How a Fixed Rate Personal Loan Can Help You Beat a Credit Card Rate Increase

[Mar 6, 2009.]

 

As credit conditions have deteriorated for both borrowers and lenders, both sides of that equation have reconsidered this time-honored relationship.

American Express, for example, suffering from heavier than usual defaults and late payments, has been rumored to want out of the credit card business entirely.

More problematic for Visa and MasterCard customers has been the trend towards rate and term changes for existing customers who are carrying high balances on their credit cards.

An unsecured personal loan, at a fixed rate, may provide an answer for credit card borrowers who are facing an interest rate hike or credit limit cut.

Credit Card Balances Can Become a Vicious Cycle

In a recession, especially a job loss intensive one as is occurring right now, the inability for people and businesses to plan for the future is Public Enemy #1. Incomes are uncertain and, thus, so are loan repayment possibilities.

Sometimes, banks attempt to re-obtain certainty by raising interest rates on existing customers--to try to recoup losses from non-paying debtors. However, this often only makes the repayment challenge that much more challenging.

Let's take the example of someone who has a job, has been making their minimum credit card payment each month, and carries a balance of $10,000. To that person, an interest rate increase from 14 percent (which they'd been planning on) to 19 percent can mean one hundred dollars extra in that payment per month.

Over the course of the year, that's more than $1,000 of unplanned expense, and principal is still not getting paid down, usually, only interest. It's unlikely that the borrower's raise at work will keep up with this increase.

If the borrower misses a payment, penalties accrue, and interest is charged on those at the higher rate. It can become a vicious cycle.

The Beauty of Fixed Rate Personal Loan

Credit card users who find themselves in the above situation--rising credit card interest rates but stagnant or even decreasing income from the job--are prime candidates for a fixed rate unsecured personal loan.

Although not everyone can qualify for a fixed rate unsecured personal loan, many people can. The borrower above, employed and in need of a relatively small loan, could probably find a suitable option in the personal loan market.

If a fixed rate personal loan can be found at a 10 percent interest rate in the amount of $10,000, he or she won't have to worry about those high and getting higher credit card interest rates.

He or she will be able to plan with certainty what the monthly payment is going to be, and how many months it's going to take for repayment to occur.

It may not be easy, but it is simple.

 

About Author:

Andrew Freiburghouse is a writer and businessman. He has worked as a magazine reporter, tax preparer, screenwriter, copywriter, and loan officer. He graduated from Santa Clara University in 1999 with a B.A. in English. Andrew was born and raised in the City of Los Angeles.