loans and credit

In times of economic downturn many people who need cash feel that their 401(k) is their money so borrowing from it is a better option than personal loans. However, this may not be the best idea. In fact, it could be financially unsound and carry problems long into the future.

Borrowing from a 401(k)

When you borrow from your 401(k), the account manager gives you the money out of your account. This has a few pitfalls. First, you will be subject to the tax liability for withdrawing funds. Additionally, your retirement account immediately takes a drop and thus cannot produce the desired increases that it would produce had the money stayed in the account. If that were not enough, you could face tax penalties as well. The additional penalties occur when the borrower unexpectedly loses their job and is forced to pay back the entirety of the loan within 60 days. When this does not happen, the amount becomes taxable and penalties of up to 10 percent occur.

How Personal Loans are Better

Since a personal loan is not a secured loan (in most cases), the interest rate on the loan will be higher. However, the loan will not have any deleterious effects. You can safely borrow any amount needed and take several years to pay back the loan. There are no additional taxes or penalties assessed for borrowing, and payments will remain the same despite your employment status. While no one likes to think of losing a job, the unexpected happens. When you choose a personal loan, paying back the loan is much more difficult without a job, but at least you will not be suddenly out of a job and be required to pay back the entire loan immediately.

The Best Option: Build an Emergency Fund

Your best option is to build an emergency fund while you are also putting money in your 401(k). It takes discipline and practice to set aside money for emergencies but it is the most financially sound decision. Ideally, you will want to save up six to twelve months of income. This money can then be used for emergency situations (i.e. fire, theft, ER visits) or in the event of unexpected job loss. In the current economy, it is taking the average job seeker three months to find a new job with an extra month for every $10,000 over $50,000 made. Therefore, if you make $70,000 a year, it is taking approximately five months to find a new job.

While dipping into your 401(k) may be tempting, it is a risky option. Instead, check out personal loans and then start building an emergency fund so you will be better prepared next time.

Personal loans are used to pay anything from an emergency room visit, to car repair, or even buy groceries when money is tight. In fact, most people will require a personal loan at some point. It is not unusual for people to take out several personal loans throughout their life, but when do they become dangerous?

Bad Credit Loan Gone Bad
Recently, it was reported that a woman was looking for a loan. She did not have bad credit but responded to an advertisement for Yes Loans. They specialize in bad credit loans or payday loans here in the United States. When she figured out what it was, she canceled the service. However, she had already given them her information. About a week later, she received a letter saying she could get a loan for £3,000 at a 49.4% interest rate. She did not want it and destroyed the letter. Ten days later, the loan company took out £69.50 from her account. While she eventually got the money back, it was quite an ordeal.

3 Tips to Avoid Bad Payday Loans
When it comes time to borrow some money, the best bet is to go with the most traditional route possible (i.e. banks, family, or friends). However, if you have bad credit, this may not be an option. If you must get a payday or cash advance loan, then watch out for these three things.

Third Party Lenders – While it is not necessarily bad, when you deal with third party lenders, your information will get passed around. Again, the company may be legitimate but you never know where they are sending your information.

Hidden Fees and Charges – Bad credit loans have a high enough interest rate without your having to pay all kinds of fees. Like low interest credit cards, it is not unheard of for the interest to skyrocket even if you are just one day late. Also watch out for late fees, early payment fees, and service charges as these can really add up.

Automatic Withdrawal – Cash advance loan companies would like you to believe you must have a checking account to use the service. This is so they can withdraw the money right out of your account. To avoid overdraft fees and the like, use a savings account that they cannot make a withdrawal from.

Seeking a personal loan is not always a bad thing. However, you need to know what you are getting before you sign on the dotted line. Therefore, read the contract, look for interest rates and fees, and make sure you understand what they are offering.

If you have ever gone into a bank seeking a personal loan, you just may be shocked to hear about how banks deal with personal loans. While banks deal with all kinds of loans including secured loans, unsecured loans, revolving credit (i.e. credit card), mortgage loans, auto loans and more; the unsecured personal loan is associated with the most “myths” about banks and their dealings with loans.

Myth #1: Banks have “Strict” Lending Policies

Many banks would like you to believe that they have strict lending policies that dictate to whom they can give a loan and under what circumstances those loans can be given.

Truth: With Few Exceptions, Lending Policies are Flexible

The exceptions: Federally insured loans like FHA mortgage loans and some student loans come with strict lending procedures. You do have to meet all the federal rules and regulations to qualify for these loans.

However, all other loans are very flexible and will vary depending on the bank and even the loan officer! The bank has the ability to decide to whom, when and under what circumstances they give a loan. Everything from the minimum credit score to the minimum and maximum loan amounts are based on how they choose to do business.

Myth #2: Banks are Altruistic

Banks give off an altruistic impression with their slogans about “protecting” your money. They give you interest and “free” things to make keeping your money in their institution more convenient.

Truth: Banking is BIG Business

They do not give you the “free” checking and moderate interest for your benefit. They are competing with other banks to use your money. They take it, invest it, loan it to others, and make quite a bit of money with it. Therefore, they need you to stay in business.

Myth #3: Personal Loans Are More Difficult to Approve

Again, banks want you to believe that personal loans are harder to get approved than other loans. They want you to believe any unsecured loan is intrinsically more difficult to process and receive approval on.

Truth: Refer Back to Myth #1.

Banks are free to make up their own rules and they do. Since personal loans are unsecured, they run a higher risk of not getting their money back, and since unsecured personal loans are generally for smaller amounts (a few thousand dollars), they stand to make less money on the interest.

When dealing with a bank, remember they are a business like any other. It is time we stop thinking of them as anything less.

Debt consolidation loans sound like a great idea. After all, you get to reduce all your personal loans into one big loan. Your credit report shows that you have paid off all you previous loans and only have one loan out. Additionally, your revolving credit is paid off and that raises your limit on the cards. But, is it all it’s cracked up to be? Find out the pros and cons of debt consolidations loans to find out if it is right for you.

Pros of Debt Consolidation

• All your personal loans, credit card loans, and unsecured loans are all paid off.
• You only have one loan payment to make each month.
• In many cases, you can get a lower interest rate for the personal loan.
• With a lower payment, you can pay the same amount as before and pay off the debt faster.
• Your credit score reflects loans paid in full.
• With one payment, you can easily prevent late fees, overdraft fees, and forgotten or misplaced bills.
• A lower payment means you don’t have to miss payments in tough times.

Cons of Debt Consolidation

• Without careful money management, you can easily get back into the same situation of maxed out cards and late fees. The big difference is that not only are all your cards maxed out but you also have a debt consolidation loan to pay off as well.
• Your credit cards may increase your credit limit on your cards making it more tempting to splurge on something you cannot afford.
• Not all consolidation loans lead to a lower interest payment. Sometimes, it is better to keep the rates you have instead of consolidating.
• Missing a payment can cause big fees and skyrocketing interest rates.
• One payment means a larger onetime payment that may be more difficult to make than smaller payments throughout the month.

Is Debt Consolidation Right for You?
With all the commercials and all the hype, it is tempting to think that debt consolidation is a quick fix to all your personal loans. However, they are not for everyone. Sitting down with your bills and figuring out the rates you pay and the rates you would pay with a consolidation loan is the only way to know for sure. Trained professionals can help you with the process. However, you do want to make sure they are unbiased parties. Unfortunately, some places are not there to help you make the best personal decision. They are only there to sell you a loan and make a profit.

There’s a big difference between debt consolidation and debt settlement. Unfortunately, when newspapers run stories listing the misdeeds of debt settlement firms, the average consumer doesn’t make the distinction. Consumers instead lump debt consolidation companies and debt settlement firms into the same category of companies that can’t be trusted. Such is the case with the Debt Settlement Consumer Protection Act, a bill introduced in the Senate by Sen. Charles Schumer, a Democrat from New York. As part of the debate over the bill, Schumer and his Senate colleagues have discussed in depth some of the allegedly unethical practices in which debt settlement companies have engaged. When consumers read news stories summarizing this debate, they rarely separate the world of debt consolidation from that of debt settlement. This is unfortunate; debt consolidation may not be perfect, but it is a legitimate tool for consumers who are overwhelmed with debt.

Bad Debt Settlement Behavior
The charges leveled at debt settlement companies are pretty disheartening. Many firms are using the federal government’s bailout of the banking industry to bring added credibility to their companies. The Government Accountability Office has introduced into the Debt Settlement Consumer Protection Act debate audio recordings of debt settlement companies bragging to their clients that their companies had government approval and were receiving bailout funds. Obviously, these debt settlement companies were not actually the beneficiary of U.S. bailout dollars. Then there are the typical charges filed against these companies: They charge exorbitant fees for their services. They often encourage their clients to stop paying their bills, something that further damages their credit scores. And some even take money from their clients and then do nothing at all.

The Bill
Schumer’s bill requires debt settlement firms to use written contracts that fully disclose all the services that they will provide. Contracts would also have to spell out in good faith the total amount of fees that consumers will pay for their debt settlement services. Lobbyists for the debt settlement industry aren’t in favor of the changes. But it’s hard to argue with the increased transparency that Schumer’s bill would provide.

The Debt Consolidation Difference
Debt consolidation is a different beast. When taking out a debt consolidation loan, consumers pay one single monthly payment that they can afford, instead of several to various lenders. The debt consolidation firm then pays off the consumer’s creditors from this monthly payment. By taking out a debt consolidation loan, consumers can stave off the calls from collection agencies while steadily paying off their debts. Debt consolidation loans do lower consumers’ credit scores, and they often come with high interest rates. But for some consumers, they are the best option for eliminating debt.

Personal loans come with a higher interest rate than secured loans, because the very nature of the loans does not give the lender any assurance you will repay. Therefore, banks need to charge a higher interest rate to cover their losses for those who do not pay back the personal loan. That being said, it makes sense to get a secured loan whenever possible, but sometimes, a secured loan is not possible.

The Dos and Don’ts of Personal Loans

Sometimes a personal loan is necessary and a good decision. For example, a member of the family needs dental surgery not covered by insurance. The family member may need wisdom teeth removed, dentures, or a partial plate. All of these things cost between $1,000 and $3,000 and are necessary. This is the time to get an unsecured loan. Here are more Dos and Don’ts:

Do: Try to get a secured loan if possible (i.e. for cars). Get a loan for medically necessary procedures. Get a loan for emergency situations for which funds are needed immediately.

Use personal loans as a last resort only to be taken before deciding to take a cash advance on your credit card.

Don’t: Get a personal loan for unnecessary things (i.e. vacations, gambling). No matter how necessary the loan is, do not get a loan if you cannot pay it back.

Agree to a loan without finding out about extra charges for lateness, early repay, and insufficient funds.

Charges that Affect Personal Loans

Interest Rate – The interest rate is the most obvious charge associated with the loan. The rate will be considerably higher than a secured loan but less than a payday loan. Still, you want to shop around for the best rate possible.

Processing Fee – Sometimes it is referred to as an application fee. Whatever the bank calls it, you will be charged a fee for borrowing the money. Generally, it is about 1% to 2% of the loan amount. However, some banks charge a flat fee for all loans.

Early Payment Fee – Not all banks charge you extra for paying early, but this is something you need to know. In some cases, the fee can be enormous and should be avoided at all costs. In other cases, the bank will have a large early payment fee for a certain length of time and then will lift the fee allowing you to pay off the loan early.

Late Payment Fee – While some banks will allow a grace period, all banks will charge a fee for late payments. Find out what it is and avoid it as much as possible.

Two people making the same income, walk into the same bank, wanting the same amount for personal loans. While they both get the loans they were seeking, one gets a much better interest rate and thus gets a much better deal.

Why Do Some People Get Better Rates Than Others?

First, there is no law saying how much of an interest rate a bank can charge (except for military personnel.) This means the bank can determine how much and at what interest rate they are willing to offer a personal loan. In most cases, the better rates and the better terms go to those with the better credit score.

How to Improve Your Credit Score

Since your credit score does more than determine the interest rates on personal loans, it is important to do everything you can to keep that score high. People use your credit score to determine job eligibility, insurance premiums, interest rates, availability of personal loans, and so much more. Here are some things you can do to either raise your score or keep it high.

Pay Hospital Bills – Many people are unaware that as long as you pay part of your bill you are ok. Therefore, every month pay something on all your medical bills.

Only have 1 or 2 Credit Cards – Revolving credit is a tricky thing. On the one hand, you need some revolving credit to get a credit score. However, too many credit cards or too many request for credit cards can lower your score.

Keep Balances Low – Paying off your credit cards each month is ideal. If you must roll over a balance, then pay it off as soon as possible. You need to keep a low debt to income ratio.

Pay off Bad Debt – Many people believe that once a debt goes bad, there is nothing you can do. However, paying off charge offs and slow pays will still be better than nothing.

Pay off the Low Debt – Small debts like $20 or $30 can have a huge negative impact on your credit. Check your credit report and pay off these little debts to get them off your record.

Negotiate Large Debt – Even after a debt has gone to collections or been written off, you can call and try to negotiate a smaller fee. You may be surprised to find the creditor is willing to settle for pennies on the dollar.

The best thing you can do about your credit score is to watch it. Take advantage of the free yearly credit card report to keep the right information on and faulty credit information off.

In a sign that fewer consumers are heading for debt consolidation loans, credit card charge-offs fell in April, according to a report from Moody’s Investors Services. Charge-offs are credit card balances that the card issuers have written off as being uncollectable. When the number of these falls, it’s a sign that consumers are not falling quite as deep into debt. This is a good sign for the economy overall; consumers will be more willing to spend on everything from home-improvement goods to new cars to electronics if they aren’t as deep in debt.

Positive Numbers
Moody’s reported that credit card charge-offs dropped to 10.91 percent in April. That’s down from a rate of 11.21 percent in March. Moody’s officials also reported that that the dip serves as evidence that uncollectable credit card payments might have peaked in the first quarter of 2010. This is good news for consumers. Debt consolidation loans are useful tools for consumers facing overwhelming debt. But they do come with certain negatives. Consumers will lower their three-digit credit scores if they take out debt consolidation loans. Lenders see such loans as a sign that consumers have been irresponsible with their finances. Also, debt consolidation loans come with high interest rates and fees. Consumers will often end up paying more than they would have had they simply paid their debt on their own.

Fewer Consumers in Trouble
Still, for consumers who may have lost their jobs – and there are many of them – or have watched their annual income drop, debt consolidation may be an only option. In such instances, consumers need to do their research before consolidating their debt. This means asking the right questions before working with any consolidation company. Consumers need to request, in writing, the exact fees and rates they’ll be paying. They also need to know how long it will take them to pay back their debts and how much interest they’ll pay while doing it. Educated consumers increase their odds of working out a debt consolidation arrangement that works best for them.

Promising Financial News
The Moody’s report, though, provides more evidence that consumers are finally starting to dig out from the country’s financial mess. No, most people aren’t exactly thriving financially these days. But for many, the pain has mostly stopped. Now it’s on to recovery. For those who have taken out debt consolidation loans, that means making a vow to never run up large amounts of debt again. For many, it may mean a change in spending habits or, for the most severe of over-spenders, an appointment with a credit counselor.

Between personal loans, auto loans, credit cards and mortgage loans, it is virtually impossible to live a debt free life. Almost everyone will borrow money for something at one point or another in their lives. That means debt will inevitably be in our lives. Despite the bad rap debt has received, there is such a thing between bad debt and good debt and it is important that we know the difference.

When Debt is a Good Thing

In general, debt is considered good when it is used to better yourself, your future or your overall wealth. This is why everyone will have a tendency to get in a little debt at some point in their life.

Examples of Good Debt:

Purchasing a Home – Since purchasing your own home is considered better than continuing renting a place that you will never own, a mortgage is considered “good debt” and is not a strike against you.

Purchasing Real Estate – While you may not need real estate, it is also considered a financially sound option. When you purchase “renter” houses, you are actually increasing your net worth, especially if the rent covers the mortgage.

Receiving Student Loans – It is a generally accepted practice to obtain student loans. The idea is an education is worth the investment. Since few people can pay thousands of dollars for an education in a lump sum, student loans are considered acceptable debt (as long as you pay it back.)

Borrowing for a Business – Since most businesses take money to start up, a business loan can be a sound debt. As long as the loan is good and the business plan is acceptable, then a business loan is considered good debt.

When Debt is a Bad Thing

The commonly accepted term for bad debt is anything that is frivolous. Sometimes, we want to live outside our means. Instead of saving up the money for the cool things we want, we borrow, charge, or take out personal loans. This can lead to ever increasing debt that becomes almost impossible to get out from under.

Examples of Bad Debt:

Purchasing Vacations – While we all want to get away once in a while, borrowing to fund such excursions is a bad idea.

Charging a Wedding – Nothing gets a couple off on the wrong foot like financing a wedding. Starting off your marriage with this personal loan is not a good idea.

Borrowing to Invest – The stock market is not a good place to be in debt. You never know when the market will crash taking you and your personal loans down with it.

When college students immediately have to worry about debt consolidation upon graduation, who suffers? The students, obviously, have a lot to worry about. But what about the colleges themselves? And, looking far into the future, what about the rest of society? Who knows how many talented doctors or attorneys we’ll lose out on as the costs to obtain these degrees become unmanageable for a growing number of students. These are interesting questions that journalism teacher Laura Heller addresses in a blog post for the personal finance site WalletPop. Her view? When students are drowning in debt – both of the student loan and credit card variety – academe as a whole suffers.

Too Much Debt

It’s not hard to picture today’s medical student or engineering graduate student one day calling up a debt consolidation firm. Medical students, for instance, typically graduate with more than $100,000 in debt. Even the typical undergraduate student graduates with more than $20,000 worth of student loan debt. This doesn’t include credit card debt; the average undergraduate student racks up about $3,000 worth of this kind of revolving debt while in school. These are sobering numbers. And they’re having a big impact on colleges and universities, writes Heller.

Enrollment Shifts

In her post, Heller cites several studies showing that today’s college students are, for the most part, flocking to lower-cost options. Enrollment at community colleges is on the rise. It’s the same at public universities. But private colleges and universities are struggling to keep their enrollment levels up. This isn’t surprising. Tuitions are high enough at public universities. They’re even more daunting at private ones. For families who are worried about the nation’s high unemployment rate, and whether they can pay their mortgage each month, shelling out big bucks for private colleges may not seem like a reasonable option. And for students themselves, the prospect of leaving college with tens of thousands of dollars of debt in a weak job market might seem like an unwise financial move, too.

Creative Solutions

To avoid a future of debt consolidation, many students are taking a more creative approach to their college education. Why else would online colleges such as Phoenix University be so popular? And why else would so many students elect to take as many of their credit hours as possible at community colleges before enrolling in four-year public or private universities? Still, even with these creative measures, college education is rapidly becoming an unbearable burden on students and their families. Something has to be done to change this. Are the country’s college officials, education advocates and politicians creative and dedicated enough to take on this challenge? Let’s hope so, or else the only ones who will benefit are the debt consolidation companies.