loans and credit

If you’ve taken out a debt consolidation loan, the odds are good that you need to increase your life insurance, too. At least that’s the view from AccuQuote, a provider of term life insurance quotes to U.S. residents. Officials from AccuQuote, in a recent news story, said that consumers who increase their debt also increase their need for more life insurance coverage. Now, AccuQuote does have a vested interest in convincing consumers to take out more life insurance. But, despite the obvious sales pitch, there is truth in what AccuQuote says. Taking on more debt, to the point where you’ve taken out a debt consolidation loan to deal with it, does a lot of things: It stops the calls from collection agencies. It gives you a chance to get your financial life back in order. It hurts your credit score. And, yes, it does increase the need for more life insurance.

Protection

Look at it this way: The goal of life insurance is to provide protection for your loved ones. If you were to die today, you’d want your life insurance policy to provide enough financial support to your loved ones that they’d never have to worry about lacking the money they need. Ideally, a life insurance policy will help them pay off your home and provide for your children’s education. However, it’s much more difficult for this to occur if you happen to die while carrying a significant amount of debt. And if you die after taking out a debt consolidation loan? That’s a sign that you have a lot of debt. And just because you die, that debt doesn’t disappear.

Paying Down Your Debt

Your loved ones would have to use some of the funds from your life insurance policy to pay off your debt consolidation loan. That leaves fewer dollars remaining to cover the mortgage of your home and your children’s college education. It also places an additional financial burden on your spouse. If you have taken out a debt consolidation loan, then, you have two choices to prevent your loved ones from facing a lifetime of financial stress: You can pay off that debt consolidation loan quickly, or you can take out more life insurance.

More Insurance?

It may seem counterintuitive to take out more life insurance if you are already struggling with debt. Taking out more just adds to your monthly payments, and makes it that much more of a challenge to pay down your debt consolidation loan. But by making the financial sacrifice now, you can rest easy knowing that you have taken the steps to guarantee that your loved ones can live a life free of financial stress should you die unexpectedly.

With the economic crisis happening across the world and banks offering more personal loans, credit cards, mortgage loans, and other loans, the finger of blame is being pointed squarely at the banks. Questions are being asked and unions are looking for answers. Are banks at least partially responsible for customers getting in way over their head in debt? Is the pressure put on bank staff to sell, sell, sell causing the unsavory and unnecessary loans to be made? Are banks trying to sell you a larger personal loan than you need? The Sunday Star-Times (from New Zealand) is seeking answers.

Unnecessary Loans or Helpful Advice?
The most telling aspect is the case of a 77-year-old man who wanted to purchase an item in the price range of $14,000 to $15,000. Now this man went into his bank to get the money he needed. He had plenty of money in term deposits and could have broken them to gain the money he needed without paying any interest and without going into debt. However, the bank did not suggest this option to him. Instead, they convinced him to get a credit card. The idea was to get a credit card and put the $14,000 to $15,000 on that. The main problem with this method comes in paying for the credit card, because the 77-year-old lives on a fixed budget. Now, the man has thousands of dollars in debt when there was no need to have any debt.

Is the Pressure to Sell Too Much?
We do not like to think of banks as businesses, but they are. And like any business, they have to sell to make a profit. Banks sell credit cards, personal loans, mortgages, secure loans, and checking and savings accounts. Like many other businesses, the banks in question have quotas and targets. The staff has quotas they must meet in order to prove themselves with the company. When someone does not meet the quota, they are made to feel inferior and sometimes not valuable to the bank. The big difference is that unlike other quotas, these sales feed on the desperation of people. Then when the people cannot pay, the rest of us have to suffer as well.

The unions are saying it is all too much. The banks need to cut back on the quotas to properly reflect the economic times we are currently in. The banks are saying they are working to “decouple” salary increase and sales targets. However, is it too little too late? Only time will tell, but one thing is for certain. Watch out the next time you attempt to get a personal loan. The bank may try to convince you to super-size it.

If there’s been a silver lining to the Great Recession and its oh-so-slow recovery it’s this: A smaller number of consumers may be heading toward debt consolidation. That’s because the recession might have taught consumers how important it is to save money and pay off debt. The recession also led to the federal government’s Credit CARD Act of 2009, new legislation that placed stricter regulations on the way credit card companies can operate. Both factors have led to a greater number of consumers who are slowly paying their way out of debt, according to a new study by national credit bureau TransUnion.

Cutting Debt

According to TransUnion’s survey, average consumers have lowered their credit card debt by 11 percent. At the same time, the company says, late payments on credit cards and delinquencies of longer than 90 days have also fallen. This is good news for the average consumer: Consumers with lower levels of credit card debt are far less likely to need to take out debt consolidation loans in the future. And while these loans can help struggling consumers get their debt under control, they’re also pricey. They come with high interest rates and, often, origination fees. They also cause consumers’ credit scores to drop. And in today’s world, no one wants to be saddled with low credit scores. Consumers with low scores will pay higher interest rates on any money that they borrow.

Why Consumers Are Saving

Why are consumers suddenly saving more and needing less help from debt consolidation services? Some economists say that the shock of the Great Recession, and the looming threat of unemployment, has encouraged more consumers to pay down their debt and put away money in case of emergency. The Credit CARD Act may be having an impact, too. The act prevents credit cards from raising interest rates without giving consumers proper notice. It also mandates that credit card companies must mail out their bills far enough ahead of payment due dates to give consumers a chance to make their payments on time. This cuts down on costly late fees, which add on to consumer credit card debt.

Permanent Changes?

Are these changes permanent? Have consumers learned their lessons regarding the importance of saving? Or is this just a temporary thing spurred by the struggling economy? These are questions for which financial analysts don’t yet have answers. After all, U.S. consumers have never been known for their frugal ways in the past. Some financial experts are guessing that once the economic recovery really takes off, consumers will return to their old spending habits. That might mean a greater demand in the future, once again, for debt consolidation loans.

One type of credit card being used more widely now than ever before is the prepaid credit card. A Prepaid spending card is basically a charge card that can be loaded with funds, spent just about anywhere that credit or debit cards are accepted, and then reloaded with additional funds. These cards used to be rare, sometimes sent instead of cash or a check for mail-in rebates, but they can now be purchased at major retailers like Wal-Mart. H&R Block is even willing to put your tax refund on a prepaid card! 

In 2006, about $1 billion was spent using prepaid cards. This year, that amount is expected to be closer to $8 billion, almost double the $4 billion spent in 2008. Here are some of the pros and cons:

– Spending Ability Is Limited: Some people are using these cards as a way to make sure they’re keeping their spending within reason. If credit card spending is a problem for you or if you have a hard time keeping track of what’s in your bank account, a prepaid card will only let you spend until you run out of money. Some people are using these cards for specific items like restaurant food or vacation spending money. If you load a card at the beginning of the month with the amount you’re willing to budget for eating at restaurants, for example, the card will help you to stay within your budget guidelines.

– They Make Great Gifts: With the holidays just a few months away, people are starting to think about giving gifts this year. A prepaid card is can be thought of as a tacky gift, but it’s as good as cash and gives the person receiving the gift the option to spend the money anywhere. The popularity of gift certificates as gifts has grown dramatically over the past several years and a prepaid card makes a great alternative to a gift certificate.

– Fees: Like any financial tool, the fees associated with prepaid cards are important to consider. One knock against prepaid cards is that the fees can be hidden so easily. With many cards, you’ll pay an activation fee and a fee each time to add money to the card. Many cards also add a monthly fee, a fee to withdraw cash from an ATM machine, and a fee if the funds are denied because of an insufficient balance. You may also see fees for inactivity and for closing out a card.

– Fraud Potential: If your debit or credit card is stolen, there are measures in place to protect you against fraud. Prepaid cards, for the most part, don’t offer the same protection. If your wallet is stolen or your card is lost, anyone could theoretically pick up that card and use it. Because many of these cards are issued without the security of a PIN number, you don’t have the added level of protection that you do with a debit card. With many of these cards being used by customers that are anonymous to the credit card companies, it’s hard to back any fraud-related promises.

With the stock market continuing its ascent in what has been a violent roller coaster ride over the past two years many people are holding the majority of their investment money in cash and money market accounts. The problem for these investors is that interest rates on cash and cash equivalents have fallen to almost nothing, with 78% of money market funds paying less that one-tenth of one percent in annual interest. Holding $1000 in an average money market account right now will get an investor a measly 8 cents in interest every month.

 Because investors want some return without all the risk of the stock market, many are turning to bonds as a middle ground between holding cash and owning stocks. Bonds have traditionally been considered a “safe” investment but there are risks with bonds that could hurt investors if certain factors occur. Here are some of the risks you should address before buying any kind of bond.

Default Risk: If the issuer of the bond goes bankrupt or out of business, the lenders sometime lost out. As a bondholder, you’re holding a debt instrument that the issuer originally used to borrow money. Bonds are rated based on the financial strength of the issuer but these ratings aren’t always perfect. The safest bonds have the strongest financial backing. The safest bonds out there are government treasuries, but the interest rates on treasuries aren’t much better than the rates on cash right now.

Interest Rate Risk: If market interest rates change, the value of your bonds will be affected. We are currently in a very low interest rate environment. When rates start to rise, bond values will fall. If your bond is several years from maturity, you’ll see the value fall by a larger amount than for a short term bond. Because interest rates are likely to go up in the next couple of years, your best bet right now is to buy short term bonds in most cases.

Call Risk: Some bonds have a feature that allows the issuer to call in their debt prior to its maturity date. A callable bond is risky because if the issuer decides to repay bondholders early, they must reinvest that money at current rates, which could be much lower than the interest rate was on their callable bond.

Political Risk: One of the policies that many people believe will change with the Obama administration is the tax code. If taxes increase, you could owe more of your interest income to Uncle Sam in the form of taxes. Municipal bonds, or tax free bonds, are one solution that might make sense to minimize this risk.

Market Risk: Bonds trade between investors just like stocks do. This means that most bonds are liquid but the market value of these bonds fluctuates day to day. The price of a bond is determined by how much demand there is for that particular type of bond. Government bonds have been profitable for investors recently because so many people want safe bonds that demand has been strong. Bonds in banks, for example, over the last few years, have seen their value fall because there are not a lot of investors willing to take on the default risk associated with banks. 

During the spring, it’s common to see a whole range of articles on the internet about your tax return–but very few of those articles will tell you if you should use the return to pay off personal loans. They may advise you on the latest technical gadget to splurge on, or where you should take your vacation courtesy of your overpaid tax bill, but they are pretty mum when it comes to paying off debt. So is it wise to use a tax return to pay off personal loans? Following are some criteria to help you decide if it will work for you:

Do You Have an Early Payment Penalty?

Some personal loans come with an early payment penalty. This means that if you pay your personal loan off early, you could come out paying a fee. Although it’s more common to have an early payment penalty on a large secured loan, such as a mortgage or student loan, some borrowers with less than outstanding credit may have an early payment penalty on a personal line of credit. This amount varies, but one standard fee is six months’ interest on the outstanding principal. If this is the case for you, you’ll have to see if paying it off early actually costs more money than paying it off as scheduled.

Which Loan Has the Highest Interest Rate?

You may select to pay off the debt that has the highest rate of interest. In this case, you may elect to pay off credit card debt first, and work on paying off your personal loan if it carries a lower rate of interest. On the other hand, since the Credit CARD Act of 2009 has been passed, credit card lenders have been severely restricted on retroactive rate increases. In addition, borrowers who maintain good payment records for six months may be eligible for a lower interest rate. Therefore, maintaining a steady payment for your credit cards and paying off a personal loan might make more sense in your case.

How Can I Reduce My Tax Payments?

Finally, the smartest strategy you can implement is to reduce the amount of taxes you are paying, beginning right now. If you have overpaid by a considerable amount of money, you are essentially giving the government an interest-free loan on your money. Instead, find out how you can reduce your payments so you don’t overpay, and spend that money on paying down your debt throughout the year. If you have more cash flow during each month, you will reduce your need for a personal line of credit and credit cards.

Home Affordable Modification Program may give homeowners some financial relief. Even if their debts are skyrocketing, they may not have to resort to the high interest rates that come with debt consolidation loans. That’s because Wells Fargo has joined Bank of America in announcing that they will modify the home-equity loans of consumers who have already qualified for assistance from the U.S. Treasury Department’s Home Affordable Modification Program. This is a big deal because combined, Wells Fargo and Bank of America service 25 percent of the second mortgage loans in the United States.

An Alternative to Debt Consolidation

Homeowners struggling to pay their first mortgage loans can now request a loan modification through the Home Affordable Modification Program. Under this program, lenders and banks are given financial incentives from the federal government to lower the monthly mortgage payments of struggling homeowners. The goal is to reduce interest rates, forgive portions of loans’ principal balances or restructure their terms to somehow lower the amount of money homeowners must pay each month.

But what happens to those homeowners who have their first mortgages modified but are now having trouble paying their second mortgages or home equity loans? Well, if they are customers of Bank of America or Wells Fargo, they, too, can petition to have that loan modified. This, of course, is an alternative to debt consolidation: Rather than take a debt consolidation loan to handle their home equity and credit card payments, consumers can have their second loan modified. It might save them enough money to pay down their escalating credit card debt, too, without the help of a debt consolidation loan.

Will Others Follow?

The Obama administration would like to see other banks and lenders follow the lead of Wells Fargo and Bank of America. Administration officials have made no secret of the fact that they’re not happy with the progress banks and lenders have made under the Home Affordable Modification Program. According to the latest numbers from the U.S. Treasury Department, 170,000 homeowners had received mortgage modifications through the end of February, 2010. The department also reported that 91,800 additional loan modifications had been completed, but were only waiting for the final OK from homeowners. There’s little doubt that a loan modification is a superior alternative to debt consolidation loans. These loans are a necessity for consumers in fiscal emergencies. But they are far from ideal. They come with high interest rates and origination fees. But if there is no alternative, consumers will continue to rely on them, especially in this difficult economy.

If you are drowning in a sea of credit card debt, you can use personal loans to pay off the balance on your plastic. Debt consolidation offers several benefits to the lender, and is a practical use for personal loan funds. All you need to do is apply for a personal line of credit that pays off your balances; you then need to make only one payment per month. In addition, the interest rate on personal loans is generally better than that of credit cards–usually only 11% versus 20% or more when it comes to plastic. Therefore, using a personal loan to pay off excessive credit card debt can save you a lot of money in the long run.

Step One: Gather All Your Information

Before you apply for a personal loan, you need to gather all the information you need on your credit card and unsecured debt. Make sure you include every credit card, a current balance, and the interest rate you pay in your overall list. If you have other kinds of unsecured debt, such as medical bills, you might consider including those as well. Using your personal budget, try to figure out a reasonable monthly payment that you know you can afford. Finally, figure out how long you can spend paying the debt back.

Step Two: Approach Your Lender

Once you have your total debt amount and an idea of what you can afford to pay and for how long, it’s time to find a bank. You can begin by applying with your own bank or credit union; often they run “sales” on personal loans at certain times of the year. But if you are turned down by your own financial institution, don’t lose hope. You can apply with other institutions online, or even try for peer-to-peer lending, which has fewer restrictions than typical banks have. Most lenders will be more likely to give personal loans if you have a plan for using the money and even come in with a plan to repay the debt responsibly.

Step Three: Pay Off Your Balances–And Keep Them Down

Finally, once you have your loan funds, pay off your credit card debts. While you are at it, unless you have a great deal of self-control, you should think about closing the accounts altogether. There is no sense in paying off the debt with one loan only to run up more unsecured debt. Debt consolidation is a great financial “do-over,” but only if you get your spending habits under control as you pay off your personal credit lines.

Fed Chairman Ben Bernanke was in the news again this week, but the story had nothing to do with the economy or with Bernanke being reappointed as the chief of the Federal Reserve. It turns out that Bernanke was a victim in one of the fastest growing crimes in America: Identity Theft. Bernanke’s information was accessed when his wife’s purse was stolen at a coffee shop, providing thieves with the address, phone number, and checking account number of the Bernanke family. This was all the information necessary for an identity thief to take advantage of one of the nation’s top economic minds

Identity theft affected almost 10 million people in 2008, up 22% from a year earlier. The average victim pays $500 to correct the problems caused by identity theft. These crimes aren’t generally high-tech scams–they usually begin with a stolen wallet or mail containing personal information. Here are five tips to reduce your chances of becoming an identity theft victim.

– Shred Important Documents: For between $60 and $70, you can purchase a cross-cut type shredder that will destroy any documents containing your private information. Use a shredder to destroy anything that could be used against you by identity thieves, including junk mail like credit card applications. “Dumpster Diving” is a popular tactic used by identity thieves who are willing to dig through your garbage cans looking for your information. When in doubt, shred!

– Guard Your Personal Information: one of the most common ways that thieves get access to your bank account is through “shoulder surfing,” or looking over your shoulder as you enter your pin number when using an ATM or bank card. Most consumers enter their pin number multiple times each day and many are not careful about keeping that number hidden from those around them. In addition, get a locking mailbox if possible so mail thieves don’t have a chance to sift through your mail before you do.

– Cancel Old Credit Cards: If you haven’t used a credit card in six months or more, it probably makes sense to close the account. An open credit line is an easy way for an identity thief who has a little of your information to simply request a new card, using your information to verify the stolen identity. Also, don’t carry these rarely used credit cards or other documents like social security cards in your wallet.

– Use Common Sense: Many of the identity theft victims could have avoided the problem if they had used better judgment. Never write down PIN numbers or passwords to carry with you. If you receive a phone call, letter, or e-mail asking you to provide personal information be very suspicious and careful about what you disclose. With identity theft rising so rapidly, extra caution is in order for everyone.

Monitor Your Credit Report: You should check your credit report at least annually looking for anything that looks fraudulent or out of the ordinary. You can also pay a monthly fee to have your credit report monitored so that you’ll be notified anytime there is a red flag associated with your name. Catching identity theft early can go a long way in minimizing the damage it can cause. 

As people look at their investment portfolios and compare their value to what it was worth at the end of 2007, there is probably a wide range of emotions. Those who sold early in the bear market and held cash have to feel good about that choice, but some are kicking themselves for still being in cash and missing the last 5 month rally. Those who held on to their stocks and rode them lower and lower certainly feel frustration as they wonder why they didn’t sell at the first sign of trouble.

 It’s almost impossible to predict how most stocks will perform in the future, but there are several mistakes that many investors make that can hurt the performance of their portfolio. Here are 5 mistakes to avoid as an investor:

 – Don’t try to time the market: There are many traders out there who will gladly tell you tales of the perfect buy and sell calls that they have made on stocks. They’ll be less likely to tell you how many times that have guessed and been wrong. It’s impossible to know which direction the market is going from one moment to the next, and those who try usually get burned often enough to think better of it in the future.

– Don’t Rely On Past Performance To Predict Future Results: Just because an investment has averaged a 10% return over the past 10 years, it’s not guaranteed to generate a 10% return in future years. There are many factors that go into investment performance. Buy investments based on factors that will drive performance in the future, not based on what they have done in the past.

– Don’t Let Your Emotions Dictate Investment Decisions: Warren Buffet, one of the top investment minds in history, is famous for saying that he buys when people are scared and sells when people are greedy. Many investors sold as the market was bottoming out because the losses were just becoming too much to bear, but selling at that point made those losses that had been on paper a reality. Now that the market is headed in the right direction again, the same investors that were selling 6 months ago will feel better buying again, when the market is high. No one makes money by buying high and selling low.

– Don’t Take Risks That You Can’t Afford To Take: Although we can’t always see bear markets coming, we know that periodically stocks will have a bad year, some worse than others. Whenever you buy stocks, you need to realize that they could lose value very easily. If you’re using next month’s mortgage payment to buy stocks, there’s a risk that you’ll come up short on next month’s payment. Invest for the long term with dollars that are reserved for your long term goals.

– Don’t Invest Without A Plan: Whenever you buy as an investor, you should have a goal for that investment. You should also have a plan that you can rely on if things go in the wrong direction. Have a plan for when you will sell in a good market or in a bad market and stick to that plan.