loans and credit

With the national unemployment rate still near the 10-percent mark, consumers are struggling to pay off their home equity loans, something that might lead to an increase in the number of debt consolidation loans taken out by desperate individuals. A new report from the American Bankers Association in early April showed that consumers are struggling more than ever to pay their home equity loans on time. The reasons for this are simple: Many consumers are out of work. Others have had their pay slashed. Others have seen their home values plummet, erasing a major source of their paper wealth. It’s little wonder, then, that debt consolidation loans, which help consumers manage spiraling debt, are looking like attractive options to a larger number of individuals.

Late Payments on the Rise

According to the numbers released by the American Bankers Association, late payments on home equity loans hit a new high in the fourth quarter of 2009, when a total of 4.32 percent of all home equity loans were at least 30 days late. That’s a slight increase from the 4.30 percent of late payments in the third quarter of last year. There is some good news, though. Consumers are doing a better job of paying off their credit-card bills. According to the bankers’ numbers, late payments on consumer credit cards fell to 4.39 percent in the fourth quarter. That’s down from 4.77 percent in the third quarter. At the same time, the bankers reported, eight out of 11 consumer loan categories saw late payments drop in the fourth quarter of 2009. It’s certainly a good sign that consumers are paying off their RV, marine and personal loans on time.

All Is Not Well

That doesn’t mean that all is well. The fact that consumers are struggling to pay their home equity loans is troubling. These are secured loans, with owners’ homes acting as collateral. If these owners miss too many payments, their banks can take over their homes. The last thing the country needs as it continues to dig out from the Great Recession is more housing foreclosures. The threat of losing their homes may lead a growing number of these struggling consumers to the services of debt consolidation companies.

The Debt Consolidation Choice

This is not necessarily a bad thing. Yes, debt consolidation loans do come with higher interest rates. They do sometimes come with high fees. But consumers who do their research should know all this. Even with these negatives, debt consolidation might remain the best option for consumers who are struggling with debt. It is a far better choice, after all, than going through the pain of a housing foreclosure.

How effective are debt consolidation and settlement services in relieving the financial stress faced by today’s debt-strapped consumers? As with most complex questions, the answer depends on whom you ask. If you ask the writers at financial website Bankrate.com, debt consolidation and settlement doesn’t work often enough. If you ask officials with the Association of Settlement Companies, a trade association, these services are the best ways for struggling consumers to shrug off their financial woes and start a new life debt-free. It’s a debate that doesn’t look to end anytime soon.

Industry Numbers

The Association of Settlement Companies may not be the most objective source of information on debt consolidation or settlement. The trade association, after all, represents the companies that make a living in this industry. Its job is to make sure that these companies receive good press and avoid tough federal or state regulations. Still, the numbers provided by the association do point to an industry that has helped its share of consumers escape high debts. In 2009, according to the association, debt settlement companies helped settle more than $1.1 billion of consumer debt. This saved consumers more than $600 million of debt that they would not otherwise have been able to repay. The association’s numbers showed that more than 34 percent of consumers completed their debt-settlement program. That’s not a great figure, but it is better than the 21 percent to 26 percent of consumers who completed credit-counseling programs.

Critics

There always have been critics of both the debt consolidation and debt settlement industries, though. Bankrate.com, one of the better known online providers of consumer financial news, has long been critical of both types of financial assistance. In a recent story on the site, reporter Steve Bucci wrote that debt settlement rarely or never works. The biggest problem? Most lenders want a lump sum repayment of at least 60 percent of the debt that they are owed. Most borrowers simply don’t have that money, Bucci wrote. The Association of Settlement Companies debated this point, and said that debt settlement often does work for struggling consumers.

Other Complaints

Debt consolidation receives its share of complaints from critics, too. Most of them point out that debt consolidation companies often charge high interest rates for their services. Others say that the fees involved in these loans are too high, while still others say it sometimes takes far too long for consumers to pay off their debts under such arrangements. This debate is likely to continue. But until the economy improves, you can bet that consumers will continue to turn to debt consolidation and settlement services, no matter what the financial experts say.

Are consumers taking steps to avoid a future that involves debt consolidation? The latest financial data suggest that they are. According to a recent story on the MarketWatch Web site, outstanding consumer credit dropped by $11.5 billion in February. That might mean that consumers, still leery of a sluggish economy, are putting fewer purchases on their credit cards. If consumers truly are being more careful in their spending habits, it might mean a slowdown in business for debt consolidation companies. Only time will tell, though, if consumers are truly committed to saving more and spending less.

A Nation of Spenders

The truth is, the United States has long been a nation of spenders. We are a consumer society. When we want something, we buy it, whether we have the money to pay for it or not. Has that changed because of the Great Recession? Maybe temporarily consumers will spend less. But how long will this last? In a society in which instant gratification rules, can we really count on U.S. consumers to keep their spending habits in check for long? We’ll have to watch the debt consolidation industry to see if their business spikes or drops as the economy recovers to know the answer to that question.

Less Spending For Now

There’s no arguing with the numbers now, though: Consumers are charging less. According to the MarketWatch story, consumer credit fell by 5.6 percent in February. This dropped outstanding consumer credit to a still sky-high $2.45 trillion. Outstanding consumer credit rose a bit in January, by $10.6 billion. But that increase came after 12 straight months of declining consumer debt. Overall, consumer debts are down a solid 5.2 percent from their peak in July of 2008. According to the story, revolving credit fell $9.4 billion, or 13.1 percent, in February. This marked the third-largest fall in revolving credit in the past 32 years. That’s pretty impressive. Other credit fell, too. This includes auto, personal and student loans, all of which fell by a combined $2.1 billion, or 1.6 percent, in February.

A Lasting Change?

It’s not surprising that consumers would try to spend less. After all, the national unemployment rate still stands near 10 percent. It’s wise to put the credit cards away when you’re not sure if you’ll be earning any income next week or next month. But as the economy improves, will we see consumers returning to their credit cards and, possibly, running up the revolving debts that lead many to debt consolidation? No one knows yet. But if history serves as a guide, you can expect those credit cards to return with a vengeance.

You can use personal loans to cover a multitude of expenses, but you may wonder when a personal line of credit is actually better for your needs than a credit card. In fact, as the economy has worsened, consumers are finding it more difficult to obtain a personal loan and more difficult to use a credit card. You need to make sure you are using the right kind of credit for every monetary situation. Before filling out an application for personal loans or pulling your credit card out of your wallet, this is what you need to know about personal credit lines.

Personal Loans 101

A personal loan is a line of credit that you obtain from a lender, such as a bank, or from a family member or a friend. The loan funds can be secured by collateral, making it a secured loan. It can also be made without collateral, making it an unsecured loan. Generally speaking, a personal loan has a relatively low interest rate, topping out at about 10%, and lengthy payment terms averaging about five years. These loans have been more difficult to get during the recent recession but secured loans have gotten easier to obtain because they pose a lower risk to the lender.

Credit Cards 101

A credit card is a kind of personal credit line, in which a financial institution gives you a certain amount to spend with a credit limit, or topping amount you can charge. Credit cards are a kind of unsecured debt, and as such, carry a higher interest rate than personal loans, usually averaging between 17% and 32%. The payback terms can vary but you are generally required to make a minimum payment on your balance every month, and interest is charged on the remaining balance. Credit cards used to be very easy to obtain but recent changes in government regulations in the credit card industry have made them harder to get.

Which Line of Credit Should You Use?

You may wonder which kind of credit works best for your needs. A personal line of credit is usually used for a one-time expense that requires planning, such as a vacation, home renovation or repair, or debt consolidation. A credit card is usually used for recurring expenses, such as medical bills, clothing, entertainment, or sudden emergencies that require immediate payment. If you have time to make a loan application and wait for your personal loan to be funded, you will have more time to pay back the loan and will pay lower interest on the balance. If you need immediate help and cannot wait for a loan request to be processed, you should consider using a credit card.

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The providers of debt consolidation loans received some good news in early April from the Associated Press: Consumers are borrowing money again. And when consumers add to their levels of debt, they’re more likely to one day need the services of debt consolidation loans. The big question from stats released by financial data company Thomson Reuters is whether consumers learned any lessons from the Great Recession. Namely, did they truly learn the value of saving more and spending less, or are consumers, now that the economy is showing signs of life, ready to go on another spending binge? The providers of debt consolidation loans hope it’s the latter.

Borrowing on the Rise
In January of this year, consumer borrowing actually rose. That was fairly big news. Before the January incline, consumer borrowing declined for 11 straight months. January’s increase has now been followed by a second consecutive rise in consumer borrowing in February. Economists responding to a survey by Thomson Reuters said that they expected consumer borrowing to rise at an annual rate of $500 million in February following an increase of $4.96 billion in January. The hope is that these higher levels of borrowing are signs that consumers now have more confidence in the national economy, and that they’re willing to take on more debt. But before anyone gets too excited, it’s important to note that even with the recent increases, consumer borrowing is still 4.2 percent lower than where it stood just one year ago.

Consumers Are Key
Consumer confidence, of course, is one of the keys to rejuvenating the national economy. If consumers are spending, the economy will grow. However, most economists don’t predict that consumers will truly open their wallets until unemployment takes a significant dip. The national unemployment rate still stood at 9.7 percent as of March. Unfortunately, economists predict that it will remain at this elevated level until the middle of the decade. That’s a long time to wait for consumers to begin spending in force again.

Debt Consolidation Option
As long as unemployment remains high, debt consolidation loans will remain an option. After all, when people lose their jobs, their annual income takes a dramatic tumble. They rely more on credit cards to get by until they can land new employment. As their debt rises, they might find relief only through debt consolidation loans. This is why the news that consumer spending is rising, even if only slightly, is good for the debt-consolidation industry: People are more willing to take on debt, even in this wounded economy. That means more business for loan consolidation companies.

Wisconsin is the only state in the union that doesn’t regulate payday loans. And the leaders of that industry want to keep it that way. At least that’s how it seems after the payday lending industry donated nearly $75,000 to Wisconsin politicians last year, the same year in which these legislators debated whether they should pass a bill regulating the way payday lenders operate. A story in the Milwaukee Journal Sentinel reported that this figure represents an all-time record for a non-election year.

Wisconsin Stands Alone

Did the donations from the payday loan industry influence state legislators? That’s always difficult to prove. But the fact is, Wisconsin still stands alone as the one state that does not regulate payday loans in any way. This may be changing, though. In February, Wisconsin’s House of Representatives passed a bill that would restrict payday loans to a maximum amount of $600 or 35 percent of a borrower’s bi-weekly income, whichever figure is less. The House bill, if eventually passed, would also prohibit vehicle title loans and forbid people from rolling over a loan from one paycheck to the next. This bill, though, is just a first step. Members of the Senate in April are scheduled to consider payday loan regulations, too. According to the Milwaukee paper, it’s not clear if both the House and Senate members will reach an agreement on a bill to forward to the governor.

Critics Abound

The bill that the House passed has earned criticism from both opponents and proponents of regulating payday loans. Critics of the industry say that the Wisconsin measure will mean little if it doesn’t cap interest rates, which can go as high as 500 percent over the course of a year, on payday loans at 36 percent. Supporters of the industry say that the bill goes too far, and would make it impossible for payday lenders to survive financially.

Surviving in Other States

Of course, this argument ignores the fact that payday lenders are still thriving even in states that have regulations that are more restrictive than the ones Wisconsin legislators are debating. The fact is, there will always be a market for payday loans, no matter how severely they are regulated. That is especially true now, as the economy continues to limp along. Payday loans act as a financial safety net for individuals who are struggling to pay their basic bills and afford their necessary living expenses. In today’s economy, with unemployment continuing to rise, the demand for payday loans is even higher. It’s important for legislators to regulate the way these lenders do business, so that they don’t take advantage of desperate borrowers. But it’s also important for these lawmakers to realize that there is a reason payday lenders are doing such big business today.

While the latest housing statistics brought mostly bad news for homeowners, there was a silver lining if you happened to be the owner of a debt consolidation business. That’s because both home sales and housing prices fell in January. And this means one thing: In a nation where most people have their wealth tied in to the value of their homes, shrinking housing values mean that debt consolidation loans are becoming an important option for a growing number of individuals.

Gloomy Housing Numbers

The National Association of Realtors reported that the sales of existing single-family homes, townhouses, condominiums and co-ops dropped 7.2 percent in January when compared to sales in December of 2009. This means that home sales are on pace to reach 5.05 million in 2010. That seems like a big number, but it’s actually far lower than the sales numbers that the housing market generated from 1999 through the first half of 2006, the housing boom years. What’s even more important, though, is that the national median existing-home price has been stagnant. In January of this year, the median sales price stood at $164,700. That is the exact same rate as in January of 2009, but down from December. The reason? Distressed properties. According to the Realtors Association, foreclosed and distressed housing accounted for 38 percent of all residential sales in January. This acted to bring down the median sales price.

What it Means for Debt

For too long, U.S. consumers counted on rising home values as the source of their wealth. The formula was simple: Buy a house for $200,000. Five years later, with housing values skyrocketing, it might be worth $270,000. Unfortunately, that money was never “real” dollars. Once home prices began falling in late 2006, U.S. consumers saw their wealth, which was largely imaginary, begin to plummet. At the same time, unemployment began to rise. People who lost their jobs could no longer take out home equity loans to cover their expenses. They instead had to rely on credit cards for their weekly purchases. That has led to skyrocketing debt for a growing number of consumers. And that, of course, has led to increased interest in debt consolidation for many of these individuals.

Research is Key

Debt consolidation is not necessarily evil, though some press coverage paints the industry in those terms. These loans, which consolidate consumers’ debt into one single monthly payment, can act as safety valves for individuals who are working through difficult financial times. The key, as with any financial decision, is for these consumers to research their loans before signing on any dotted lines.

An article in the Wall Street Journal from April of 2009, warned that defaults on student loans would skyrocket to 6.9%, the highest default rate since 1998. There had been a steady climb since 2003: from a rate of 4.7% in 2005 up to 5.3% in 2006.

“The volume of people in trouble is definitely increasing,” stated Deanne Loonin, an attorney with National Consumer Law in Boston. She is a staff attorney with the firm, which counsels consumers on student loans. As you can well imagine, from 2008 to 2009 it was getting even worse due to the faltering economy.

The final figure released by the Department of Education in September of last year indicated that 6.7% of all student loans went into default between October 1, 2006 and September 30, 2007 (government fiscal year). This reflected the plight of college graduates in recent years who faced a declining economy near the tail end of 2007. Especially since the subprime real estate lending debacle, the loss of jobs has continued to mount. At the beginning of 2010, we are facing serious unemployment in the United States with the rate climbing into the double digits of over 10%.
U.S. Secretary of Education, Arne Duncan, explained in a press release, “The economic downturn likely had a significant impact on the borrowers captured in these rates…The Department is reaching out to make sure current and prospective student borrowers are aware of the many flexible repayment options designed to assist them with their financial obligations, such as the new Income-Based Repayment Plan.”

Are you Behind on Student Loan Payments?
College graduates have been caught in the economic downturn and having a huge debt to pay back when you cannot find a job is a tough situation to be in. Even if you haven’t graduated yet, you will still be required to repay your loans. If you happen to be struggling with your student loan payments, it is never wise to allow your loan to go into a default status while you wait for the economy to get better.

Weighing the Consequences of Defaulting?
It’s important to realize that late or missed payments will damage your credit score in a time when you are trying to make a foundation in life. Not making any payments is even more serious. If payments are not made for 270 – 360 days and no arrangements are made with the lender, your loan will go into default. The result of defaulting is not dischargeable through declaring bankruptcy and the government possesses powerful tools to go after borrowers who default. Rather than let things go into a default status, some type of plan for repayment or a forbearance should be established.

Personal loans are unsecured lines of credit that consumers take out to pay expenses not typically covered by other kinds of loans (such as a mortgage loan or an auto loan). These expenses can be carefully-planned expenditures or they can arise out of emergency situations, but the upshot is usually the same: the debtor needs a personal line of credit to cover them and can handle the slightly high rate of interest it takes to get one. Although a personal loan can be used to cover almost any expense you can think of, there are 3 typical ways that consumers use them:

1. Debt Consolidation

The number one use for personal loans is debt consolidation. If you have a large amount of credit card debt, medical debt, or other unsecured debt that is racking up a huge rate of interest, loan consolidation offers the benefit of one monthly payment and usually a much better rate of interest than consumer debt. This can be a huge benefit to consumers who feel they are drowning in debt or have too many payments to keep up with each month.

2. Holidays and Travel

Personal loans are also commonly used to finance holidays and travel. If you are newly engaged and have no idea how you can finance your wedding ceremony, reception, and honeymoon, a personal loan can amply cover all three expenditures. If you have always dreamed of spending a summer in Tuscany, you can get the needed funds to cover your dream vacation. If Christmas is approaching and you don’t have enough saved up for gifts for everyone on your list, a personal loan can make your season merry and bright. These are all items that would cost a fortune if financed with plastic.

3. Boats, Motorcycles, and Other Recreational Vehicles

If you have found the bass boat of your dreams, or if there is a Harley in your neighborhood with a “For Sale” sign, then a personal loan could be your ticket to getting the toys you want. Sometimes you find a bargain that is just too good to pass up, so obtaining a personal line of credit can be the key to getting the right deal at the right time. In that case, a personal loan can actually save you a lot of money in the long run, since you won’t have to pass up a good deal and wait for a once-in-a-lifetime opportunity to come up again.