes sense. I knew/know about that plan of attack, too, but for some reason thought this was better or it didn't apply. I'm thinking now that I was just being blind.

    So, if they want or offer me a loan that is not for the full amount, I can apply it to the most logical debts first. What if they offer or want me to have a loan that is for the full amount? What rate should I try to haggle for, or should I just not go with the deal?

    [Edit]
    So, if it's the full amount they offer, I need a rate at 5% or lower to not get screwed on that last little bit of debt, right?

    If it's partial, I want to get something below 8.30% and pay down the three debts that are above that rate, right?

    LaOs on
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    ThanatosThanatos Registered User regular
    edited October 2008
    LaOs wrote: »
    While your math is correct, LaOs, what you're not taking into account is selective payment.

    Right now, you can focus entirely on paying down the $2200 that you've got at 19.75%. Then, you can move on to the $6,000 at 12.25%. Then on to the 8.3%, etc. Once you pay down that first $2200, your average interest rate drops to 8.3%. If you pay down $2200 on a consolidated loan at 9.12%, you're still going to be paying the rest of it at 9.12%. So, while a 9.12% consolidated loan looks good now, $2200 later it's going to look bad. As you pay down the next $6,000, it's only going to get worse.

    You should look into what they offer, and absolutely give a shot at consolidating those higher-interest loans. If they insist on a combined loan, make sure you take this into account.
    Okay... that makes sense. I knew/know about that plan of attack, too, but for some reason thought this was better or it didn't apply. I'm thinking now that I was just being blind.

    So, if they want or offer me a loan that is not for the full amount, I can apply it to the most logical debts first. What if they offer or want me to have a loan that is for the full amount? What rate should I try to haggle for, or should I just not go with the deal?

    [Edit]
    So, if it's the full amount they offer, I need a rate at 5% or lower to not get screwed on that last little bit of debt, right?

    If it's partial, I want to get something below 8.30% and pay down the three debts that are above that rate, right?
    Here's the thing: as long as they allow you to pay down the principle on the new loan early, you should just take as much as would be advantageous for you. For instance, say they offer you something at 7% for the full value of all of your loans. Just pay down the three highest interest rates, keep the lowest interest rate, and either don't take out the rest of the loan, or use the rest of the loan to pay down the principle on the loan, while hanging onto your 5% loan from your other bank.

    The math gets kinda complicated, but the first thing you should do is go talk to them, see what they offer you. If it's clear what would be most advantageous, do that. If it's not clear, come back and tell us what they offered, and we can probably help you sort through it.

    Thanatos on
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    LaOsLaOs SaskatoonRegistered User regular
    edited October 2008
    LaOs wrote: »
    While your math is correct, LaOs, what you're not taking into account is selective payment.

    Right now, you can focus entirely on paying down the $2200 that you've got at 19.75%. Then, you can move on to the $6,000 at 12.25%. Then on to the 8.3%, etc. Once you pay down that first $2200, your average interest rate drops to 8.3%. If you pay down $2200 on a consolidated loan at 9.12%, you're still going to be paying the rest of it at 9.12%. So, while a 9.12% consolidated loan looks good now, $2200 later it's going to look bad. As you pay down the next $6,000, it's only going to get worse.

    You should look into what they offer, and absolutely give a shot at consolidating those higher-interest loans. If they insist on a combined loan, make sure you take this into account.
    Okay... that makes sense. I knew/know about that plan of attack, too, but for some reason thought this was better or it didn't apply. I'm thinking now that I was just being blind.

    So, if they want or offer me a loan that is not for the full amount, I can apply it to the most logical debts first. What if they offer or want me to have a loan that is for the full amount? What rate should I try to haggle for, or should I just not go with the deal?

    [Edit]
    So, if it's the full amount they offer, I need a rate at 5% or lower to not get screwed on that last little bit of debt, right?

    If it's partial, I want to get something below 8.30% and pay down the three debts that are above that rate, right?
    Here's the thing: as long as they allow you to pay down the principle on the new loan early, you should just take as much as would be advantageous for you. For instance, say they offer you something at 7% for the full value of all of your loans. Just pay down the three highest interest rates, keep the lowest interest rate, and either don't take out the rest of the loan, or use the rest of the loan to pay down the principle on the loan, while hanging onto your 5% loan from your other bank.

    The math gets kinda complicated, but the first thing you should do is go talk to them, see what they offer you. If it's clear what would be most advantageous, do that. If it's not clear, come back and tell us what they offered, and we can probably help you sort through it.

    Ah. Yes. I forget that there's actually a process... I'm given the loan and then use that money to pay off the TD loans--it's not instant. I *could* take what they offer, pay down whatever it's advantageous to pay down, and then keep plugging away at whatever was lower, giving back (or just not using) the remainder of what RBC gave or offered me. Right?

    [Edit]
    Giving back meaning, of course, using the remainder of the RBC loan to pay down the principle of the RBC loan itself.

    LaOs on
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    ThanatosThanatos Registered User regular
    edited October 2008
    LaOs wrote: »
    LaOs wrote: »
    While your math is correct, LaOs, what you're not taking into account is selective payment.

    Right now, you can focus entirely on paying down the $2200 that you've got at 19.75%. Then, you can move on to the $6,000 at 12.25%. Then on to the 8.3%, etc. Once you pay down that first $2200, your average interest rate drops to 8.3%. If you pay down $2200 on a consolidated loan at 9.12%, you're still going to be paying the rest of it at 9.12%. So, while a 9.12% consolidated loan looks good now, $2200 later it's going to look bad. As you pay down the next $6,000, it's only going to get worse.

    You should look into what they offer, and absolutely give a shot at consolidating those higher-interest loans. If they insist on a combined loan, make sure you take this into account.
    Okay... that makes sense. I knew/know about that plan of attack, too, but for some reason thought this was better or it didn't apply. I'm thinking now that I was just being blind.

    So, if they want or offer me a loan that is not for the full amount, I can apply it to the most logical debts first. What if they offer or want me to have a loan that is for the full amount? What rate should I try to haggle for, or should I just not go with the deal?

    [Edit]
    So, if it's the full amount they offer, I need a rate at 5% or lower to not get screwed on that last little bit of debt, right?

    If it's partial, I want to get something below 8.30% and pay down the three debts that are above that rate, right?
    Here's the thing: as long as they allow you to pay down the principle on the new loan early, you should just take as much as would be advantageous for you. For instance, say they offer you something at 7% for the full value of all of your loans. Just pay down the three highest interest rates, keep the lowest interest rate, and either don't take out the rest of the loan, or use the rest of the loan to pay down the principle on the loan, while hanging onto your 5% loan from your other bank.

    The math gets kinda complicated, but the first thing you should do is go talk to them, see what they offer you. If it's clear what would be most advantageous, do that. If it's not clear, come back and tell us what they offered, and we can probably help you sort through it.
    Ah. Yes. I forget that there's actually a process... I'm given the loan and then use that money to pay off the TD loans--it's not instant. I *could* take what they offer, pay down whatever it's advantageous to pay down, and then keep plugging away at whatever was lower, giving back (or just not using) the remainder of what RBC gave or offered me. Right?
    As long as they don't require you to take the whole loan, or penalize you for early repayment, yes.

    And given that that last little bit of debt is variable, if they offered a 6% loan for the whole shebang, I'd almost certainly take it. You also have to take into account the fact that the money you save now with an overall lower interest rate can go towards principle, which means that while you'd have a higher interest rate in the long run, you'd be paying that interest on a smaller amount of money, so it'd be cheaper in the long run to take the higher interest rate.

    Like I said, the math can get kinda complicated.

    Thanatos on
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    LaOsLaOs SaskatoonRegistered User regular
    edited October 2008
    Hmm, right. And yeah, that variable rate was up near 7 or 7.5 the last time I looked at it--rates have come down a lot lately (and could go back up again).

    Thanks for the help, Than. It could all end up moot if I don't get anything even resembling an attractive rate offered. :D

    LaOs on
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