Before success frequently comes failure. Frequently, in fact, before success comes many failures, as in Edison’s oft-quoted 1,000 failed attempts at inventing the lightbulb.
If you are anywhere on the journey of paying off debt, know that you learn from each and every mistake. Oddly, failing is good news – growing, and changing, requires failing occasionally (or often!). While you won’t fail if you don’t try new things – if you’re not making any changes, you’re not making any progress either.
In the last two years, we’ve made major progress with regards to conquering debt. But I wanted to take a moment and share some of the attempts I made that didn’t work – or that did work, but ended up costing much more in the long run. I’m sure I’ve made other mistakes that I’ve either forgotten about – or worse, didn’t even recognize!
Refinancing my car to pay off a credit card
Fresh out of school, I was tired of having older cars with constant problems. So, I bought a brand-new, bright red Mazda Miata convertible – with a matching (large) car payment. I loved that car – and oddly, I got lucky with it, in that it was a limited edition and held its value far better than I had any right to expect. Some 3 years later, I had paid down the loan to around $6,000, and had a $10,000 credit card balance that was a major point of stress.
My ex-husband, whose legacy to me was (among other things) sexually-transmitted debt in major proportions, suggested that I refinance the car to pay off the credit card. I had never heard of such a thing – who knew you could borrow against a car in a cash-out refinance like a house? But you can, actually – assuming the car’s value is sufficient to justify the loan. So, off I went to the bank, who informed me that they could loan up to $16,000 on the car’s current value, exactly the amount I needed to pay off both the current car loan and the credit card.
Now, in some ways this wasn’t horrible – after all, the interest rate on the new car loan, around 8%, was far less than the interest rate on my credit card. It was also probably less than I would have gotten for a non-collateral personal loan.
So what’s the big problem? Chief among the issues is that, had I been unable to pay the loan, I would have lost my car, leaving me with no transportation. I had converted personal debt with no collateral into debt with the right to repossess my only method of transportation.
In addition, I had already paid 3 years toward my original car loan; but I refinanced for another 5 years. So, my original loan actually took 8 years to pay off! And the addition of my credit card payoff amount meant I couldn’t sell or trade-in that car until the refinanced loan was paid off; leaving me few options if the car no longer fit my needs, or started having too many problems.
The good news is I was lucky and didn’t have major financial issues or the need to sell the car before the loan was paid off. And thankfully, that loan was paid off about a year before my son was born and I suddenly realized that a tiny, two-seated Miata was a horrible car for a woman with a newborn!
The lesson learned? Never convert unsecured debt to secured debt if you can help it. This is the same reason it’s not a great idea to refinance your house to pay off debt – you’re risking other belongings and potentially your home!
Incidentally, the other lesson learned? Don’t buy cars new! Even though this particular situation worked out okay, I got lucky – the car actually outlasted the loan. If the car had broken down and been unrepairable while I still had a car loan on it, I would have been stuck paying the loan and buying another car simultaneously. This was my first, and probably my last, new vehicle purchase. My current vehicle was bought used at ten years old with a very small, short-term loan (I was able to pay cash for about half of it), and has been driven for six years so far, and still going strong.
Not working with my creditors when things weren’t going well
At one point, my ex-husband left the military, I lost my job, and we got divorced…all within a few months’ time. Not surprisingly, the minimal savings I had wasn’t enough to cover the mortgage and other debt payments, not to mention the attorney’s fees from the divorce.
But I was embarrassed – so not only was I still going out to eat with friends, so they wouldn’t realize how broke I was, I wasn’t communicating with my creditors. I absolutely did not want to admit that I was having problems, and in the long run, it cost me a lot of opportunities to work out solutions. The last thing I wanted to do was call and have a discussion about my money challenges.
I also feared outcomes such as creditors closing my credit card accounts, which would look bad on my credit report. Looking back, I should have been much more afraid of letting things get out of hand completely; a minor hit to my credit report would have been no big deal.
I ultimately found a job some four months later; but by that time, I was behind on nearly everything. About a year after I had first lost my job, I actually started reaching out to creditors and asking for payment options; but by then, I was already behind and already taking hits to my credit report.
I was pleasantly surprised – most were willing to work out temporary solutions to keep me as a customer and keep me on good terms. Only one, a vehicle loan company, offered no alternatives or programs whatsoever.
The lesson learned? Call your creditors early and often if you’re running into financial difficulties. Most are willing to work with you if you’re up front about it. What do you have to lose if you don’t? You run the risk of falling behind when there may have been other options; leaving you in a hole you have to dig out of. You may risk your pride, but let’s be real – you should be proud of proactively trying to avoid major problems, being honest with your creditors (and yourself) and actively working to resolve things.
I think this “failed it!” post will become part of a series on lessons we’ve learned the hard way. After all, if you can learn a lesson without having to experience the failure yourself, we’ll all win. Want to share a #failedit moment of your own? We’d love to hear from you below!