I have a line of credit which was assigned a fixed rate and set repayment plan. Recently they raised the APR from 14 to 19.74 percent stating "due to current state of the economy". I still owe a little over $8,000 with monthly payments of $220. They said the only way around this increase is to close my account and they will revert to the original rate but this will negatively affect my credit or double my payments to pay off faster. I can not afford to pay more than the agreed amount which at the time I originated the loan would have it paid off in 6 years. Now it will never be paid off. Should I close the account or should I add this creditor to my existing consumer credit counseling account? Which is the better of two evils?
I understand how frustrating it can be when banks arbitrarily increase the interest rates they are charging on existing loans. When your line of credit came due and the bank set up a repayment plan with a fixed interest rate and monthly payment amount, I am sure that you believed, as do many consumers, that the quoted rate, payment amount, and repayment term would not be changed without your consent. Unfortunately, in the modern American economy, banks can charge their customers almost any interest rate, fees, or penalties the banks deem appropriate, and there is little that we consumers can do to rectify the situation. The large banks have nearly bottomless pockets to pay lobbyists and to make large contributions to the campaigns of many state and federal politicians, giving them an undue amount of influence in our government bodies. As a result, almost all state laws relating to the amount of interest that can be charged on loans, often called “usury laws,” have been largely nullified when it comes to banks. In many states, if you loaned someone money and charged them 19.74% interest on the loan, you would be practicing usury, which can be criminal. However, banks are allowed to charge interest rates of 30% or more on credit cards and other unsecured loans. With interest rates this high, it is no surprise that many Americans are drowning in an ever-growing ocean of debt.
Now that I have spoken my mind about the practices of many large financial institutions, I would like to take a closer look at your situation and help you figure out the best way to resolve the problems you are having with your credit line. As I mentioned, I know it is frustrating to see your interest rate increased for no apparent reason but that the creditor needs more money coming in the door. However, I ran the numbers on this loan based on the information provided in your question, and the situation may not be as insurmountable as you think. At the old interest rate of 14% with payments of $220 per month, it would have taken you approximately 48 months, or four years, to pay off your remaining $8000 debt. With the interest rate increased to 19.74%, the debt will be paid off in around 56 months, or a little over four and a half years, if your monthly payments remain at $220. As you can see, this rate increase will only extend the repayment period by around 8 months; I know that this is longer than you were originally planning to be paying on the loan, but that you can still pay this loan off within a reasonable amount of time. While the repayment period is not too much longer than you originally planned, you should know that the increased interest rate will result in your paying about $1800 more in interest over the life of the loan. If it is ever possible, you should try to increase your monthly payments in the future to repay the loan faster to reduce the amount of interest your will pay on this debt. For some helpful tips for consumers struggling to repay their debts, I encourage you to visit the Bills.com website.
I am not sure why closing your account would increase your monthly payments, unless the creditor would increase your minimum payment % in order to have the loan paid off faster. I also cannot see how closing the account would significantly damage your credit rating; your score may decrease slightly due to the decrease in your overall available credit compared with total debt owed, but this impact will likely be minimal and short-lived. I would encourage you to contact the lender to discuss its policies in detail to determine exactly what will happen if you close your account, and how much your monthly payments would increase. While it would obviously be great if you could prevent your interest rate from increasing by closing the account, if doing so will make your payments unaffordable, it would probably make your overall financial situation worse rather than better. I would advise you to proceed carefully, to communicate with your lender, and determine exactly what the affect of closing your account would be. If you have any doubts about closing your account for fear that your payments will increase, I would advise you to keep the account open and continue making your regular payments; even with the interest rate increase, you will still be able to payoff this debt within a reasonable period of time.
Even if you are unable to close the account and keep the interest rate at 14%, the amount of time needed to pay off the loan should only increase by about 8 months, as I explained before. Given the relatively small increase time required to pay the loan, I would recommend against adding this account to a credit counseling program. Credit counseling programs generally try to work with creditors to reduce the interest rates charged on consumers’ accounts; however, this creditor has already expressed an unwillingness to work with you in regard to the interest rate or the payment amount, so adding the account to your CCCS (Consumer Credit Counseling Service) program will probably not be of much benefit. I think that your best option at this time is to simply continue making your payments each month until the account is paid off; hopefully you will be able to increase your payments in the future, allowing you to pay the account off faster and to reduce the amount of interest you pay over the life of the loan.
If you would like to read more about the options available to consumers who are struggling keep up with their debts, I invite you to visit the Bills.com debt help. I wish you the best of luck in resolving this account, and hope that the information I have provided helps you Find. Learn. Save.