loans and credit

There have been two major trends reported in the personal loans industry this past week, and these have major consequences for anyone opting for a personal line of credit. First, financial analysts are reporting a decrease in the number of borrowers seeking personal loans for debt consolidation. This means more borrowers are choosing to pay off debts, saving a personal loan for a single large purchase. Secondly, financial analysts are reporting that personal loans remain quite difficult to obtain from financial institutions and interest rates are on the rise. This means that more people may choose non-traditional methods of obtaining a personal loan.

If you are in need of a personal line of credit, these new trends may give you pause. You may wonder, is it even OK to try for a personal loan at this point? Should you wait or find alternative means to fund your personal expenses? No matter how difficult personal loans may be to obtain, there will always be situations that arise that call for more funding than you have. Use this step by step guide to see if you should apply for a personal loan to cover your unexpected expense:

Ask Yourself These Questions First

Before considering a personal loan, you should determine if your situation is indeed an emergency and you have exhausted other avenues of funding. Ask yourself these questions to determine a real emergency:

• Is it a sudden, unplanned expenditure? • Did you give yourself 24 hours to think it over? • Can you afford to pay for this expense right now, in cash?

• Is this a necessity or a luxury?

Some emergencies are straightforward, such as a sudden medical expense or a car repair for the vehicle that gets you to and from work. Buying a new couch just because it’s on sale is not really an emergency, but it is an unplanned expense. Asking these questions can help you decide if it’s the right thing to do at the moment.

Find Alternative Ways to Pay

If taking out a personal line of credit won’t work at this point, then you can find alternative ways to pay for these expenses. For example, you can save up money prior to starting home renovations. You can also look at layaway for major home purchases; several major retailers are bringing this kind of personal line of credit back during the recession. Personal loans are a good option in many situations, but they aren’t the only option–think outside the box and you may be surprised at how well you can handle a crisis without a personal loan

Add the writers at SmartMoney.com, one of the Web’s most trusted sources of financial information, to the growing chorus of financial experts – and debt consolidation providers — wondering if consumers are ready to dust off their credit cards again. In February, of course, consumer credit fell by $11.5 billion, a figure that includes a drop of $9.5 billion in credit card debt. This is the lowest that consumer credit card debt had been since September of 2006. Financial experts, though, aren’t convinced that consumers have truly changed their ways when it comes to how they use credit cards. At least SmartMoney, in a story published April 22, expects that consumers will return to their formerly beloved plastic shortly. This, of course, is news that debt consolidation companies want to hear; the more consumers use their credit cards, the more likely they are to run up their debt, and the more likely they are to need the services of a debt management firm.

Returning To Plastic?

During the recession, consumers purchased fewer items with their credit cards. It was one thing they could control during the economic downturn. But now that the economy is starting to heal, economists are predicting that U.S. consumers will return to their old habits. After all, consumers had gotten used to purchasing big-ticket items such as flat-screen TVs, bedroom sets and home appliances with their credit cards. Once the economy improves enough to restore consumers’ confidence, what’s to prevent them from reverting to their habit of paying for everything with credit? Economists quoted in the SmartMoney story predicted that a rebound in credit usage will mean a strong second quarter for the profits of lenders.

Debt Consolidation Business and Plastic

The debt consolidation business relies largely on consumer spending. After all, if consumers save their money and don’t overextend themselves financially, fewer of them will turn to debt consolidation as a way to manage their debt. It’s in the best interests of debt consolidation companies, then, to see consumers return to their days of spending wildly and simply putting their purchases on their credit cards.

A New Era?

The truth is, though, even if the country is entering a new era of wiser spending – something that is certainly up for debate – debt consolidation services will still have a place. Debt consolidation loans serve as a financial safety net to consumers who’ve lost their jobs or have had their annual incomes slashed. When their income falls, and their debt levels rise, they’ll need an option to stop the collection agencies. Debt consolidation will remain that option for people who are struggling financially.

Though most aren’t even old enough to vote, prospective college students are learning a harsh political lesson. Thanks to a plethora of states struggling with mounting budget deficits, many public colleges and universities are boosting tuition rates. Luckily, Junior and little Sally will have the option to take out a student loan to cover those rising costs. Let’s examine why that’s not such a terrible situation for your children.

Establish Credit

Rather than filling out numerous credit card applications just for the sake of getting a free t-shirt, which will likely ruin their credit, your children will begin building the foundation for solid credit. They’ll gain the ability to manage their expenses, be aware of what things cost, and learn to pay off loans. Learning these lessons through a low cost loan will prove invaluable to your children as they progress through life and take on additional financial responsibility.

Unbeatable Terms

A huge benefit of student loans is the associated terms. Borrowers do not need to start paying off the loan until they complete school and get their first job. Additionally, the rates for student loans are typically much lower than other types of loans.

Build Character

While your children won’t want to hear about it, taking out a student loan to pay for school will help them build character. Their college experience will be much more rewarding if they are responsible for paying their own way, as opposed to having it handed it to them courtesy of the bank of mom and dad. Your children will be more inclined to work harder and get better grades if they know they’re on the hook for the bill.

Other than the obvious advantage of being able to attend college without having the cash up front, these additional benefits should eliminate any hesitancy regarding obtaining a student loan.

Perhaps no other topic dealing with personal loans is more hotly debated than personal loans made between friends and family members. Perhaps this is because we have all, at some point, needed to borrow money quickly but couldn’t get it through a traditional source. Or perhaps a loved one came to us in desperate need, requesting our help. Whether you have borrowed or lent, or both, this guide will help you make an effective decision in future.

Why You Shouldn’t Make Personal Loans

Some financial experts and pop psychologists maintain that you should never make a personal loan to a family member or friend. Their reasoning is simple: placing a business relationship (lending cash) between personal relationships will put a terrible strain on both parties. In fact, financial guru Dave Ramsey goes so far as to call it a “master-slave” relationship, noting that it can fundamentally rupture friendships and family ties. Ramsey, along with other financial and relationship experts, reaches the conclusion that if a loved one comes to you with a financial need, you make a gift of the money and never expect payback. This will keep both parties from becoming locked in a business liaison that could sour and ruin your close personal ties.

Why You Should Make Personal Loans

On the other hand, there may be instances when making a personal loan is the best option for you and your loved one. As financial institutions tighten their belts, traditional personal loans have become more difficult to obtain. For some people with a less than stellar credit record, obtaining a personal line of credit from a trusted friend or family member may be their only way out of a bad situation. You may desperately want to help but can only afford to make personal loans if you have the hope of getting your money back some day. In these instances, funding a personal line of credit may be the way to go.

It’s a Personal Decision

Ultimately, the choice to give personal loans is in fact, a personal one. If you can afford to give the money as a gift and can do so joyfully, with no strings attached, then by all means do so. If you want to make an official loan, be sure to place the loan terms in writing, along with specific payback terms. Have both parties sign the paperwork and give a copy to the borrower, keeping one for you. If you make the loan a formal affair, you might have a better chance of payback, and you might have legal recourse if your borrower defaults on the loan.

A sharp increase in the number of personal bankruptcy filings in March provides more evidence that debt consolidation loans, despite those critics who decry them, serve a necessary function. After all, if more consumers would turn to debt consolidation services, they might be able to avoid having to file for bankruptcy. And that’s something that can only help consumers. Chapter 7 bankruptcy filings stay on individuals’ credit reports for 10 years, while Chapter 13 filings remain on them for seven. Consumers who try to apply for mortgage or other loans with bankruptcies on their credit records will be saddled with sky-high interest rates, if they earn approval for loan money at all.

The Debt Consolidation Alternative

Consumers can avoid the stain of bankruptcy by instead consolidating their debts into one monthly payment that they can afford. This keeps the collection agencies at bay. And while it does lower a person’s credit score, debt consolidation doesn’t harm it as badly as do bankruptcy filings. Unfortunately, a growing number of individuals who could benefit from debt consolidation have instead chosen to file for bankruptcy protection. The New York Times recently ran a story about a significant rise in personal bankruptcy filings in March. According to the story, which cited data from Automated Access to Court Electronic Records, a data-collection company, personal bankruptcy filings were up 19 percent this March when compared to the same month one year earlier. Federal courts reported more than 158,000 bankruptcy filings in March, the report said. That equals 6,900 a day.

Record-Setting Numbers

The number of personal bankruptcy filings in March also represented an increase of 35 percent from February. In fact, the bankruptcy numbers are a record: the previous high in monthly bankruptcy filings in the last five years was the 133,000 that the country saw in October of 2009. March saw the most personal bankruptcy filings since the personal bankruptcy law was made more stringent in October of 2005, according to the New York Times story.

The Start of A Trend?

Is this the start of a trend? Will we see personal bankruptcy filings increase for the next several months? Let’s hope not. But such a trend wouldn’t be surprising. After all, unemployment is still far too high. People are struggling to pay their bills. Because their home values have fallen, they can’t take out home equity loans to help them survive. Some individuals can’t see any solution other than to declare bankruptcy. Of course, debt consolidation loans could help these consumers avoid having to file. The problem is, these loans receive such bad press that many consumers avoid them. And this simply leads to more people falling deeper into debt.

Each new day seems to bring a new attack on companies in the for-profit debt consolidation and settlement businesses. Critics of these companies say that they charge fees that are too high, or that they levy interest rates on their debt consolidation loans that are simply exorbitant. Some companies working in this field deserve the criticism. They do overcharge, taking advantage of desperate consumers willing to pay just about anything to stop the collection agencies from calling. But others provide a valuable service. It’s unfair, then, to call the entire debt consolidation and settlement industry corrupt, just as it’s unfair to say that all lawyers are shady and all salesmen are sneaky.

Illinois Aiming At Debt Management Companies

The latest state firing a salvo at debt consolidation and settlement firms is Illinois. Consumer advocates and legislators here are in the middle of debating the Illinois Debt Settlement Consumer Protection Act, which would put restrictions on the way debt settlement and consolidation firms do business. The Illinois House of Representatives has already passed the measure. Members of the state’s Senate are now considering the bill, though it looks likely to pass. What will the legislation mean to debt consolidation and settlement companies in Illinois? It would forbid companies from charging upfront fees, save for a $50 enrollment fee, for consolidating or settling debt. It would also require them to give refunds to customers who drop out of their programs. It would also allow consolidation and settlement firms to charge based on what they save customers, not on how much customers owe to creditors.

Will It Put Consolidation Companies Out Of Business?

Critics of the measure worry that it will drive debt consolidation and settlement firms out of the state of Illinois, leaving its residents who are struggling economically with fewer options. However, the bill doesn’t seem to ask anything unreasonable of debt management companies. In fact, it targets all the shady practices that have given these companies such a bad reputation in the first place.

Honest Business?

The Illinois Debt Settlement Consumer Protection Act seems to be asking debt consolidation and settlement companies to act fairly in their dealings with consumers. In essence, the state’s politicians are asking the companies to refrain from taking advantage of consumers simply because these consumers are in desperate financial straits. Is this unreasonable? It hardly seems so. In fact, whenever debt management companies fight legislation such as this, claiming that the passage of such bills will ultimately harm consumers, it makes them look all the more untrustworthy. This is a disservice to those debt firms that actually do work honestly and do charge reasonable fees. It helps paint an entire industry with the same negativity.

According to an article on CNN Money this week, interest rates on various loans, including personal loans, has been on a steady upward climb since the economy has begun to heal. Although mortgage loans have experienced the quickest rise in interest, personal loans and credit cards have also seen a slow and steady upward climb over the past year. When the recession hit, the amount of personal loans granted by financial institutions took a dive, as most lenders were unwilling to assume additional risk in already troubled times. Even though interest rates remained somewhat low (hovering around 10%), a personal line of credit was difficult to qualify for or even find at your local bank or credit union.

Personal Loans and Banks

Personal loans remain difficult to obtain from banks, especially if you are looking for an unsecured line of credit. Secured personal loans offer less risk to the lender but are still difficult to obtain. Usually lenders and borrowers have very different opinions about the value of the collateral being offered. If you are planning on offering collateral, it’s wise to take a professional appraisal with you to the bank, so that you can have expert testimony that shows your item’s value. If you are seeking unsecured credit, you can improve your chances of approval by asking for a smaller amount or a longer payoff time.

Personal Loans through Peer-to-Peer Lending

During the recession, the peer-to-peer lending industry grew, as a way to obtain a personal loan without using a traditional financial institution. This method of obtaining a personal credit line remains popular even as the economy appears to be on the mend. In this scenario, you can apply for a loan on a peer-to-peer lending website and an individual or group can decide to grant your loan based on a variety of factors. Because peer-to-peer lending is less formal and even friendlier than going to a traditional financial institution, many borrowers are seeking it out as a way to get the extra cash they need.

Personal Loans from Friends and Family

During this recession, the amount of personal loans obtained from “The Bank of Mom and Dad,” has grown exponentially. As family members and friends lose their jobs, face foreclosure, and experience other dramatic financial crises, loved ones are stepping in more and more often to fill the gap left by traditional financial institutions. The problem with family lending is, of course, the potential for disaster that comes of mixing personal relationships into a business transaction, but as long as the economy remains shaky, people will continue to go to loved ones for help.

One year after the $787 billion economic stimulus plan was announced by President Obama, there are opposing viewpoints as to the effectiveness of that stimulus plan. The government is spending money at a pace that the U.S. has never seen before and the spending is going to ramp up even more heading into year two. Most would agree that the economy still has a long way to go before we can call the recovery spending a success, but few agree on the effectiveness of the recovery dollars that have been allocated so far. Regardless of how you feel about the stimulus plan, here are the facts about what has been spent so far.

– Over the past year, an average of $27 billion a month has been spent on items and projects related to the stimulus plan. During year two of the plan, spending is expected is to increase to $34 billion a month. So far, of the $334 billion worth of spending projects that have been approved, $179 billion has actually been spent.

– Most of the spending so far has been aimed at tax cuts and the funding of direct benefit programs including unemployment reserves and Medicaid. The total amount of money allocated to tax cuts so far has been $119 billion. Spending in year two is expected to be aimed more at projects such as infrastructure, widening the reach of broadband, and healthcare.

– During year 1, an average of $14 billion was spent each month to benefit individuals directly in the form of government benefits. Year 2 spending toward individuals is expected to fall to $11 billion per month.

– The goal is for 70% of the $787 billion worth of stimulus to be allocated by September 30, 2010, and so far the government is confident that they will be able to achieve that goal.

– Recently lawmakers amended the anticipated cost of the Stimulus Plan to $862 billion (although the White House prefers that we continue to use the $787 billion figure).

Proponents of the job that Uncle Sam has done with stimulus spending so far point to the creation of jobs as an indicator of a successful program. In January, President Obama’s Chief Economic Advisor claimed that the stimulus program has created between 1.5 million and 2 million jobs during the first year and called the program, “the great unsung hero of the past year.” During the fourth quarter of 2009, the government website about the Recovery Act claims that nearly 600,000 jobs were created.

There are plenty of opponents to the government spending plan and they’re wondering where exactly those 2 million jobs have gone. The unemployment rate is essentially unchanged compared to a year ago and one republican lawmaker claimed that 2.9 million jobs were lost between the time the stimulus plan was announced and the end of 2009. With the national debt spiraling out of control and resulting in a burden that will be passed on to future generations, it’s no wonder that the recovery plan is under a great deal of scrutiny.

The government has provided a website where people can see exactly where stimulus dollars are being spent. To see more details about the Recovery Act, and exactly how your money is being spent visit www.recovery.gov.

In yet another attempt to boost the still struggling economy, the government is encouraging consumers to go green. Certain energy-efficient purchases allow taxpayers to receive a rebate to help alleviate the expense of making earth-friendly purchases. While these energy-efficient improvements can be costly, the incentive programs combined with the energy savings you’ll see make exploring energy-efficient options worth your time.

High Cost, High Return

Depending on the product specifications, some of the more expensive qualifying items include HVAC systems, roofs, water heaters, and windows. Installing any of these items may qualify you to receive up to $1,500 in tax credits. Obviously, you’ll only make these types of improvements if it’s absolutely necessary. But, if you’ve been considering installing new windows anyway, this may be just the extra incentive you need.

Upgrade Your Old Appliances

As part of the American Recovery and Reinvestment Act of 2009, the federal government allocated funds to states to provide rebates for homeowners who purchase energy-efficient appliances. Refrigerators are typically the biggest energy hogs of all your home appliances, making them the first candidates to be replaced. Also, consider updating your washer and dryer as well as your other kitchen appliances. Again, these replacements can be expensive, but if you’re ready for an upgrade anyway, the rebates make it more cost-effective for you.

Inexpensive Improvements Add Up

If you have no need to update your windows or appliances, you can still improve your home’s efficiency and receive compensation for your efforts. Simple tasks such as adding caulk to seal up your home or adding insulation to keep drafts out also qualify for a tax credit. These are also inexpensive ways to reduce your home’s energy consumption.

I realize some of these changes can be very expensive. However, if you need to replace these items anyway and plan on staying in your home for several years, the costs can be recouped within a few years, particularly when combined with the tax savings you’ll receive. Some of these improvements can reduce your energy consumption by as much as 25%. Considering the average homeowner spends nearly $2,000 on annual utility bills, the savings can be significant.

If you do plan on making any energy improvements, you need to act quickly. The tax credits are set to expire at the end of the year and will most likely not be extended, while the rebates for appliances will last only as long as funds remain.

If you have to move cross-country for your job or your school, you can use personal loans to finance your trip. Even if your company will cover your relocation expenses, most companies will do a reimbursement of your costs after the job starts. This means you will still need to come up with the cash to make the move yourself, and float these expenses until your reimbursement check comes in. Using a line of credit will help you meet your needs as you make this life-changing move at a lower interest rate than credit cards typically carry; after all, the last thing you want to worry about is trying to balance these expenses with your usual monthly bills. Following are three ways a personal loan can help you as you relocate:

1. Pay Deposits and Fees

One of the most expensive parts of your move will be paying your deposits and fees on your new home. Many utility companies require a deposit before turning on service to your new address. Your landlord will require, in many cases, first and last months’ rent as well as a pet deposit if you are bringing your pets. All of these deposits can add up to thousands of dollars, and they must be paid before you can move in to your new place. Personal loans can help you meet these obligations while still remaining current on your regular monthly expenses.

2. Pay Your Travel Expenses

You will also need to find a way to cover your travel expenses until your employer can pay you back. You will need to rent a moving van to move your household cross-country, and you will need to pay for your own gasoline, lodging, and food on the road if you choose to drive. If you fly out, you will need to pay for your own plane tickets. Personal loans can cover all of these planned expenses plus emergencies that occur on the road. For example, if you have a flat tire and need to repair or replace it, a personal line of credit can help you pay for everything and get back on the road.

3. Cover Your Paycheck

Finally, most employers have some sort of lag between your hire date and the time you receive your first paycheck. Consumers often find that carrying the burden of an expensive cross-country trip plus waiting for a paycheck is simply too much to bear. A personal loan can help you ride out the time between starting your job and your payday, allowing you to buy groceries, gasoline, and other mundane expenses without worrying how you will pay for everything.