Interest Rate Arbitration – What Is It?
Interest Rate Arbitration is a debt relief strategy designed to lower interest rates on debt payments. This debt relief strategy is most often used by debtors struggling with multiple credit card and loan payments each month. It helps debtors obtain lower interest rates on debt accounts, thereby lowering monthly outgoings and making it easier to track, manage and pay off several bills simultaneously. Simply put, this debt relief strategy enables you to consolidate multiple bills at low rates.
How Does It Work And It’s Benefits?
The process is simple. In interest rate arbitration, the debtor takes out a secured loan, that too, at a low interest rate to pay off the existing multiple unsecured debts. In other words, you take out a secured loan to eliminate the unsecured debts. As you may already know, the interest rate on secured loans is mostly lower than that on unsecured loans; hence, it helps you cut your monthly payments dramatically.
However, to take out the secured loan through interest rate arbitration, you will have to pledge collateral against it. Collateral helps the lender cushion the loss in case you fail to pay off your debts. You can use this secured loan to pay off your unsecured debts like store cards, credit cards and medical bills.
When you take out the secured loan using this debt relief service, all you need to do is make a single monthly payment on the new secured loan. Since the debt is consolidated at a lower interest rate, the payments are also small. It is important to understand here that debt payments usually seem big and impossible to pay off typically because of high interest. High interest on unsecured loans puts many debtors in trouble, and your inability to pay that amount timely, burdens you with more debt due to late fees associated with it. To break this cycle, a single monthly payment on the secured loan at a low interest not only helps you make timely payments but also enables you to save hundreds of dollars. By reducing interest rates on multiple accounts, you can experience significant saving each month and pay off your debt easily.
In addition to this, managing and tracking payments through this method is also pretty easy as you no longer have to manage several accounts and payments.
To understand interest rate arbitration process in a better way, here’s an example:
Let’s say Jim has three credit cards at different interest rates:
- Credit Card 1 with 16 percent interest
- Credit Card 2 with 19 percent interest
- Credit Card 3 with 25 percent interest
- The average interest rate: (16% + 19% + 25%) / 3 = 20 percent
- The outstanding balance on credit card 1 is $17,000
- The outstanding balance on credit card 2 is $12,000
- The outstanding balance on credit card 3 is $5000
- The total outstanding balance is $34, 000
- Jim combines the three credit cards into a new secured loan at an interest rate of 11 percent
- At the end of the year, Jim lowers his interest rate by (20% – 11%) = 9 percent
- Let suppose if the new secured loan amount is also $34,000 then Jim will save 9%* 34,000 = $3060 annually.
Alternative to Secured Loan
Another way to arbitrate interest rate is through the balance transfer method. In this method, debtors can transfer all their balances from high-interest cards to a low interest rate credit card after paying a processing fee. By doing so, you can easily lower your interest rate and save money.
Please note, some companies often charge 0 percent interest rate on these cards during the introductory period, which may last around 6 or 12 months. This means during this period, you don’t have to pay any interest rate, but you do have to make payments towards your outstanding balance. But here’s the catch, if you fail to pay off your debt and clear your outstanding balance within the introductory period, the credit card company can double and sometimes even triple the interest rates once this period ends. So, if you opt for the balance transfer method, then we advise you to pay off your outstanding balance within the introductory period to avoid huge interest charges after the introductory period is over.
The two big risks associated with this debt relief strategy are:
- Trading debt for secured debt, you’ll have to pledge collateral and when you fail to pay off, the lender can use that collateral to cushion their loss
- The temptation of using credit cards after interest rate arbitration. If you can’t resist this temptation, you’ll find yourself back in the same situation that you were before. Therefore, you need to make sure that once you select this option to pay off your debts, you’ll be careful with your spending, cut down your expenses and make sure you don’t go around swiping your credit card on every item you fall in love with at the first glance.
Who Should Consider Interest Rate Arbitration?
This option is ideal for anybody who:
- Can’t afford to pay high interest rates on unsecured debts
- Is late on debt payments
- Wants to lower interest rates
For more information or assistance, get in touch with us today! Our experienced debt consultants are just a call away.