Using Auto Equity to Pay Off CC Debt

[Anonymous]

Hi! I've got about $4,000 left on my car loan and my car is valued at around $18,500. I have $15,000 in credit card debt at about 19%. When calling to refinance my auto loan today the banker suggested using the equity in my car to secure a loan and pay off my CCs. My goal would be to pay that debt off within 18 months which would put my payments in line with what I'm currently paying, but leave me with a total of $479 in interest paid over that time. Having already paid a ton of interest on my CC debt, this seems like a rather good deal. Are there any risks to this? Am I better off finding a credit card with a more reasonable rate? 

Any help would be greatly appreciated! 

[IOBA]

When your cc debt is paid off, will you change your cc behavior?   Stop carrying balances from month to month.

[Anonymous]

Yes, I plan to stop using my credit cards for anything I can't pay off immediately.  The balances I have now are from years of frivolous CC use. 

[Tazman81]

Hi mngrrl and welcome to the forums.

In theory, this is a perfect idea as you can get a much lower interest rate on an auto loan than you have on your credit cards.  But now that we know what is good in theory, lets look at the reality of it.  Some things that you have to ask yourself.  When is the last time that I used my credit cards?  How much did I charge that month and did I pay off the full amount of what I charged?  Can I get around without my vehicle?

What happens to many people is that they end up paying off their credit cards in a matter such as this, and then run the cards right back up.  If you have a problem spending more on your cards then what you can pay off each month, this would be a bad idea as you will be getting yourself into double the debt.  On the other hand, if you are able to not use your cards any longer so that you can truly pay off the debt (and if the interest rate is low enough), then there are benefits to this.

Would you be willing to cut up those cards and make the commitment for the next 18 months to get the debt paid off?  Maybe stick the cards in a ziplock bag full of water in the freezer.  Though I'm never a fan of securing unsecured debt by using property as collateral, if you have the self control to this may be a way to get your debt paid off that must faster and a lot less expensive.

[Tazman81]

What interest rates are you being offered for your car loan, and what interest rates are your credit cards at?

[Anonymous]

My car loan would be at 3.99% and the two cards I am carrying balances on are at 19%. I could definitely discontinue using my credit cards, I currently only use them when I'm traveling and don't want to carry my check card. However, I've recently opened a separate checking account which I use to deposit limited funds for occasions where I don't want to compromise my entire checking balance. With that I can eliminate the use of my credit cards. 

[Anonymous]

Good move! An auto loan is going to provide you the best rates due to it being a secured loan.

[Anonymous]

Thank you for the advice! I guess I should also ask how this might affect my credit score, will it have any negative impact? 

[Anonymous]

You scores are going to go up because you will have lower utilization of your credit lines. PIF in the future!

[Anonymous]

Get gap coverage.

You could easily total your refi car and suddenly have a serious negative equity issue