Secure loans

Nikki and I found ourselves in a situation that is probably not all that uncommon between two people dating. Nikki incurred a lot of debt to get through college, the most egregious (though not largest) of which is her credit card debt, with its high interest rate, fees and penalties. I have some money, so I’d like to help her out, but it took us a while to find a good way to do so. The amount is large enough that, in our stage of relationship, it would be over the top for me to pay off entirely. I could lend her money at a low interest rate, she could pay off the credit card debt, then pay me back. But having that kind of debt between us would add unwanted complexity to our relationship, which could turn messy if things don’t work out between us in the long run.

We found our ideal solution in the form of secure loans. I first heard about the general concept of secure loans when I talked to Andrew and Steven of Open Produce about ways to invest in their store. They said I could put money into a CD in my name, then let them use that as collateral for a bank loan. My money would only be touched if they defaulted on the bank loan, but otherwise I keep the money and interest. That sounded like one of those win-win-win situations. The bank can give a loan with virtually no risk (since there’s collateral), my friends get a loan at a low interest rate, and I feel better about investing because I don’t have to handle the logistics (and potential mess) of collecting my money and interest. That got me thinking; maybe something like that would work for Nikki as well.

We spent the better part of a day earlier this week visiting financial institutions in the Mountain View area, to see if we could get her such a loan. Our first stop was WaMu/Chase, but due to the recent acquisition and transitionary period, they didn’t offer secure loans. We then tried Bank of America, who told us the best option would be for me to get a credit card with a low introductory rate, and lend her money directly; exactly what we didn’t want. We then tried Wells Fargo, who did offer secured loans, of the kind we were looking for. They said we could open a CD, then take out a loan of up to 90% of the amount in the CD. Unfortunately, the rates weren’t great. Right now, CDs have a pretty low interest rate, but the loan would have an interest rate of around 10%; lower than the 16% she pays for the credit card now, but it seemed high for a loan for which the bank incurs virtually no risk.

The friendly lady at WaMu/Chase had told us to also try credit unions, so after visiting 3 “real” banks, we did some research in the car using Google WiFi. Our conclusion? Credit unions are awesome. They’re like banks, but owned by its members, so they generally have lower rates. Indeed, the two credit unions we visited both offered secure loans, and had much better rates. One offered loans at 2% above the interest rate on the CD (rounded to next .5%). So if the CD has an interest rate of 2.1%, the loan would have an interest rate of 4.5%; more than 10% less than Nikki’s credit card! The other place was similar, but with rates of 2.5% above the CD rate, instead of 2%. There were other minor differences. One of the credit unions had no minimum monthly payments and the whole sum was due when the CD matured, but the other place had minimum monthly payments. One required both our names to be on the CD and loan, while the other allowed for the loan to be in her name only (which is exactly what we wanted).

At the end of the day, we felt pretty good about having found a financial mechanism that suited our needs, and one that would save her thousands of dollars over the next several years at that. I also reflected on the fact that, for millions of other Americans in debt, such financial machinations aren’t available to them, not necessarily for any fault of their own. But, that’ll have to be another post.

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