January 08, 2007
Debt Consolidation Loans
Debt consolidation loans might be the easiest way for you to begin the New Year off on the right note. If you are not familiar with the concept of consolidating debt, the simplest way to describe it is:
You make a list of every debt that you owe to anybody and get one loan to pay off all debts owing.
When debt spins out of control consolidating your debt might be the best option for you because you now only have one payment to make and usually the payment amount is lower as the pay back time is usually extended.
If you have been struggling to make ends meet you might want to consolidate your student loans, credit cards and any other outstanding debts, especially high interest debts, and roll them into one easy to make consolidated payment. To really take advantage of a debt consolidation loan make more than the minimum payment to accelerate relief from debt. When you pay more than the minimum requirement, you will chip away at the principal which will not only pay off your loan faster it will also reduce the amount you pay in interest charges.
Don't put this off, consolidate your debts today and start breathing easier.
August 26, 2006
When NOT to Use Your Credit Card
There are legitimate reasons to use your credit card such as:
I could go into every possible purchase but there is no need to go into that depth for what I want to say to you here.
Using your credit card to earn rewards points is a wonderful thing but make sure you don't over-extend yourself. Earn your points, pay your balance in full. That is a good use of a credit card.
When NOT to use the plastic
Never use your credit card for cash advances!
If you need to make a purchase you are much better off making the purchase of an item on your credit card as purchases in most instances have a grace period before interest begins to accrue.
A cash advance will immediately begin to accrue interest. Check your rates, as you will find the cost of borrowing on your credit card is incredibly high! Avoid pulling money from an ATM on your card, it's going to hurt! Same goes for those Visa and MasterCard checks that are exactly the same thing as a cash advance on your credit card. Credit card checks are simply a sneaky way that the banks have come up with to encourage you to take out a high interest cash advance.
If you truly do need to borrow money in the form of hard cash you should apply for a personal loan at a much lower rate than a charge card. Yes, it will take a little longer to receive the cash but this simple piece of advice will save you a lot of hardship down the road.
Cash advances on credit cards are a fools game - Don't play a game that is going to leave you facing the potential of bankruptcy!
Posted by Colin at 03:19 PM | Permalink | Comments (0) | TrackBacks (0)May 18, 2006
Wow - Those Little Pieces of Debt
I don't know about you but it certainly seems every store and service out there offers a financing program with short-term interest free periods to entice the sale but the interest sky-rockets after the intro period.
Sitting at the kitchen table with my wife going through all our bills we realized that we are getting hammered on all the store financing for furniture and appliances we bought. At the time of purchase all we seemed to hear was "interest free" so heck why not, interest free money, I would rather pay something off slowly that doesn't cost a dime in charges. I guess we neglected to ask all the right questions such as "how long is this purchase interest free?". It would be nice if sales staff would mention this, at least do it after closing the sale. I guess they worry that might result in returned merchandise, that would not have been the case with me though, I simply would have liked a straight-shooter sales person.
While each bill isn't that large by itself when we add up all the small bills and store interest it IS a sizeable amount. We will be heading off the bank to take out a lower interest consolidation loan. If you find yourself in a similar situation you should consider doing the same, in our case consolidating loans will save a few hundred dollars every month which we are going to use to pay down the principal on the loan at an accelerated rate.
Posted by Colin at 10:43 AM | Permalink | Comments (0) | TrackBacks (0)May 17, 2006
Credit and Loan Categories Explained
Apart from credit cards, there are five basic categories of credit:
What Is an Instalment Loan?
An instalment loan is the typical loan you take out to finance such major purchases as a car, appliances or a new roof. It is a loan of a fixed amount that requires regular payments. These payments can be made weekly, bi-weekly, semi-monthly and/or monthly. There are two types of instalment loans: fixed-rate and variable-rate.
Fixed-Rate Instalment Loans
With a fixed-rate instalment loan, the conditions and interest rate are set for the term of the loan and payments are usually blended. That means the payments are set up as a blend of principal and interest designed to repay the loan in total by the end of the term. For example, if you borrow $5,000 at 10 percent, you'll pay a total of $500 in interest in the first year, assuming the interest isn't calculated on a declining balance. That means that over one year you'll make total payments of $5,500, or $458.33 a month.
Many financial institutions calculate the interest on your loan on the declining balance. To understand how this works, you have to look at the principal (i.e., the amount you borrowed) and the interest (the cost of the loan) as two separate payments. For example, if you borrow $5,000 at 10 percent on January 1 and your payments are $400 a month, this is how your monthly payments would be applied:
| Outstanding Balance | Monthly Interest | Monthly Payment | Applied to Principal | Principal Balance | |
| February 1 | $5,000.00 | $41.66 | $400.00 | $358.34 | $4,641.66 |
| March 1 | 4,641.66 | 38.68 | 400.00 | 361.32 | 4,280.34 |
| April 1 | 4,280.34 | 35.66 | 400.00 | 364.34 | 3,916.00 |
| May 1 | 3,916.00 | 32.63 | 400.00 | 367.37 | 3,548.63 |
| June 1 | 3,548.63 | 29.57 | 400.00 | 370.43 | 3,178.20 |
| July 1 | 3,178.20 | 26.48 | 400.00 | 373.52 | 2,804.68 |
| August | 2,804.68 | 23.37 | 400.00 | 376.63 | 2,428.65 |
| September 1 | 2,428.65 | 20.23 | 400.00 | 379.77 | 2,048.88 |
| October 1 | 2,048.88 | 17.07 | 400.00 | 382.93 | 1,665.95 |
| November 1 | 1,665.95 | 13.88 | 400.00 | 386.12 | 1,279.83 |
| December 1 | 1,279.83 | 10.66 | 400.00 | 389.34 | 890.49 |
| January 1 | 890.49 | 7.42 | 400.00 | 392.58 | 497.91 |
| February 1 | 497.91 | 4.14 | 400.00 | 395.86 | 102.05 |
| March 1 | 102.05 | 0.85 | 101.20 | 101.20 | 0.00 |
As you can see, since your principal goes down each month, the amount of interest you pay also goes down so that more of your payment goes to paying off the principal. Financial institutions calculate the interest on the declining balance from the outset, so the lender will provide you with a monthly payment amount that will pay off the loan in the term you request.
With a blended payment, you know exactly how much your payments will be each month, and how long it will take to pay off the loan so you can work the payments into your budget.
Variable-Rate Instalment Loans
Variable- or floating-rate instalment loans provide you with maximum flexibility during periods when interest rates are declining. The rate of interest charged fluctuates with changes in market conditions. For example, if you take a loan in January at 10 percent and in mid-month the interest rates fall, then the interest rate charged on your loan in February would be adjusted down to reflect the lower rate. Typically, though, the amount of your payments doesn't change. Instead, more of your payment is applied to the principal since less is needed to cover the interest.
With floating-rate loans, the interest rate is not fixed. Rather it "floats" with the prime lending rate. Prime is the lowest rate a financial institution charges its best customers — usually their corporate customers since they tend to borrow considerably high amounts than most individuals. We common folk usually pay several points above prime. The more valued you are as a customer, the lower the interest rate you'll be charged.
Be aware that with a variable-rate loan, if rates rise dramatically the monthly loan payment may not cover all of the interest since the payment was established based on interest rates in effect at the start of the loan. The interest not paid would still be owed, or you may be required to increase the monthly payment. If you choose a variable-rate loan, watch where interest rates are going and lock in when rates appear to be rising. The last thing you need is to get stuck with a loan with a variable rate going up, up, up!
What Is a Demand Loan?
This is a loan for which the lender can ask (demand) repayment at any time — referred to as "calling" the loan. However, a repayment schedule is usually established at the time the loan is granted. Payments on demand loans can be blended, fixed principal plus interest, or interest only. The interest charged usually floats.
Some people choose a "fixed principal plus interest payment" where a specified amount of principal plus the interest accrued is repaid each month. If you choose this method, the payments may not be a fixed amount each month because the interest charged may vary from month to month. Alternatively the financial institution may ask for additional payments to cover the increased interest amount if rates go up.
Susie decided to buy a partnership in a commercial property venture. A demand loan was being offered by the institution that was financing the partnership deal. Susie decided she wanted to use a "fixed principal plus interest payment" so that she would have the loan paid off within five years. She chose to pay off $500 a month in principal plus whatever interest was owed. That means she would pay off $6,000 a year in principal, plus the interest. She began by making monthly payments of $725 a month. Since interest rates went up midway during the term, she eventually had to make payments of $825 a month to keep up.
With an interest-only loan, while the monthly interest costs must be paid each month, no principal is repaid. The principal remains outstanding for the full term of the loan, and interest is calculated on the full principal each month. Some people use this type of interest calculation when they are borrowing for investment purposes and want to minimize their cash flow outlay, particularly when they wish to use the interest paid as a tax deduction for income tax purposes.
Susie's husband, Dalton, also took a share in the same commercial property venture. Dalton chose to use an interest-only loan so that his cash flow wouldn't be strapped. His payments started out at $225 a month and eventually rose to $325 a month. However, he made no payments against his principal. At the end of five years, he still owed the total principal, while Susie had her loan completely paid off. However, since Dalton was doing considerably more investing than Susie, this suited his purposes. He knew exactly how much interest he had paid each month (for tax purposes) and he could easily work the $325 payments into his cash flow.
What Is a Personal Line of Credit?
A personal line of credit (PLC) is a floating-rate loan that establishes a specific amount of credit available to you. Since the maximum credit limit available is established when the PLC is approved, you don't have to be concerned with the delays or justification associated with applying for a new loan each time you need credit. Once approved, you have immediate access to the credit line established, and can use it whenever you like for whatever you like. You are often provided with a set of PLC cheques, which you can write to access the line. So, when you go to buy that new furniture, you can simply write a cheque and the money will come from the PLC to cover it.
A PLC is "revolving credit" or "open-ended credit," like a credit card. However, unlike a credit card, you can take advantage of interest rates that are often lower than those offered on instalment and demand loans. Interest on a PLC is usually calculated daily on the outstanding balance and charged monthly. The payment amount is not fixed, but a minimum monthly payment is required. Payments are applied against the outstanding balance with no prepayment penalty so you can make a full repayment at any time.
PLCs are usually offered to customers who have established a good credit history and have proven their ability to handle credit effectively. Not everyone can get one. Many financial institutions require that you have a minimum household income of $50,000 a year to qualify. That's because a PLC is a revolving line of credit and lenders are especially cautious. When a financial institution grants you a PLC, it's a vote of confidence in your ability to handle credit. And a PLC can be a tricky form of credit to manage. The line is easy to access and payment amounts are very flexible so the line can grow quickly. Some people get PLCs for the right reasons, but use them in ways that are not really to their best advantage.
PLC are useful for a number of reasons, but instant gratification shouldn't be one of them. It cost Patsy about $693 more than necessary to carry that PLC balance. You can buy a lot for $693. And that's all after-tax dollars. She would have to earn about $1,025 at her marginal tax rate to break even. There are good reasons to borrow, and not-so-good reasons to borrow.
Posted by Colin at 11:54 PM | Permalink | Comments (0) | TrackBacks (0)May 12, 2006
Suffering From a Case of a Fool and His Money
Not too long ago I blogged about dumping the lease on my Chevy Avalanche, which incidentally the only way to do this is have somebody else take-over the lease payments or sell it for the amount of the buyout on the vehicle.
Now, not only do I have the vehicle for another year and a half, summer is coming and I have nothing to tow behind my truck. I have found myself visiting RV dealers and looking at camping trailers. Yup, considering taking out a loan to get one so the family can go on a bunch of getaways this summer. Am I being foolish by creating yet another desire for an expensive toy? Probably! I am hoping that by sitting here and blogging my wish for a trailer that some wisdom might enter my mind - Nope... Not working...I think I am going to look at a couple trailers again tonight - Hey, as the salesman said "If I buy now I can have it in a week, but if I wait it might take until August for delivery of the trailer"...Oh well, it's only money and life is short
I'll keep you posted on this one...I better go make more money now to pay for all these loans...
Posted by Colin at 03:31 PM | Permalink | Comments (2) | TrackBacks (0)May 11, 2006
To Borrow or Not to Borrow...
Many people fear getting into debt because of their upbringing or personal beliefs. The fact is that using credit is a part of life. Whether you are financing the purchase of new appliances, replacing your furnace or financing your children's education, borrowing can offer real benefits. After all, it'd be pretty tough on the family to have to to wait out a winter while you saved all the money you needed to buy a new furnace. Borrowing money, putting in the furnace and paying off the loan in easily manageable payments makes a lot more sense.
The question shouldn't simply be whether or not to borrow. Sometimes we have to.
Instead, ask yourself:
Do I really need it?
What's this going to cost me?
What else do I have to give up to buy this?
If you need a furnace, my best guess is that your answer to the first question is a resounding yes.
The next question is a very important one. The cost of borrowing can vary significantly. The higher the interest rate you pay, the greater the cost. Also, the longer the term of the loan, the greater the cost to you. By negotiating the lowest possible rate and taking the shortest possible term, you can pay off the loan faster while reducing the overall costs.
But don't overlook the last question either. The more the payments restrict your cash flow, the greater the cost to you in terms of stress and having to go without other things you feel contribute to a comfortable lifestyle. If you choose to make higher payments over a shorter term, you have to be sure your other important living needs can still be met. Resist the urge to steal from Peter to pay Paul. Paying off your loan quickly won't do you any good if you run up your charge cards during the process. If you choose instead to take a slightly longer term so that your payments are lower and fit more comfortably into your cash flow, remember this will mean a longer commitment and more interest over the full term of the loan. Weigh the answers to each of these questions carefully in deciding how you'll manage your credit needs.
May 09, 2006
What Is a Secured Personal Line of Credit?
A Personal Line of Credit can either be secured or unsecured. That is, with or without collateral being offered as security for the loan. A secured Personal Line of Credit can mean significantly lower interest costs. When a PLC is secured with equity in your home, it is often referred to as a "home equity line of credit" (HELC) and sometimes as a "collateral mortgage." If you have equity in your home in excess of the current market value of the property less any outstanding debt, you can use that equity to secure your personal credit line . For example, if you have a home worth $170,000 and an outstanding mortgage of $100,000, you would have $70,000 in equity.
When you use your home to secure a line of credit, the equity must usually equal a minimum of 30 percent. That means that outstanding debt registered on the property, including the PLC limit, cannot exceed 70 percent of the appraised value of the property.
Cathy and Robert have a home worth approximately $200,000 and an annual family income of $65,000. Their outstanding mortgage is $100,000. That means Cathy and Robert would qualify for a home equity line of credit of $40,000: 70% of $200,000 = $140,000 less outstanding mortgage of $100,000 = $40,000
May 06, 2006
All About Secured Loans
With many personal loans, the only security required for the loan is your signature as a representation of your willingness to repay. However, in some circumstances lenders may require that security take the form of real estate, or investments such as stocks and bonds. When these types of assets are offered as security, they are referred to as collateral.
By offering collateral, you may be able to borrow more than you could simply on your signature. As well, it is also very likely that you will be able to borrow at a lower interest rate. The reason for this is that if you default, the lender can take possession of the collateral as payment toward the balance of the loan.
In order to benefit from the secured rate, loans must often be 100 percent secured. Real estate equity and investments such as Savings Bonds, GICs or debentures, and mutual funds are often used as collateral. For collateral other than real estate, often referred to as "paper securities," only a percentage of the asset's value may be accepted as security. This is referred to as the "margin requirement." The amount you qualify to borrow will be based on the fair market value of the security — what it's worth when you're using it as collateral, not what you paid for it.
Margin requirements vary with the type of security being pledged and from one financial institution to another. For example, typically only 50 percent of the market value of stock is accepted as security for a loan. The reason is that the price of stocks can be volatile, increasing or decreasing very quickly. Since, typically, only 50 percent of their market value will be accepted as collateral, even significant decreases in value will not result in insufficient collateral to cover the loan.
Assets pledged as collateral are reviewed periodically, and if the value of the assets has decreased and there is not enough collateral to cover the loan, you will be asked to pledge additional assets to secure the loan.
In legal terms, most movable property such as cars, boats and trailers are referred to as chattels. When you use this type of property to secure a loan, you are often required to sign a promissory note and a chattel mortgage giving the lender the right to take possession of the property if you default on the loan. Most car loans are actually chattel mortgages with the car being used as security for the loan.
A chattel mortgage contains a number of conditions that you must meet. For example, you cannot use the same property as security for any other loan or PLC, the property cannot be sold without the permission of the lender, nor can the property be removed from the jurisdiction outlined by the lender.