Consolidating loans using high-interest private money?
Yes, the thought of using private money may sound scary, or even obscure.
However, if you're in a tight spot with your finances and are having a hard time obtaining traditional bank loans, this may be the ideal way.
Having bad credit situations makes it harder to leverage properly, but it does not stop you from fixing it.
And - while you re-establish solid credit, the alternative route is a one-time fixed monthly obligation which would come to around the same, if not, less of a payment.
How does this make sense?
Consolidating your debts with Private Money essentially means borrowing against your home and refinancing it as an exit strategy down the road.
The interim private money provided would carry a high-interest rate but is to be considered only as a bridge loan.
It's important to remember that Private Money should never be considered a long-term solution
When paying such high interest rates, you do not want to keep the loan for longer than 12 to 24 months.
Private money requires the entire balance to be paid at maturity. This means that you will need to pay the principal back by the term agreed upon between yourself and the private lender.
- Assuming that you have a $400,000 property and that it is mortgaged at the present for the amount of $200,000.
- Next, let's assume that you have about $50,000 in high-interest credit card debt and are looking to consolidate it and to pay it off.
- At this stage, let's assume that your credit is bad and that you're unable to borrow tranditionally.
- Our goal is to leverage the remaining equity in your home, which is around $200,000 (since the other half is mortgaged).
- By going to a private lender, you'll be putting yourself in a position to borrow 25% LTV based on the remaining equity. This allows you to borrow $50,000 against your property.
- Using this private money, you now are able to pay off the high-interest Credit Card debts.
- By waiting and maintaining low balances on those Cards and by using solid Credit Building strategies, you're now in a position to borrow from traditional banks.
- By this stage, you'll be able to refinance your property thanks to your re-established Credit and from the funds borrowed, you can exit the private money that you had initially borrowed by pledging your property as collateral.
Credit Cards are dangerous if not used right
If you've borrowed private money, you should consider the consequences if you fail to pay it off based on the terms.
Most importantly, remember that you're only using the private money as a bridge loan and not something that will be long-term.
Here's what you need to know:
The goal of borrowing privately instead of institutions is mostly because of bad credit. And you probably got damaged credit due to missed payments, some negative accounts, and some other factors.
With that being said, it's important that you maintain your credit properly.
Often, it's not uncommon for people to go back to their paid off credit cards and start using them again.
You have to be very careful. You don't want to stack up that debt as you initially did since your house is on the line.
Don't stop using the cards though:
Keep a close eye on how you spend but spend moderately. Using your cards and keeping low balances on them helps improve your credit and debt ratio.
Make small purchases using your cards that you would have paid cash for.
And remember, stay disciplined and accountable.
Here are some suggestions:
Things to buy on Credit:
- Gas for your car
- Pet food (if you have pets)
- Phone bill
- Internet Bill
- Online Purchases (moderate)
Things not to buy on Credit:
- Vacation packages
- Paying for repairs on your Car ($1000 +)
- Buying expensive jewelry
- Things that you CANNOT Afford
- Overpriced Drinks at Bars/Clubs
Of course, the recommendations above are suggestions and may not reflect your current situation.
Cash Flow matters a lot in a Debt Consolidation Scenario
If you've made the choice of going the private money route, it's important to consider some key facts:
- You've made the choice of consolidating privately because you wish to spend less on your debts
- By paying less every month, you're hopefully left with more money
- You want to maximize your savings and this will ultimately increase your cash flow
Having more money at the end of every month is not a bad thing.
What are some reasons why you would need that extra cash flow?
There are many reasons why having those surplus funds stashed away may come in handy.
- You can use it for a rainy day
- In case your credit still needs some work, it may be used as a tool to extend your private loan
- Build more credit by using it as collateral with traditional financing by pledging it such as a "Secured Credit Card" (very useful if done with the bank that you plan on refinancing your mortgage with)
Cash Flow = Leverage
If your cash flow reaches a certain amount based on strategic financial planning, you may be able to use it wisely such as investing in Real Estate based on your personal investment philosophy.
The more money you get to keep and leverage, the better it is for your financial circumstances.
Mistakes definitely happen - but learn from them!
Being in a tight situation where you need to borrow private money from a private lender against your property is no joy ride.
I would strongly suggest that you analyze your financial situation and take the time to understand what led you down that path in the first place.
Sure, it's entirely possible that it may not be your fault. It can be that you were laid off and that you are unable to sustain the debt at the moment.
Whatever your situation, always plan to have a solid exit strategy in place.
A lot of people take private loans too casually. Don't make that mistake.
If you're not careful and are careless, you may end up losing your home. That includes the downpayment you had initially made towards your home.
Private money is sensitive and you need to be cautious when using it.
Most importantly, document everything properly, including previous mistakes and lessons learned.
Private funding should always be a last resort. It's perfectly normal that you consider this option, especially if your credit is low.
Don't forget to plan your exit strategies in place prior to considering on talking with a private lender.
Here at Best Credit Resources - our aim is to provide you with the best solution based on your financial condition. If you need assistance, we're one call away.