personal loans

Lifestyle Changes to Manage Your Debt

August 16, 2016 By Money Saving Pro 1 Comment

Sometimes real change takes a lifestyle shift, but it may not be as difficult as it sounds. If you are burdened by debt and you would like to buckle down and eliminate it once and for all, there are a few simple changes you can make to help you accomplish your goal.

Get Used to Balancing a Budget

The first step in managing your personal finances is to create and balance a budget. This is not only vital for people who have debt issues, it’s a financial foundation for anyone with budgetary goals. If you get in the habit of keeping track of your incoming and outgoing expenses, you can save money for financial benchmarks, whether that’s paying off debts, buying a house or starting a business.

Balancing a budget is easier to start than you might think, even though only a third of Americans have household budgets. All you need is an accurate representation of all of your monthly expenses and your income. If you have a steady income, you can start there. Here are the steps you need to balance a budget:

Take your salary or hourly rate and calculate how much you earn each month. It’s important to work with actually money here, not expected windfalls or potential investment returns. To accurately balance a budget, you need to use your real money.

If you have quarterly or annual incomes, like stock dividends, you can spread that money out over each month or set it aside as savings.

When you have an accurate picture of your incoming money, you can begin to calculate monthly expenses.

Start with fixed amounts like internet and cable bills, rent, mortgage payments, loan payments and credit card payments. List them all on a spreadsheet.
Then calculate payments that can change like groceries, utilities, and miscellaneous purchases. Looking at the items on your credit card bill is a great way to see where you tend to spend money.
Add all of your expenses together and subtract them from your income. If you have a positive number you have a balanced budget and you can choose to take the extra money and put it toward your financial goals like emergency funds, retirement savings or putting off debt.
If you want more savings or if you are left with a negative number, go back and look at the variable expenses. Look at ways you might be able to spend less.

Adopting a mindset of reconciling all of your purchases with your budget is a great way to be proactive about paying off your debts. Focus on limiting your expenses and putting the money you save toward paying off your debts faster.

Manage Overspending Tendencies

If by creating a budget you realize you have a tendency to overspend, there are a few ways you can keep yourself accountable. It sounds like a cliche, realizing you have a problem with spending too much is a great first step. Many people who overspend, don’t realize they are doing it and it may be that you just need to remember to watch yourself when you are shopping. Here are some other ways to manage your overspending:

Pay with cash. Credit and debit cards make spending easy and out of sight. You may not realize how much you spend until you receive your bill. If you use cash, you can see the money leaving your wallet and when you run out, you know when you need to stop spending.
Limit your number of credit cards. If you have too many credit cards, it can be difficult to keep track of how much you are spending. If you have a serious problem with spending, it might be best to get rid of all of your credit cards.
Find someone to keep you accountable. A friend, spouse or family member that knows you want to limit your spending can help keep you from going overboard. Ask them to check up on your shopping and spending week to week.

Consider a Personal Loan

A personal loan is a great way to consolidate debt into one monthly payment and generally offer considerably lower interest rates than credit cards. Take a look at some of the personal loan options that are out there, and be sure to choose one that is ideal for paying off debts.

Get a Side Job

There are a number of benefits to having a side job, not the least of which is the extra money. Even if you are making enough money with your main job, a side job can give you the means to really bolster the payments you are making toward your debts. You can even do some freelance work so you can take on extra jobs when you have time and have no obligations when you don’t.

Side jobs are also a great way to diversify the type of work you do and the experience you accumulate. Having more than one type of work experience can be good if you want to find a new job in a different area of expertise.

Side hustles can also open new doors and opportunities. You may find that your side job is more interesting to you and new business paths can open up.

Do you have any tips on how to manage debt? Share your thoughts below.

Photo: Flickr: Images Money

How You Should Be Paying Off Your Loans

July 19, 2016 By Jennifer Clark 1 Comment

Sometimes, we need different loans for different occurrences in our life, such as a college education or a new home. So the reality of life in America is that juggling multiple loans at once is an unfortunate reality for many Americans. For those of you whose debts have metastasized like an alien in a science fiction movie, here is the skinny on how to get your obligations back under control.

Snowball vs. High Interest Method

There are basically two schools of thought when it comes to the strategy of paying off your debts: the snowball method and the high interest method. Both methods are similar but they have some important differences that need to be addressed if you are using either to pay off your debt.

Snowball Debt Reduction Method

The snowball method has been popularized by personal finance guru Dave Ramsey. The main idea is that that you arrange all your debts from largest to smallest and progressively attack each debt in turn. Once the smallest debt is paid off, you use the cash you would have spent on that debt to pay off the next highest debt, then the third, then the forth – etc. Pretty much the main idea is that your debt payoff progress starts to “snowball” – literally like a snowball rolling down a hill, your progress gets faster and faster.

Per Dave Ramsey, let us say you owe the following:

1. $400 medical bill ($50 payment)
2. $3,000 credit card debt ($112 payment)
3. $4,000 car loan ($100 payment)
4. $10,000 student loan ($134 payment)

With the debt snowball, list the debts in order of how much you owe (as above). Start by making the minimum payments on everything but the smallest debt. In this case, that’s the $400 medical bill. Assume you can come up with some additional side income. Possibly $400 a month – which you can get from any number of side jobs.

Since you are paying $450 a month on the medical bill (the $50 payment plus the $400 principle), that medical bill will last a month or so. Next, take that $450 and attack the credit card debt. You’ll be paying $562 on the credit card debt (the $450 plus the $112 minimum payment). In about five months, this debt should also be paid off.

Tackling the rest of the debts is simple, just add the amount from the medical bill and the credit card ($450 + $112) to the amount you are paying on the car loan ($100) this should be about $662 per month. This means it will take about six months to pay off the car loan. Once the car loan is paid off you’ll have about $796 to allocate to the student loan debt, which will be gone in about 12 and a half months.

So, with a little bit of the work and some sacrifice you will have paid off $17,400 dollars worth debt in just over 25 months. The main advantage of the debt snowball is that you get the psychological motivation by paying off the smaller debts first. The idea here is that debt reduction is a long term process and if you tackle the biggest debts first, you won’t stay motivated and won’t make progress.

The High Interest Method

The high interest debt reduction strategy is similar to the snowball method, but instead of targeting the lowest bills, the high interest method calls for targeting the highest interest debt first. Typically credit cards, store cards, payday loans or unsecured personal loans have higher interest rates than mortgages, car loans or medical bills. So in this case the high interest method would have you rank the debts like this:

1. $3,000 credit card debt ($112 payment)
2. $4,000 car loan ($100 payment)
3. $10,000 student loan ($134 payment)
4. $400 medical bill ($50 payment)

The credit cards and car loans are ranked first, as they are the highest interest debts.

To reduce your debts, pay the minimum on all your obligations except the highest interest debt. For that one, you need to put ALL your available cash to it. This means your emergency fund money, your rainy day cash – all your free cash, everything. It all needs to go towards the highest interest debt. Your savings will never earn more than a high interest credit card or unsecured personal loan. Do this every month. Once a debt account has been eliminated, remove it from the list and re-order until you are back in the black.

The high interest method has been shown mathematically to be the quickest way to reduce your debts. No other method will get you out of debt faster or save you as much money.

The high interest method only works if you include all your debts. So, consider all your complete picture.

Here are three additional factors which the high interest method mandates:

1. Manage your debts actively, so this means monitoring your debts to be sure your creditors don’t raise their rates. Credit card companies are notorious for arbitrarily raising rates. Some debts like medical bills can have late fees associated with them.
2. Factor in taxes. Mortgages and student loan debts are subsidized by the Federal government which means that their effective rates are lower than their nominal rates.
3. Actively manage when you pay your debts. In some cases if you pay your debt before it is due you can reduce your total interest paid.

One major problem with the high interest method is that it tends to ignore behavioral finance. People often aren’t motivated to keep paying off their debt if they don’t see an immediate return on their efforts. This is the advantage of Dave Ramsay’s snowball method.

Unfortunately not all debt is created equally, so what is the best approach to paying off your loans if you just have one or two separate debts?

Paying Off Your Credit Cards

Slow and steady is not the route you want to take with credit cards. The faster you can pay off your credit card balance, the better. The interest rates on this type of borrowed money is usually the highest possible (with the exception of usurious products like payday loans), and missing payments can be really harmful to your credit. In addition, may credit cards simply tack the interest owed onto the balance of what you owe. Ways you can defeat this is by paying more than the minimum balance and work on paying off the credit cards ones with higher interest rates first.

Avoid making only the minimum payments. If you only continue to pay off the minimum balance, you set yourself up to pay more in interest, which can add up to more than what you initially borrowed. Also, avoid using credit cards to pay off other debts if you’re already have several other looming financial obligations, particularly with higher interest rates. Credit card companies are getting wise to balance transfer schemes and are less likely to give you points these days for these sorts of transactions.

Repaying Car Loans

A car loan can be paid similarly to a mortgage, but with shorter repayment terms, paying off this loan faster makes sense. Making bi-monthly payments will cause you to obviously pay more toward your car loan each year, even if you only commit an extra $50 per month. So consider these types of accelerated payment schemes.

By paying off the car loan faster, you do reduce your interest as well. Be sure to talk to your lender first, as sometimes it is frowned upon to pay off this type of loan early. In general car loans aren’t tax deductable and they are secured against depreciating assets so you don’t have much to show for this kind of debt at the end of the day.

Repaying Student Loans

The average time it takes to pay off student debt for a bachelor’s degree is roughly 21 years, according to research, and even longer for a master’s degree. But, in addition to paying your monthly minimum amount due, paying extra toward your loan each month will help to reduce the overall balance. Dedicate a specific amount to regularly pay on top of your minimum to maintain consistency. Anywhere from $50 to $100 is great, but if you can do more, you should. Talk to the company handling your loan to see how extra payments should be made. In some cases, paying it at the same time of your minimum requirement causes it to only go toward interest instead of your overall balance.

A big mistake you’ll want to avoid when repaying student loans, though, is to be cautious of consolidating federal loans through private lenders. In fact, before you consolidate at all, be sure to really look at the numbers. If you have really high interest rates with specific types of student loans, it may be a good route to take; however, consolidating is not necessarily a guarantee of better rates or loan terms. Look at all the details before jumping the gun.

Paying Your Mortgage

How you work toward paying off your mortgage depends on whether or not you want to repay it faster than the typical 30-year period. You effectively have two choices, you can either carry the mortgage for the life of the note or you can pay it off early. Carrying the mortgage in the allotted agreed time has its own benefits, such as tax deductions and expense predictability. Also, a key factor in thinking about paying off your mortgage early is whether you have a better use for the money. For example you could use the money would you would otherwise put towards the mortgage for investments like retirement or college savings for your kids.

Paying extra should only be done if you can feasibly do it financially. If money seems like it will be tight after paying extra, don’t do it or find a way to make it work like through a supplement income. This is because mortgage interest is tax deductible, which means its generally “cheaper” money than credit card debt.

Mortgages are like any form of debt. One of the main keys to remember with paying off loans is ensuring you’re making your payments on time. Not doing so can result in penalties and dragging out the repayments longer. Remember to research the loans, repayment methods, and be wary of quick repayment schemes, as some of these have substantial risk. Check out the mortgage professor for more on this.

Personal Loans for Home Improvement: What You Need to Know

March 7, 2016 By Alexa Mason 1 Comment

It’s that time of the year again! The time when you finally decide that your surroundings have become too monotonous, and you need to give your house a makeover. Renovations can be time-consuming and extremely expensive. This kind of decision requires a considerable amount of forethought before you make any changes.

Planning will help you understand how to go about the project, but if you haven’t got the necessary funds, a personal loan for home improvement is your solution. However, before you approach a lender and apply for the loan, here are a few things you need to keep in mind.

Home Improvement as a Personal Loan

A home improvement loan is simply a personal loan, and bears all the conditions of a regular personal loan. Personal loan interest rates vary across different loan vendors, and a little extra research on your part can help you find the one with the lowest interest rate. Since these loans are also unsecured, getting a bank to sanction the loan is an easy task. There’s no need to provide collateral or to divulge your reasons for taking the loan.

You’ll have to show documents like your proof of address, identification and financial statements from the last three months. Lenders will use this information to assess whether you’re financially stable to repay the loan.

No Strings Attached

When you take a home improvement loan, you can use the funds to renovate spaces both inside and outside your home. For example, you can install new windows to allow more light to enter your home. You could even install a porch or add another room using the money from a home improvement loan. A few lenders even let you use the funds for new furniture. Taking out a personal loan for home improvement allows you to do just about anything you want with your home.

Keep it Small

When you opt for a home improvement loan, try using it to take care of simple work, like installing a new window, fixing the plumbing or painting the house. It’s easier to calculate the cost and time of completion in the case of smaller projects. That makes it a lot simpler to budget accordingly, and you’ll end up spending a smaller amount of money.

Bigger projects like adding a room or switching up the look of your kitchen can be time-consuming and expensive. Also, you may run into other financial obstacles while the project is underway. That means you’ll have to ask for a bigger loan amount. Also, some larger products (i.e. a new roof) can be covered by homeowner’s insurance in some cases, so you may want to check and see if your project is covered prior to taking out a loan.

These are a few things to keep in mind before you take a home improvement loan. Ensure that you’ve done a stringent check on the lender that you’re approaching, so that you understand the terms and conditions involved.

Photo: Flickr: Phil Roeder

The Hazards of Personal Loans

May 24, 2008 By Cortni Marrazzo 2 Comments

When most people think of the word debt, they immediately think of credit cards, auto loans, student loans and mortgages. Those seem to be the most common debts in our society today. But there is another kind of debt that doesn’t get as much attention as the previously mentioned, and that is personal loan debt. This occurs when you borrow money from a friend or family member for whatever reason and vow to pay it back to them at a certain time.

Taking out a personal loan

“Personal loan” is really a technical term. Most people would simply call it “borrowing” and it is usually done with a close friend or family member. A prime example would be a friend or family member that had poor credit, but needs to get a car so that they can get to their job or find work. Due to their bad credit, they might not be able to get a car loan on their own, so they ask for you to lend them money or cosign for the car loan.

personal loans can vary greatly in amount, payoff time, promised payoff time, method of payoff, etc. While credit cards have a pretty standard way of lending people money (the statement arrives with a designated minimum payment and interest is charged if the balance isn’t paid) personal loans depend greatly on who is doing the lending.

The unpredictability of these types of loans is pretty scary. More often than not there is no paperwork drawn up for these kinds of loans and they are only established by word of mouth and banked on trust. However, peoples’ feelings and decisions can be very volatile and someone who lent you money and told you that you could pay it back in 6 months could turn around and demand the money immediately 2 weeks later, which they have every right to do. They can also tell you that they won’t charge you interest and later demand some kind of reconstitution for lending you that money. There are so many unknowns with these kinds of loans that it really makes them dangerous in a way. Extreme cases can end up in court with people battling a loan like this out.

Since these loans are typically from people you know and care about, things can quickly turn ugly if any issue arises. Say you borrow money from a friend and before you pay them back they find out that you bought something that cost a significant amount of money. The person that lent you the money could be resentful that you spent money on something else before paying them back. If you valued a new purchase over paying that person back, it will most likely put a strain on your relationship.

If you promise to pay the money back by a certain date and you are unable to do so, that might also increase tension between you. If you are someone who has a habit of avoiding problems, you would most likely stop calling and communicating with that person so you don’t have to face them about not being able to pay them back. Pretty soon you no longer talking to that person and a relationship has ended because of a small sum of money. Relationships are worth more than any amount of money so you don’t want to let a loan jeopardize that.

I would guess that the major reason people take out personal loans from their friends or family is to cover short term expenses or bills until their next paycheck or source of income arrives. Sometimes bills are due 3 days before a paycheck is deposited or an unexpected car repair comes up. This is what a savings account/emergency fund is for. Unexpected stuff happens and you need to be able to cover yourself until the money you need comes in. If you keep borrowing money from people a) they will most likely start to get irritated with you and b) you won’t learn the importance of saving for the unexpected. Instead of spending seemingly “extra” money on things you don’t need, you should be putting that money into savings for when you don’t have “extra” money (assuming you don’t have a nice savings stash already).

Issuing a person loan

Now that you know why it’s not smart to take out a personal loan, this is why, for the most part, it’s not smart to lend money to others. First of all, this is more directed to those who habitually lend to the same person and not for once-in-a-while circumstances. When you lend money to “habitual borrowers” you are basically bailing them out and preventing them from learning an important financial truth – that you have to save for unexpected expenses (see above paragraph).

Sometimes tough love means having to say no and letting the friend or family member figure out how they are going to get the money they need without borrowing it. In most cases it will be tough and they will struggle and suffer a little, but in the end they will remember that feeling and do what they can to save and not end up in that situation again. If they can always borrow money from you then they will never learn that and saving won’t become a priority to them. This situation most often occurs with parents lending money to children and it can be hard to say no when your child is in need, but it’s important to realize that usually saying no to a temporary need is helping them build a more sound financial future.

This is especially true if lending money to others puts yourself in financial danger. If you use your savings to bail other people out, then what will you use if something unexpected pops up for you? Your own responsibility should enable you to take care of those situations when they happen, but you could be shooting yourself in the foot if you’re too busy taking care of other people’s financial needs instead of taking care of your own.

Personal loans can be a dangerous territory and I urge you to be careful if you decide to venture there on either side. If you do decide that you need to borrow money for whatever reason, I urge you to do that as a last resort and do so very sparingly, as it is not good for your financial health. If you do decide to lend money, I urge you to encourage the person who wants to borrow money to pursue other options first and perhaps help them make a plan to prepare for such unexpected expenses in the future. And on both sides I urge you write down your loan agreement (including amount, payoff time and schedule and any interest charged) and have both parties sign. This will help guard the lender and keep the borrowing accountable to hopefully prevent any negative consquences.