Credit And Loan

How to Become Debt Free

2008-08-05T20:44:00.007+07:00

In today's consumer society it is all too easy to get into debt. If you have a few credit cards, car loan, mortgage and possibly student loans it can easily add up. If your income is reduced for any reason you could find yourself in serious financial difficulty.

Your goal should be to become debt free. It is possible but will require a major change on how you think about money. You will also have to change your spending habits and spend less money than you make each month no matter what. If you have a tendency to over spend, limit your spending by relying on cash instead of credit cards or store cards. Set a monthly spending budget.

Next you need to pay off your high interest unsecured loans, credit cards and store cards. You can use a debt consolidation loan or if you own your own home, get a home equity loan. A debt consolidation loan enables you to replace all your current high interest loans and credit card debt with one low interest loan which can cut your monthly repayments by up to 50% and put money in your pocket.

Debt consolidation is a very useful tool if you know what you are doing and understand how you got into debt in the first place. It is all pointless if you continue with your old spending habits as chances are you will end up in even more debt in just a few years.

Debt Elimination Is The Key to Financial Freedom

2008-08-05T20:36:00.005+07:00

If you want financial freedom, the first thing that you will need to do is to get rid of your debts. After all, as long as you owe money, you can't consider yourself to be financially free. This is due to the fact that the money you will earn in the future won't actually belong to you, as you'll have to put it toward paying off debts in the past.

While there are plenty of other issues involved in becoming financially free, you're going to need to work hard to get out of debt first if you want to be successful at achieving financial freedom.

There are a few things that you need to do in order to eliminate your debts. The first, of course, is just to make sure that you have a budget set up. Even if you are still a student, you should start now to make sure that you are not spending beyond your means - once debt starts to really pile up, it can be a daunting task to eliminate it entirely.

Debt elimination avalanches are a good way to get rid of any existing debts that you might already have. Once you have a budget, you should have a certain amount of money each month going toward one debt or another. If you end up with any extra money one month, you should make sure that you either put it away and save it, or that you put it toward your existing debts.

The avalanche comes in once you are finally successful at paying off one or more of your debts. Instead of using the extra income you get each month on other purchases, you should apply that money to one of your existing debts. The result is that you'll be paying off your remaining debts even faster than you were before. The more debts you pay off, the faster your remaining debts are paid - and the sooner you will get out of debt.

Another thing that you should think about when you're looking toward getting out of debt is debt consolidation. This may be more effective than a debt elimination avalanche, but you should be careful. While you are the only person in charge of how much you pay while you're working on the debt avalanche, debt consolidation requires putting somebody else in charge of your debt, which may not be the best idea if you get involved with the wrong company.

However, if you have several student loans, then you might find it easiest to consolidate your different student loans in order to lower your interest payments.

You can even start budgeting and paying off your debt while you're a student. Just remember, the sooner you start paying your debts, the sooner you'll be completely financially free. It might be harder at first, but it is possible to eliminate debt for students.

Credit Card Debt Elimination

2008-08-05T20:26:00.008+07:00

Credit card debt elimination can be done with a good plan and a little patience. The important thing is to find what works best for you and stick to your plan. The rewards are well worth it and you'll save yourself a lot of money in the process. You can choose to either start paying off the credit card with the highest interest rate first or you can get rid of the credit cards with the smallest balance first. The important thing is to know exactly how you are going to approach your credit card debt elimination before you begin.

First, set a realistic budget for yourself to lower your spending in all areas and stick to it. Living by your budget will help you pool your available cash for your credit card debt elimination plan. The most important you must do immediately is eliminate your credit card spending. You can never succeed with credit card debt elimination if you continue to add to the outstanding balance. The interest on that debt added with a climbing balance will make credit card debt elimination impossible.

It's important to pay your credit card bills on time and always pay more than the minimum payment on the bills you want paid off first. Paying the minimum payment doesn't eliminate that high credit card interest rate. That's exactly what the credit card companies want because they are making a killing off of that interest. If you are concentrating your bill paying efforts on one bill at a time, then you should still pay at least the minimum on the others. Once each bill is paid redirect your resources to the next bill so your credit card debt elimination can become a reality.

A tip that some have been successful with is contacting creditors to ask for a lower interest rate. Even if most creditors say no what if some of them say yes? The interest savings to you will multiply your credit card debt elimination efforts and save you money. It's worth a few phone calls and your time to try this.

One last tip is, if you choose to close your credit card accounts, do not close them until after the bill has been paid. Some credit card companies often will penalize you by raising interest rates if you close an account that carries an outstanding balance. The most important thing to remember is to begin your plan right now. Think of how you will feel when you are finally free of high credit card interest. The sooner you start, the sooner your ultimate goal of credit card debt elimination can be accomplished.

You Can Make Financial Resolutions Anytime

2008-07-05T23:54:00.003+07:00

The New Year often brings with it a desire to right the wrongs in your life. From this desire springs the tradition of New Year resolutions. You should take advantage of this to change your financial situation.

There is a good chance by the time many of you read this, you will have already made and BROKEN your financial resolutions. Those of you who have not already done so, know they are hard to keep. You can change that. Anytime is a good time to make financial resolutions.

Since you are thinking about this, you must suspect a problem. The first step is defining the problem. Define it specifically. "I spend too much money", is not good enough. You spend too much money on what? Why do you spend too much money? It is not often you are speaking of life's necessities here. You need to specifically target your problem areas.

The best way to identify problem areas in your spending, is to pull out your check registers and credit card statements for the past twelve months. Write down all checks and charges for items other than necessities. This spending will be your gold to mine.

After making this list, add up the total amount of these expenses. This will be a very revealing exercise. For some the total will be staggering, especially when done for a twelve month period.

Pay close attention to checks and charges for restaurants and fast food chains. Look at the amount and frequency of payments to convenience stores. Examine closely the spending on your home and your closet.

Using this information you become aware of your weaknesses and where they occur. You are now better equipped to overcome them. You need to make conscious decisions to stay away from the places where you overspend. If you don't go there you won't be tempted to waste your resources and place your financial life in peril.

Now, armed with these bits of information you can boldly and successfully make resolutions. Remember, changing your behavior is how you will keep these resolutions. If you fail, and you will, just climb right back on the resolution wagon. Dogged repetition will help you succeed. Check how you are doing on a monthly basis. Make any adjustments needed.

Putting your financial house in order and becoming debt free is a process before it is an event.

Eight Ways to Consolidate Debt

2008-07-05T23:49:00.003+07:00

Next to winning the lottery, a debt consolidation loan is a debtor's dream. With one monthly payment and a fixed monthly payment schedule, you can actually see an end to those monthly payments.

In reality, consolidating bills isn't always easy. If you have a lot of debt, it can be hard to find a consolidation loan at a lower interest rate. And if you're not careful, you can end up deeper in debt than when you started.

Your goal in consolidating your debt should be to lower your overall costs. To accomplish this there are two things to keep in mind:

1. Get the lowest interest rate possible

2. Have a plan to pay off your debts in 3 ? 5 years.

Here are some of the best ways to consolidate:

Using Credit Cards

The good news about this method is that with a good credit rating, you may get a much lower rate than other forms of consolidation loans. And since credit card issuers don't require collateral, you aren't "risking the farm."

Call your current issuer to ask what interest rates they will offer you if you transfer balances from other cards over to theirs. Go for a fixed rate if you can get it, and ask them to waive any transfer fees. If you can't negotiate a low rate with your current issuer, try shopping for a new card at a site such as CardRatings.com. But be careful! Too many applications for credit in a short period of time can hurt your credit rating.

Once you do consolidate this way, be sure to set up an optimal payment plan so you can be debt-free in 3 ? 5 years.

Home Equity Loans

With a home equity loan, you borrow against the value of you home, minus any other mortgages. The two major kinds are:

A Home Equity Loan ? a fixed amount of money for a fixed period of time (sometimes at a fixed rate) and
A "Home Equity Line of Credit" where you borrow up to a pre-approved credit limit (interest rates usually variable) and can borrow again if you still have money available.

These loans can offer attractive rates, low payments, and the interest is usually tax-deductible if you itemize.

Many issuers offer no or low closing costs for these loans. Interest rates are often variable, however, and there's always the risk that you can lose your home if you can't pay.

Cash Out Refinance

Refinancing your home and taking out money to pay off bills (called "cash-out refinance") is yet another way to tap the equity in your home. If you can refinance at a substantially lower interest rate, you'll eliminate the high interest costs of the debts you pay off, and you could even come out with a lower payment than you have right now since rates are so low.

One option to consider: an interest-only loan. By lowering your monthly payment, you can free up money to use toward paying down other high-rate debt or building a retirement fund.

Make sure you understand the total cost of refinancing. Take any money you've freed up by paying off other bills and use that to create an emergency savings fund.

Traditional Debt Consolidation Loans

A debt consolidation loan is an unsecured personal loan, and the only collateral you are offering for the lender's security is you. Because lenders consider them risky loans, they're usually more expensive and not always easy to get if you have a lot of debt.

If the interest rate is too high to make it worth it and the repayment term is ten or fifteen years, you should probably consider another method of consolidation. However, if the term and interest rate are right, this can be a great way to actually save money in the end. (Check Bankrate.com for current averages). Remember, to calculate the total cost of the loan from start to pay-off.

Credit Counseling

Credit counseling agencies may help you get out of debt, though they don't actually consolidate your debt.

Instead, payment plans (usually with lower interest and fees) will be worked out for all of your eligible debts. You'll make one monthly payment to the counseling agency, which will pay all your creditors.

Participating in a credit counseling program generally won't hurt your credit rating, and if you stick to the plan you can be out of debt in three to six years. But be careful which agency you work with. If the counseling agency pays your bills late, you'll pay the price since you're still responsible to the lender. It happens.

Debt Settlement

Debt settlement is another option that's become increasingly popular with consumers who have a lot of debt and can't, or won't, file bankruptcy. You stop paying your bills and instead make a regular monthly payment to the settlement company. Your creditors contact them, and not you, about your overdue bills. As your accounts fall further behind, the negotiation company will settle your balances ? usually for 50% of the balance or less (including fees) depending on the debt. Most people can be out of debt in less than two years or less using these programs.

It's not perfect. Your credit rating will be hurt in the short run and you must be certain you're dealing with a reputable company or the money you pay each month could disappear. Still, for consumers who can't shoulder the burden of debt they have now, it can be a very good option.

Retirement Loans

If you have a 401(k), 403(b) plan or certain types of pension plans, you can borrow against your nest egg. (You can't borrow against your IRA.) It's easy, with no income qualifications or credit check.

The key here is to borrow against your retirement account, rather than withdraw from it early so that you don't end up paying taxes and a 10% penalty. Also, if you leave or lose your job, you may have to pay your loan back immediately or pay taxes and penalties for an early withdrawal.

These loans typically offer low interest rates, and interest is paid to you, since you are the lender. While tapping your next egg like this can short-change your retirement, so can costly debt payments. If you are in your 20's and 30's,you obviously have more time to rebuild a retirement nest egg, but even if you're in your 40's or 50's, you will want to weigh the cost of paying the high interest of the debts over time, versus borrowing from your retirement account. The return you get from paying off high-rate debts is guaranteed ? while the stock market isn't.

Rapid Repayment

There is a mathematically optimal way to pay your debts. Choose a fixed level monthly payment, and commit to it each month. Pay as much as you can on the highest rate debt first, while payment the minimums on the rest.

I almost always suggest consumers with debt start by creating one of these plans. Many people who do so find they don't even need to consolidate to get out of debt in the next few years. They just need a plan and they can do it on their own.

The Advantages of Credit Cards

2008-07-05T23:40:00.003+07:00

There are many evils associated with credit cards, but there are benefits that are hard to ignore. One benefit is having the credit card company act in your behalf to recover funds from a disputed transaction. Under the Fair Credit Billing Act the credit card company has to investigate the dispute and either take the charge off your bill or explain why it is correct. Even better, you don't have to pay the portion of the credit-card bill or related interest charges while the dispute is being investigated.

The types of blling disputes/errors covered by the Fair Credit Billing Act are:

Charges that list the wrong date or amount.
Charges for goods and services you didn't accept or weren't delivered as agreed.
Math errors.
Failure to post payments and other credits, such as returns.
Unauthorized charges.

Before you dispute any of issues you must first contact the retailer and try to settle the dispute. If they ignore you, or the dispute is not settled then contact the credit card company. Usually you need to have your dispute in writing to the credit card company. The address for billing disputes is different then the address to send payments. The billing dispute address can be found on the back of your monthly statement. If it cannot be found, call the credit card company's customer service for the billing dispute address. You usually only have a certain number of days to dispute the billing error so make sure you mail in your dispute before the deadline.

What is an Unsecured Loan?

2008-06-26T23:36:00.001+07:00

An unsecured loan is a personal loan where the lender has no claim on a homeowner's property should they fail to repay. Instead, the lender is relying solely on the ability of a borrower to meet their loan borrowing repayments.

The amount you are able to borrow can start from as little as £500 and go up to £25,000. Because you not securing the money you are borrowing, lenders tend to limit the value of unsecured loans to £25,000. The repayment period will range from anywhere between six months and ten years. Unsecured loans are offered by traditional financial institutions like building societies and banks but also recently by the larger supermarkets chains.

An unsecured loan can be used for almost anything - a luxury holiday, a new car, a wedding, or home improvements.

An unsecured loan is good for people who are not homeowners and cannot obtain a secured loan for example; a tenant living in rented accommodation. There are a few things to consider before applying for an unsecured loan: Unsecured loans are invariably more expensive than secured loans, and the repayment periods demanded by lenders are shorter too. This is because they have no guarantee that you can repay the loan, and therefore charge you more in interest to cover the cost of insurance policies that they need to take out to protect them should you default on repayments. In the event that a borrower does not pay up, the lender will invoke the terms of the legally-binding credit agreement and pursue the borrower through the legal system.

Lenders are obliged by law to tell you how much they charge for this type of finance and this is worked out as an annual percentage rate (APR). Ask whether the APR figure quoted is 'typical' or is what every applicant is charged. You should also investigate whether the interest rate charged is fixed for the lifetime of the loan repayment period, or whether it varies with the base rate. Check too on whether there are early repayment penalties.

Unsecured loans vary from lender to lender, so it pays to shop around before making a final decision.

What is a Secured Loan?

2008-06-26T23:32:00.002+07:00

A secured loan is simply a loan that uses your home as security against the loan. Secured loans are suitable for when you are trying to raise a large amount; are having difficulty getting an unsecured loan; or, have a poor credit history. Lenders can be more flexible when it comes to secured loans, making a secured loan possible when you may have been turned down for an unsecured loan. Secured loans are also worth considering if you need a new car, or need to make home improvements, or take that luxury holiday of a lifetime.

Benefits of secured loans include:

Lower monthly repayments than unsecured loans
The ability to borrow more money
Spread repayments over a longer period of time
More detailed information??

A secured loan is a type of loan available to people with securable assets. Usually these assets take the form of property, such as a home; this is why secured loans are often referred to as 'homeowner loans', "home loans", "secured personal loans" or "second charge loans".

You do not have to own your own home outright to be able to take out a secured loan; if you have a mortgage you can put the proportion of the home that you own up as security.

Because a secured loan is secured on property, most lenders will approve your loan even if you have a history of adverse credit such as county court judgements (C.C.J's), defaults and arrears.This make secured loans very attractive to people who would otherwise not qualify for a loan from their local bank.

You can borrow any amount from £5,000 to £75,000 and repay it over any period from 5 to 25 years. You simply select a monthly payment that fits in your current circumstances. Generally, secured loans tend to be cheaper than unsecured loans and other forms of borrowing.

The interest rate for a secured loan depends upon various factors such as the amount of money you borrow, the length of time and personal details. You can also insure your payments for peace of mind, so you do not have to worry if you lose your job or are unable to work because of accident or sickness.

Once your secured loan application has been processed and accepted you will be made a no obligation offer. It usually takes around 14 days for a secured personal loan to be completed and you can cancel any time within this period with no penalties.

Debt Relief with this Simple Formula

2008-06-26T23:22:00.002+07:00

Is there a way to get out of debt without getting a second job or having to increase your income in some way? Can the average person take his or her current income and pay off his or her bills in a matter of a few years, including the car and mortgage payments?

The answer is YES!!! You can do it without having to cut out all of your fun and extra-curricular activities as well. Now, you may need to cut down on going to the movies or going out to eat, but you will not have to stop altogether. It is a matter of putting together your plan and then sticking to your plan!

The process is fairly simple, most people just don't realize it. Anyone can get started right away, including YOU right now! Here is what you need to know:

1. What is your total net income?

2. What are your debts and minimum monthly payments? (Don't include any extra money you are paying towards any debt. You want only your minimum required monthly payments.)

Okay, are you ready to begin?

The first thing you need to do is take a percentage of your NET income (a good beginning point would be 5%) and write this amount down at the top of a blank sheet of paper.

Next, write down each of your debts (not including utility bills, insurance payments, property taxes, etc.) in a column at the left side of your page. Beside each debt, write down your total balance and then your minimum monthly payment.

Once you have all of these down, divide your total balance by the minimum monthly payment. Write this amount next to each debt. Taking the debt that has the shortest payoff number, number this number 1. Taking the next shortest payoff, number it number 2 and so on until each debt has a number next to it. These numbers indicate the order in which you will begin to pay off your bills.

Now, here is where your 5% comes into play. For debt number 1 take the minimum monthly payment and add it to the 5% figure. Divide the total balance by this new amount to get the total months it will take to payoff the debt. For debt number 2, you will take the minimum monthly payment plus the 5% plus the minimum monthly payment of debt number 1 (since it will be paid in full) and add them together. Again take the total balance and divide it by your new monthly payment to figure your total months to payoff. Do this with each debt until you are finished.

Once you have completed this, add up the total months to pay off your debts to figure an estimate of how long it will take you to pay off all of your debt.

Example:

Visa total balance $6300.00 divided by minimum monthly payment of $153.00 = 41 (months to payoff) 2 (second to payoff)

Auto Loan $13000.00 divided by minimum monthly payment of $356.00 = 36 (months to payoff) 1 (first to payoff)

Mastercard $5266.00 divided by $96.00 = 54 3 (third to payoff)

Mortgage $43,000.00 divided by $325.00 = 132 4 (fourth to payoff)

The auto loan is the first to payoff because it has the shortest amount of time before it is paid in full. Then your Visa balance and so on.

Net Income = $1500.00 x 5% = $75.00

Taking your first debt to payoff which is the auto loan:

minimum payment $356.00 + $75.00 = $431.00 total balance $13000 divided by $431 = 30 (months it will take you to payoff this balance using additional 5%)

Visa: $153.00 + $75.00 + 356.00 (since this loan amount is paid in full) = $584.00 total balance of $6300.00 divided by $584.00 = 11 (months it will take to payoff credit card)

Mastercard: $96.00 + $75.00 + 153.00 + $356.00 = $680.00 total balance $5266.00 divided by $680.00 = 8

Mortgage: $325.00 + $75.00 + 96.00 + 153.00 + 356.00 = $1005.00 total balance $43,000.00 divided by $1005.00 = 43

Add your months together: 30 + 11 + 8 + 43 = 92 approximate months to have all of your debt (including you home) PAID IN FULL! This is about eight years! Can you imagine being debt free in eight years???? That means that your home would be free and clear and you would have 100% equity!

If you apply the above formula to your financial situation, you can be debt free without getting a second job or without working extra overtime! Imagine the time you can spend with your family and friends instead of working. Of course if you take a higher percentage of your net income, you will pay off your debt faster!

This is something that anyone can do based on simple math. The trick to remember is to NOT use your credit cards. In fact, cut all but one up! Get rid of them and just keep one in case of a major emergency. Start yourself a savings account to begin building up your emergency funds. Eventually set goals for yourself to save for college funds, retirement funds, etc.

Remember this fundamental rule:

PAY FOR CURRENT EXPENSES WITH CURRENT INCOME

Carolyn Shipp http://macarolyn.tripod.com/sbtips

Some Truth About Credit

2008-06-26T23:12:00.002+07:00

Credit is currently and has been historically an integral component of our economy. Credit contribute a person's net worth, and financial power. No matter who you are or what type of business you are considering, credit is a vital component to be considered when developing your business idea and business plan.

Your credit history and status will always be a factor when lenders consider financing your entrepreneurial endeavor. No matter what type of loan, even loans for those who may struggle to acquire traditional financing, such as the SBA funded micro loan, will consider credit as one of the underwriting factors.

Because your credit history and status greatly impact your bankability and ability to acquire business funding, it behooves you to spend a significant amount of time developing and creating positive credit status and repairing poor credit history.

Now, here is the not-so-secret formula for developing good credit and repairing poor credit.

1. Time

-- You will need to plan ahead if you want to acquire business financing. It takes time for bad spots in your credit file to be removed. It also takes time to engage in the process of having them removed. You must also spend some time engaging in positive credit behavior.

2. Diligence

-- You will need to pay very careful attention to your financial details. If you want to start a business in two years, you'll need to begin keeping very careful and detail files concerning all of your credit practices. You'll need to be on top of payments and purchases you make and always be alert to avoid behavior that could be detrimental to your credit status.

3. Patience

-- Developing and repairing credit is a process that does not happen over night. Every time you challenge an item on your credit report it involves a process that requires patience. Every time you apply for credit, the application process will require patience. This goes hand in hand with time; developing good credit that you can invest in a business idea takes time and won't happen overnight so be patient. That's why you need to be passionate about your business idea. It must be able to stand the test of the financing and credit process.

4. Financial Wisdom

-- You must begin to start making sound financial decisions. Consider every financial decision you make as if it were contributing to you becoming a millionaire. Be wary of high interest commercial credit and instead attempt to acquire lower interest banking credit such as vehicle loans, mortgages, or home improvement loans. Consider each purchase you make in light of it's impact on your credit. If you make a give purchase will it inhibit you from making a loan payment and reducing debt. Begin to think in terms of debt reduction and expense reduction as ways to increase your wealth and credit status. Having less debt is just as important and financially beneficial as having extra spendable cash.

In the end, you need to take a long term view concerning funding and credit as you begin preparing to make your business dreams come true. It won't happen overnight but if you do it right and pay attention to the details, such as building sound credit, it will happen and you'll increase your wealth and power.

14 Common Credit Mistakes

2008-06-26T23:06:00.004+07:00

Establishing credit and wisely managing your credit becomes easier when you know how. You'll feel empowered by taking knowledgeable steps towards good credit, and you'll be on your way to purchasing real estate and greater financial freedom.

If you plan to finance real estate, either as a home buyer or an investor, avoiding these common credit mistakes will help you with your credit score and save you money in loan costs.

14 Common Credit Mistakes :

Using expensive or undesirable types of credit costs too much and is negatively scored.
Accumulating too many lines of credit or too many credit cards causes credit report remarks like "too much consumer credit."
Only paying the minimum due keeps balances too high.
Being maxed out on any credit card or line of credit causes deep drops in scores.
Taking cash advances costs higher interest and extra fees.
Exceeding limit and having to pay over-limit fees is a negative with creditors and causes "high proportional amounts owed" remarks on credit reports and subtracts credit score points.
Paying a day or more late causes unnecessary late fees and often increases interest rates.
Charging more than you can afford causes a snowball effect of amassing debt with no easy way to pay it off.
Letting someone else use your credit, such as co-signing a loan, raises your debt-to-income ratio and possibly adds "too many consumer accounts" on your credit report, which lowers your score.
Ignoring credit problems causes unnecessary negative impact. Talk to creditors before being late and make arrangements. This action heads off negative reporting to credit bureaus.
Failure to report address changes to creditors causes misplaced bills and late payments.
Using partial name, different names, initials instead of whole name, or forgetting Sr. or Jr. causes mix-ups. Use your full legal name to protect you from confusion with similarly named borrowers.
Failure to report name changes to creditors also causes confusion.
Not checking credit report frequently is one of the most common mistakes consumers make.

You can buy real estate with poor credit, but you will save thousands in loan costs if you maintain good credit. A bad credit report leaves home buyers with sub-prime loans which have higher point charges, prepayment penalties, and higher interest charges, which therefore cost more money.

For instance, a mortgage loan of $150,000, 30-year, fixed interest rate of about 5.72 percent costs around $870 a month. Poor credit scores raise the interest rate over 9 percent and the payments over $1,200.

As you see from these payment differences, good credit means that you can finance a more expensive house with the same income, or save $330 each month.

Credit Requirements for Mortgages

Credit needed to buy real estate is not the same as good credit. Besides your credit score, mortgage lenders consider your debt-to-income ratio and other credit matters, unlike other credit grantors. Your debt-to-income ratio is the comparison of mortgage payment, including taxes, interest, and insurance to your total gross monthly income. Real estate lenders also consider your employment qualifications and your overall debt ratios. Understanding the difference between good credit and the credit needed to obtain real estate financing helps you buy houses!

Facts You Should Know About Types of Loans

2008-06-26T11:59:00.002+07:00

When you set out to borrow, you often come across terms like unsecured loans, revolving loans, adjustable rate loans, etc. While these terms are more or less self-explanatory, it is still useful to be clear on their exact meanings and what they imply before you finalize a loan contract.

Unsecured versus secured loans

As the name implies, a secured loan is one where you offer some kind of collateral against the loan. The agreement is that if you default on the loan, the lender has the right (but not the obligation) to take possession of the asset you have pledged.

In most cases, this asset would be what the lender has financed. For example, when you take a home loan, you offer the home as collateral.

There may also be cases where you may need to offer additional collateral over and above the asset that is being financed. This happens, for example, when the lender is financing close to 100% of an asset that is prone to rapid reduction in market value. In such cases, the lender may insist on your putting up another asset so as to provide a reasonable margin of protection in case of default.

Unsecured loans are those where such collateral arrangements do not exist. These loans are granted based on your credit standing, ability to repay and other factors.

In cases where there's a choice available to the customer to take either a secured or an unsecured loan, the former may be offered at a somewhat lower rate. That is, assuming every other factor remains equal. This is because of the lower risk involved to the lender, who has recourse to a specific asset in case you default. However, this situation is comparatively rare in consumer financing, although it is more common in financing businesses.

Installment versus revolving loans

A revolving loan is one where you have access to a continuous source of credit, up to a pre-determined credit limit. If the limit is say, $10,000, you can borrow any amount up to $10,000. And typically, you can repay all or part of the amount you borrowed at a time of your choosing, within the overall tenor of the loan.

You pay interest only on the amount you borrow for the time you borrow it. Sometimes, banks may charge a commitment fee for making a revolving line of credit available to you. This fee is usually charged on the average unutilized amount of your limit.

You can also re-borrow the amount you have repaid. In effect, you have a loan that's always available to you on demand.

Unlike revolving loans, installment loans have a fixed repayment schedule. In most cases, the full amount of the loan is drawn down (i.e., borrowed) at once and both repayment schedule and amounts are fixed in advance. You do not have the option to re-borrow the amount that has been repaid.

Adjustable rate versus fixed rate loans

A fixed rate loan is one where the interest rate charged is fixed for the entire duration of the loan. The advantage is that you are immune to fluctuations in interest rates and can budget your cash outflows precisely. The disadvantage to you (the borrower) is that should interest rates fall, you lose in terms of opportunity costs. That is, you could have obtained a lower interest rate had you opted for an adjustable rate loan.

In practice, you can always choose to refinance the fixed rate loan at a lower rate if interest rates fall sharply enough to justify it. Bear in mind that your current lender may charge a pre-payment fee if you choose to repay before due date. So the difference in interest rates between your old fixed rate loan and the new loan should be large enough to justify a switch.

An adjustable rate loan is one where the interest charged fluctuates in line with a benchmark rate. This benchmark rate is usually the Prime Rate, which is what the US Treasury charges its prime (or best) borrowers. The advantage of an adjustable rate (or floating rate) loan is that what you are paying is more or less in line with the market. If interest rates decline, so do your costs and vice versa. The disadvantage is that your cash outflows for interest are unpredictable.

As a borrower, if you hold the view that interest rates are going to decline, it is best to opt for an adjustable rate loan. But arriving at the correct view consistently is easier said than done. Predicting interest rates is a game where even professional market participants and institutions frequently go wrong.

If it is important to you to be able to budget for your interest obligations in advance, a fixed rate loan may be the best choice. After all, you can refinance it should the interest rates fall significantly.

Keeping these basic facts in mind should help you make more informed borrowing decisions.

Useful Tips When Choosing Credit Cards

2008-06-26T11:35:00.000+07:00

Chances are you have received your share of "pre-approved" credit card offers in the mail, some with low introductory rates and other perks. Many of these solicitations urge you to accept "before the offer expires." Before you accept, shop around to get the best deal.

Credit Card Terms:

A credit card is a form of borrowing that often involves charges. Credit terms and conditions affect your overall cost. So it's wise to compare terms and fees before you agree to open a credit or charge card account. The following are some important terms to consider that generally must be disclosed in credit card applications or in solicitations that require no application.

Annual Percentage Rate: The APR is a measure of the cost of credit, expressed as a yearly rate. It also must be disclosed before you become obligated on the account and on your account statements. Some credit card plans allow the issuer to change your APR when interest rates or other economic indicators - called indexes - change. Because the rate change is linked to the index's performance, these plans are called "variable rate" programs.

Free Period: Also called a "grace period," a free period lets you avoid finance charges by paying your balance in full before the due date. Knowing whether a card gives you a free period is especially important if you plan to pay your account in full each month. Without a free period, the card issuer may impose a finance charge from the date you use your card or from the date each transaction is posted to your account. If your card includes a free period, the issuer must mail your bill at least 14 days before the due date so you'll have enough time to pay.

Annual Fees: Most issuers charge annual membership or participation fees. Transaction Fees and Other Charges: A card may include other costs. Some issuers charge a fee if you use the card to get a cash advance, make a late payment, or exceed your credit limit. Some charge a monthly fee whether or not you use the card.

Other Costs and Features:

Credit terms vary among issuers. When shopping for a card, think about how you plan to use it. If you expect to pay your bills in full each month, the annual fee and other charges may be more important than the periodic rate and the APR, if there is a grace period for purchases. However, if you use the cash advance feature, many cards do not permit a grace period for the amounts due - even if they have a grace period for purchases. So, it may still be wise to consider the APR and balance computation method. Also, if you plan to pay for purchases over time, the APR and the balance computation method are definitely major considerations.

You'll probably also want to consider if the credit limit is high enough, how widely the card is accepted, and the plan's services and features.

Useful Tips:

Keep these tips in mind when looking for or using a credit or charge card.

Shop around for the plan that best fits your needs.
Make sure you understand a plan's terms before you accept the card.
Hold on to receipts to reconcile charges when your bill arrives.
Protect your cards and account numbers to prevent unauthorized use.
Draw a line through blank spaces on charge slips so the amount can't be changed.
Keep a record - in a safe place separate from your cards - of your account numbers, expiration dates and the phone numbers of each issuer to report a loss quickly.
Carry only the cards you think you'll use.