Weighing Options - Personal Loan vs. Aggressive CC Payments
I'm new to YNAB, but already feel such a sense of relief just having a plan and a tracking tool that makes sense to me. My biggest goal is to pay off my credit card debt, and start building savings to avoid getting into debt again. Eventually I'll have to tackle my student loan debt, but that's on hold until the fall.
I owe about $8,000 on my cards (13.9% interest rate) and I'm trying to decide whether I should take out a low-interest personal loan to pay off my CCs or just be as aggressive as possible in making my CC payments. Here are the options I'm weighing:
a.) After budgeting for monthly bills and contributing a little to my true expenses, if I put every single extra dollar towards credit card payments, I believe I could completely pay them off by December 2021/January 2022
b.) Take out a 24-month personal loan with 5.9% interest rate and use the money I would have budgeted toward payments to build savings faster.
Both feel like they could have significant benefits - the idea of being out of consumer debt by the end of the year is very attractive, but taking a loan with a lower fixed monthly payment would give me a lot more padding to budget for true expenses and put money into savings for true emergencies. I'm curious if anyone has advice or could share how they made a similar decision!
Definitely a personal choice because you have to decide which makes you feel more secure.
In starting out with YNAB, we often find out that we have way more true expenses than we knew/imagined. Would you be okay with more of your planned credit card dollars go to those? Will it frustrate you that you are not meeting your goal? Could it wipe out progress because you throw your hands up and feel like it is not worth it? If that is the case, you may want to go with the loan. You would also have to ask yourself if you were willing to give up other expenses to keep yourself on track with your current plan.
Having a steady state of repayment with a known end date and not getting thrown off track by other expenses might make better sense. Yes, it might take longer but then you have flexibility for unknown expenses. Also, if you have more money available down the road, you could pay off the loan early if that is an option.
From a total cost persepctive, the difference in interest based on your completion dates will result in the personal loan being about $100-$150 less expensive and provide better cash flow.
The real questions are:
1) whether you can stay on track
2) whether you will or will not incur new credit card debt from falling back into old habits
Getting out of debt is never really about the interest rate. It's more about the focus month to month and putting as much toward it as you can. I'd keep things as they are and just pay as much towards the cards as I can. Doing that, my wife and I paid off 55k in debt in 20 months and never refinanced anything.
Been there. Done that. Not going back again.
There is no right or wrong solution here, but I can tell you from personal experience after taking out not one but two low interest loans to consolidate debt and then promptly running that debt back up that you should really consider if you have budgeted enough for unplanned purchases to prevent you from having to use your credit card again.
The great thing about low interest loan consolidation is that you can consolidate debt into a manageable payment each month.
The bad thing is that you will be stuck with that loan payment until you've paid it off. If you end up with an unexpected expense (say a car repair, medical bill etc) or true expenses that you don't have funds budgeted for, chances are you'll have to use your credit card as a fall back. And then you are back on the credit card debt wagon now with a new 24 month loan payment too.
If you use the aggressive CC payment /debt snowball method (I like www.undebt.it which I sync with YNAB) you can plan to throw money towards your debt and at least have a fall back option to not allocate those snowball funds toward an unexpected expense if needed. FWIW, I started using undebt.it in June of 2021 and have been able to clear $6k in CC debt all while building out my true expenses budget and adding to our savings account.
Also remember, you will also most likely have to pay an origination fee for a personal loan. If that amount is significant, you may not be saving much more than you expect. Especially since your CC monthly interest payments will decrease as you pay it off using an aggressive method.
Best of luck!