Banker Promotes Use of Last Resort Lender
Posted by John Draper | Filed under Credit Wise, Debt Traps, Take Control
I got this letter over the weekend. I just LOVE it. Read it and laugh:
I called my bank to ask for a consolidation of my credit card debt and my line of credit. The did a credit check and said than although I had never defaulted on any payments, all my cards were at or near their limit and I was only paying down the interest so I didn’t qualify. I said that was precisely why I needed a consolidation loan; to reduce the interest so more of my payment was going towards repayment of capital. She said she had gotten into debt recently because she and her husband had to pay her father in laws expenses while he was terminally ill and expected to get the money back in the will but didn’t. She suggested I do what she did- go to Wells Fargo Financial- she got her $30,000 dollars in debt consolidated at 33% interest. I said why would I do that since it is higher interest than I am paying. She said it is one easy payment and if you pay on time for one year, they reduce it to 19% for the rest of the term of the loan. What is wrong with this picture?
Okay, so here we have a banker suggesting that we take a consolidation loan at 33%. Really? And that we use a Lender of Last Resort. Really? And that we settle for getting our rate all the way down to 19% when the going rate on an unsecured loan is 12% less. Really? Is it any wonder that we’re confused about what our options are and what we should do when we find ourselves in a hole and want to make it better? Borrowing At Any Cost isn’t smart, regardless of why you’re trying to borrow.
Here’s what you should do:
First, call and negotiate with your existing creditors for a reduction on your interest rates. Tell the card companies that you’re close to the edge and are considering bankruptcy, but that you really want to pay back the principal owed. Ask for a break. You want them to waive the interest in return for post-dated regular payment.
While that works a lot of the time, sometimes it doesn’t. Or sometimes the rates don’t come down enough, in which case you need a consolidation loan. If your bank won’t help you consolidate, go and ask another lender. Sometimes our own bank takes us for granted, but another bank that would like the biz will cut us some slack. Ask for an installment loan with a maximum three-year term. Offer any other business you may have: your retirement plan, your mortgage, your accounts, whatever you have to show the new lender good faith.
Or you could do a balance transfer. Get a low interest credit card (yes, I know, but this is in the name of repayment, not more charging) and transfer part of each expensive credit balance to the new card. You want to do two things:
- reduce the cost on your borrowing, and
- get the balances on those cards below the 60% mark so you’re not seen as being too close to your limits.
Get another job. That’s right. If you’re ever going to get out of debt you need a source of money you can devote to debt repayment. If you’re already working 70 hours a week, then find a way to cut back on your spending – YES IT CAN BE DONE – to find the extra money to get out of debt. Stop buying everything but food, and that in smaller quantities.
Many of the Lenders of Last Resort, or the credit card companies that have the must outrageous rates and fees are U.S. companies. I don’t understand why Canadians have embraced these companies, making them fatter on our backs. They don’t have to follow Canadian rules because they’re U.S. companies. They don’t have to follow U.S. rules because they’re selling products outside their own jurisdiction. The result: through our own ignorance or stupidity we are being suckered into paying through our noses.
If you have a U.S. credit card – that’s any credit card issued by a U.S. company – take it out of your wallet and cut it up. I don’t care how great a “deal” you think you’re getting, it’s going to bite you in the butt. And if you’ve been dealing with a U.S. lender, give your head a shake. If you can’t get financing here in Canada, you have to ask yourself if – perhaps – you shouldn’t be borrowing. Using a Last Resort Lender is dumb, dumb, dumb. Are you?
May 20, 2008 at 11:54 am
Hmmm….are you sure the letter-writer isn’t pulling your leg Gail? The scenario of a banker not getting a loan from their own employer, then suggesting a 33% loan from Wells Fargo???
May 20, 2008 at 11:54 am
As always, love your blog Gail! Wow, we are certainly been taken to the cleaners.
Since I have been watching your show, every time I go to the bank for anything, I drink an extra cup of coffee and open my ears really wide – cause they talk a lot of high tech numbers and words and now I have learned to wade through the stuff.
In fact, my mortgage is up for renewale soon, so last month I went to the bank that I presently have it, to see what they could do for me. They have sucked me dry for the past 10 years – most of it my fault – not listening and being more aggressive.
I was sooooo fed-up, I just had to tell the banker lady – excuse my language, but let’s cut out the BS and get to the real numbers and the interest rates you can offer me, and if you can’t give me a rate that makes me drool, I don’t want to sit here, wasting your or my time, because there are 2 other banks I have investments with, and would like to spend my time there. Her jaw hit the floor and we got talking real numbers that I could work with.
After talking, I refused to make any decisions and brought the paper work home to look it under the microscope. I also went to the other banks and they gave me better deals to compete with this bank. So my plan is to pitch one against the other to get the best deal at the end of the year when the mortgage is up for re-newale.
I’m sorry but sometimes I feel we just have to stop being so soft and nice and not worry about hurting the banker’s feelings {we are women after all!} and come out with what we need and should get.
Thanks Gail! You Rock!
May 20, 2008 at 1:34 pm
Late last year our mortgage went up for renewal and we decided to see what a few of the banks would offer us. After some internet research and a few phone calls, I found a bank that would offer us a variable rate of prime less .9%. The condition was that if at any time we decided to lock into a fixed rate, then we would have to lock in for a minimum of 3 years. We were willing to live with that as the rate was pretty good. I went back to our current mortgage provider with this information to see if they could match it. After all, most of our investments are with them so we wanted to give them the right of first refusal since we had a backup plan. It only took 1 day for her to confirm with the powers-that-be that she could offer us the same deal but without the 3 year condition should we decide to lock in at a fixed rate (and why wouldn’t they match the deal? they are still making thousands in interest off of us). Prior to our mortgage renewal less than 45% of our mortgage payment was going towards principle. But now with the recent Prime Rate decreases we are up to 65% of our pymt going towards principle!! How great is that???
Just don’t be afraid to call around and see what is out there. There are plenty of companies out there that want your business. You just have to do a little leg work and you can be saving thousands off loans and the like.
May 20, 2008 at 3:15 pm
NR – thanks a million for the fantastic tips – will be calling around like crazy – am tired of not making a dent in the mortgage – feels like digging a tunnel with a teaspoon in a prison cell! Thanks.
May 20, 2008 at 4:28 pm
Christina, I’m pretty sure there’s no leg-pulling going on. Unfortunately I’ve met bankers who have told clients the wrong information about RRSP tax-deductability. I’ve seen bankers advise clients to consolidate own-RRSP and spousal-RRSP assets in a single plan. And I’ve heard bankers tell clients not to pay more than the minimums on their credit cards if they want to build a good credit rating. Since I’ve been involved with the financial services sector most of my working life, I’ve heard it ALL! Not all bankers are bad. Not all bankers are good. The banks in Canada used to have a commitment to their Fiduciary Responsibility but that’s gone the way of the Dodo Bird. Now they’re just in it for the profit, and there are a lot of people getting bad advice from the sources they thought they could trust.
May 20, 2008 at 6:37 pm
when renewing your mortgage, consider turning your mortgage into a line of credit. the rate might not be as great but the idea is that every time you make a payment, no matter how big or small, your interest portion will go down (and principle go up). you are not ‘locked in’, you can pay more with no penalties. whenever you have a couple extra bucks, throw it on. it’s super easy.
the catch: they advertise it as a ‘home equity line of credit (HELOC), and say ‘wow, you can take the equity out of your home, and renovate, pay for schooling, buy a boat’ blah blah blah, which is true. that way they have you forever. but if you treat it as a true mortgage, you’ll pay it off much faster without going hog wild on payments. food for thought.
May 20, 2008 at 8:50 pm
I think many people (like me) are waking up to the fact that in this day and age, with the internet and communication as it is, research is easy and it is not hard to shop around. Nor is it difficult to have your business in several places. It used to be it was convenient to have it at one place, because to do anything you had to travel to the branch to do it. Not so now. I have my investments with one company (track them on line), bank at a credit union (doing the majority of transactions on line, but visit occasionally) and have my mortgage with a virtual bank.
I have learned in the last few years it can also pay to have someone else do the work for you. I asked my bank for a car loan: their response was a terrible offer. I decided to try the dealership, as the girl there had said she could probably arrange financing. I was offered a good deal, the kicker was when I asked who it was through, it was with my bank, actually my branch! This taught me, maybe someone else negociates better than I do! When I was in the market for a mortgage, I used a mortgage broker…really happy as she got me a great rate (Bank and Financial Planner were very impressed with the rate so I figure I did good!) Neither the car dealership or the mortgage broker charged me anything for the service (it apparently comes from the banks end for bringing them business).
May 20, 2008 at 9:08 pm
I work for a major bank. I don’t personally issue personal loans/consolidation loans so I can’t comment too much there.
Helen, in terms of car financing, I use to do customer service on our dealer financed loans. The dealerships are given better rates because of the volume of business they bring in. The banks need to offer better rates there to stay competitive. The branches have budgets/goals and simply can’t compete with the rates that are given to the dealerships. I know it doesn’t make a lot of sense in simple terms, but the dealership is the way to go!
I can’t understand how your loan ended up at your home branch. Are you in a small town or rural area?
May 20, 2008 at 10:07 pm
All sorts of great comments here!
Gail, the home equity line of credit mortgage sounds too good to be true…. do you have any thoughts about them?
May 20, 2008 at 10:15 pm
I don’t think the HELC is a good idea for most people since the interest rate is always higher, and most people don’t take advantage of the prepayment options they do have. At RBC you can pay up to double your monthly payment every monthy. Other lenders let you up your monthly amount, use an accellerated pay plan and make anniversary pre-payments. These are much better options when you consider what you’re saving on interest. Even a .5% difference in interest rate can make a huge difference in the cost of a mortgage over the amortization. Plug the numbers into a calculator and see for yourself. So THUMBS DOWN to the Home Equity Line of Credit as a substitute for a mortgage.
May 21, 2008 at 10:15 am
Melaniesd asked: I can’t understand how your loan ended up at your home branch. Are you in a small town or rural area?
No I live in a city, bank at a fairly large Credit Union, perhaps they diviy up the different things between the branches eg the person that deals with car dealerships happened to be based at my branch?
May 21, 2008 at 10:36 am
All great ideas that have set me thinking and researching. Thank you everyone.
Quick question here – when do you know it is time to get a new or used car?
My husband is under the impression that a car should be changed every 5 years {he works for a car company and they just bombard everyone with ads and deals and what have you and he believes it – drives me crazy, crazy!}. And he always buys a brand new car off the lot.
My thought is, drive the car until it is on it’s last wheels. We maintain the car VERY well, it goes in for service every month, gets a full check up and repairs if any.
We fight terribly, and I have walked away many times angry and frustrated, only to find that he has bought a brand new car every 3-5 years.
This last car, I have been standing my ground, we have had it for 10 years and I want to keep it for another 10. He does not get it – he keeps telling me, it’s time to change the car, he cannot drive the car, he finds he needs to have a better car, etc etc etc.
When I look back, I shudder at the amount of money he has put down and the money thrown away. Nothing was wrong with the previous cars – just that it was 3 years old, it was time to change to a better, newer car – whatever that means, makes no sense to me.
He has always wanted to lease, I always insist on buying. Another fight always.
Help! Help! Help! Any comments, suggestions will be most appriciated.
Thanks a million.
May 21, 2008 at 3:39 pm
NMK:
Mathematically: does it cost you more to maintain the car than to buy a new one?
Situation dependent: How reliable does the car have to be? Can you handle a monthly versus a yearly breakdown? A travelling car salesman may not be able to own a unreliable car. Someone living by a bus station might be able to do without. So the question is: why do you own a car? (again separating needs versus wants…)
And then multi-car households…
Maintenance can have a great impact on the longetivity of a car.
Budgetwise: are your transportation costs (gas, insurance, car payment, car maintenance, etc) below 15% of your take-home pay?
May 21, 2008 at 4:38 pm
Interesting question NKM. I have been car payment free for a little over a year. I’m not sure that I have saved TOO much money as the repair costs have been much higher (as it’s now a 7 year old car). I am looking to replace my car this fall, although I won’t be buying brand new and I THINK I will be paying cash. I don’t want to have to worry about being on the side of the road with a car that has broken down.
Sometimes the benefit of having a low car payment that you can budget for is easier for people then having unexpected and costly repairs.
May 21, 2008 at 5:18 pm
NMK:
I forgot to do add something!
Do you have the 20% downpayment for the car when you purchase?
I will budget for the car payments before I change car in order to put aside my 20% down.
May 21, 2008 at 8:14 pm
NMK:
Do you know anyone who is leasing a car and soon returning it? Sometimes you can get a good deal on a lease buy-out.
DH & I are planning to buy my father-in-law’s car in a few years when he trades it for a new lease. As a senior he doesn’t want to worry about repairs etc so he likes to lease. The last car only had 65000KM on it in 4 years so it’s like getting a 1 yr old car for the price of a 4 yr old car.
I’ve been saving a small amount each pay towards buying this one out. It won’t be for 4 years though.
We currently have a 2 yr old car and that will be paid off in 3 yrs so we should be able to save the difference.
If things don’t go as planned, I’ll have some extra cash in the bank for repairs on our current car.
May 21, 2008 at 8:57 pm
Regarding the use of US credit cards. I have two cards for major US department stores. I use them ONLY on US shopping trips but here’s what I do. I bring US cash with me. I then take advantage of the sales that offer an additional 10-15-20% off if you use the store credit card! Then I tally up my bills, go to the customer service office and pay off the card before I ever leave the store! I think I am being a savvy shopper. Any comments?
May 21, 2008 at 9:06 pm
Gail, one more comment on the mortgage line of credit. I had this with a major bank. When my mortgage came due, the going rates were higher than I had been paying (for any term) but were trending downward. I let the fixed portion go into the floating line of credit portion which was charging interest at prime. The bank sent me a statement each month charging “interest only” but I always put down way more and was totally free to do that (changing the amount each month when I was more “flush”) as the line of credit did not have the restrictions of a mortgage payment plan. All the extra of course was going right to the principle and I was then free to firm up when rates were more reasonable.
May 22, 2008 at 8:43 am
Marie, Christy, Melaniesd – Wow, you guys are all sooo amazing!
Well, we live in the suburbs, and bus service is seriously lousy – bus on the hour, miss it and one has to wait a whole hour to get the next one. We only have one car, as I am unemployed presently. Should I have to run errands, I do take the bus, I do not drive, so that is another thought there. My son takes the bus to school.
Well, the present car is all paid off. The repairs on the car are under $2000 a year. And thank the Lord, we have not had any road side assistance so far, but he is covered for that by the company. The cost of running this car is about 10% of our budget.
I have the down payment for a car, but really, do I need to buy a spanking brand new car off the lot? I understand that the value of the car drops as soon as you drive it off the lot – am I right?
You know that is a great idea, to buy a leased car. Will have to look into that.
With being unemployed and then the down turn in the economy, I think, my biggest fear right now is – if husband looses his job, what will we do? I think I am also a little angry at him for wasting all that down payment money on the previously brand new cars, every 2 to 3 years, money we could have put away for times like these, almost $20,000 gone in a flash, not to mention the payments made on the cars when we had them, and then trading them in for peanuts to get the next car.
Thanks a million, you all are super amazing!
May 22, 2008 at 8:47 am
Marielle Chapman – I think that is a great idea, because, not only are you getting additional x% off your purchases, you are paying it off even before you are out the store. I, personally, think you are a smart shopper.
I’m too afraid to carry cash, so I have one credit card, that I put the purchases on, and the bonus for me is, the credit card gives me money back at the end of the year. I make sure, I pay off the credit card statement as soon as I receive it.
Thanks!
May 22, 2008 at 12:13 pm
NKM – You do not have to buy a new car to have a reliable car. You are right that the car loses value as soon as you drive it off the lot. My husband is a huge believer in buying 2 year old cars. Let someone else loose the money. My current car was bought at a year old – with 20K kms on it. Nothing. I saved about $5000 by buying it this way. You also save yourself the freight cost.
May 22, 2008 at 2:19 pm
Christy – thanks! This is the impression my husband is under – always buy brand new. You just helped me make up my mind – if and when I do ‘allow’ him to buy another car, it will not be a new one. I’m tired of loosing money on new cars. Thanks Christy.
July 29, 2008 at 9:42 pm
Gail, I just had to tell you about this. I saw an account manager at my bank to set up RESPs for my sons today. In the course of discussing things, she told me that she and her husband have accepted that they’ll “die in debt”. She further went on to say that having fun and living life to the fullest and spending every spare cent she makes every month was more important to her than being like the old people she sees come into the bank with hundreds of thousands of dollars and “nothing to show for it”. That those people obviously haven’t lived because they saved while they were young and were too old to do anything with it now.
I was very thankful she was only setting up the account and not actually handling the portfolio, because I’d be scared to have this lady do anything with my money.
July 30, 2008 at 9:36 am
To Amanda – I had a similar situation with my present bank account manager. I have been trying to set up automatic withdrawl of extra payments for my mortgage to pay it off faster and she just would not do it. She had excuses or she’ll say, I’ll have it set up in a few days and nothing had been done.
I finally had a major fit and called the toll free number to set up this transaction, explaining to the lady what happened at the branch and she was very sorry that I had this experience. The payments were set up right there and then.
I feel, that if as a bank account manager, your ‘house’ is not in order, you really should not be trying to put our ‘house’ in order, cause you have no clue what you are doing and can actually hurt our financial plans and goals.
It’s very scary. I’ll be moving bank branches very soon.
Thanks.