CLOSE UP: Loans: What’s in the Fine Print?

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Consumer finance companies have been known to make loans on either an add–on or a discount charge basis, each of which increase the borrower’s cost significantly.

Here’s how the add-on rate cheats you: As you pay off a loan, you are gradually reducing the amount of money you have borrowed.  Thus, in the first month after you have borrowed $1,000, your interest charge should be ($1,000 x (.01, the monthly percentage rate) = $10.  If you made a payment of $93.33 after the first month, you’ve paid $10 in interest and $83.33 of the principal.  So, the second month of your loan, you’re not really borrowing $1,000, you’re only borrowing $916.67.  The month’s interest, charge on that amount should be finance charges the second month and for each of the remaining 10 months. Seguir leyendo CLOSE UP: Loans: What’s in the Fine Print?…

HOW TO SHOP FOR A LOAN

Many consumers in need of a loan sometimes that the bank will be doing them a favor.  But loans constitute the major source of income and profit for banks, so most often they are eager to sell you a loan as you local appliance store is to sell you a refrigerator.  It is important that you have an objective understanding of what you can afford to borrow and what you regard as its legitimate and affordable price.

Your Personal Situation

Before even considering a loan, you should review you assets to determine whether or not you have a savings account, securities, or some liquidatable property that is yielding you less than what you would pay in loan interest.  If, for example, you have $5,000 in a money market fund that is paying you three or four percentage point less than the current rate for personal loans, you can save money by withdrawing from the fund, either to eliminate your need for a loan or to reduce you loan principal.

Determining Costs

Your comparison shopping can be done most expeditiously by telephone, since most lenders are quite willing to quote rates and terms.  A half-dozen telephone calls can give you a reasonably firm impression of the prevailing rates in your community.  The only problem in such telephone comparisons is making certain that you are comparing rates on loans whose terms and conditions are identical in every respect. Seguir leyendo HOW TO SHOP FOR A LOAN…

Risks Inherent in the New Home Equity Loans

This is a continuation of the previous post.

The kind of home equity loan that offers you a revolving line of credit can easily tempt you to use it irresponsibility for unnecessary and unaffordable goods and services—much as some borrowers use credit cards—or for high risk activities such as going into business or investing in the stock market.  The important distinction between home equity debt and credit card or other forms of debts, however is that the home equity debt exposed your home to foreclose whereas other forms of debt do not.

If you default on automobile loan, the lender can repossess the automobile.  If you default on personal or credit card loans, the creditor can place a lien against your home or even force you to declare personal bankruptcy.  Although a loan prevents you from selling your home before satisfying the debt, it does not disposed you of it, and most state bankruptcy, person’s home against claims creditors. Seguir leyendo Risks Inherent in the New Home Equity Loans…

HOME EQUITY LOANS

The home equity—a loan secured by the equity you have in your home—has become increasingly popular in recent years.  These loans use your home as collateral and carry variable or fixed interest rates.  They should be avoided.

There are several reasons these loans remain popular.  For one, you are able to borrow a larger amount of money at a lower interest rate than would be available through a personal or automobile loan.  More enticing is the fact that the interest on a home equity loan remains largely tax deductible, whereas the tax deductibility of all other forms of non mortgage consumer loan interest will have been phased out by 1991.  These attractions make a home equity loan extremely tempting, but the dangers of foreclosure in case of default must be considered very carefully.

The equity loan is based on the market value of your home and your current equity in it.  That is , if your home is worth $100,000 and you have paid off all but $20,000 on your mortgage, your equity is $80,000 and you are likely to be able a loan amounting to about 80 percent of this figure. Seguir leyendo HOME EQUITY LOANS…

PERSONAL LOANS

A personal loan is generally taken out to pay for a specific expenditure—a vacation for example, or a major appliance, or perhaps a wedding.  It is usually not secured by collateral and carries a higher rate of interest than an automobile loan, but it is often a less expensive form of loan than a credit card.

Because banks make greater profits with credit card loans, they tend to discourage personal loans—in part by raising the cards credit limits to $5,000, $10,000 and even $50,000.  But compared to a personal loan, a credit card loan costs approximately two percentage points more in interest.

Since a personal loan is made to you in a lump sum that you have specified, it is likely that you have given some thought to what the money will be used for and have carefully assessed your need for the loan as well as your ability to repay it.  In addition, if you meet the schedule of monthly payments of time.  A credit card loan, by contrast, is not fixed either in its amount or in its repayment schedule. Seguir leyendo PERSONAL LOANS…

AUTOMOBILE LOANS

A loan for the purchase of an automobile is similar in most respects to an unsecured personal installment loan but the interest rate is likely to be lower—perhaps by as much as two or three percentage points. The percentage rate is lower because the automobile serves as collateral and can be repossessed by the lender in case of default.

As automobile prices have continued to escalate the term of an automobile loan has been from the traditional three years to four and as long as five years for new models. Used-car loans are available for shorter terms and at rates as much as two percentage points higher.

Interest and Other Costs

As is true of all loans, the longer the term, the lower the monthly payment but the higher the interest cost. For example, on an $8,000 loan at 11 percent, the total interest charges would amount to $1,429 for a 36 month term but would rise to $2,436 for a 60 month term. Obviously, the most economical plan is to take the shortest loan term you can afford and use as much of your own for as big a down payment as possible, since you are unlikely to earn nearly as much interest on your cash as you are being charged for the loan. Seguir leyendo AUTOMOBILE LOANS…

Creative Financing-Shared-Appreciation Mortgages and Balloon Mortgages

Shared-Appreciation Mortgages
The adjustable rate mortgage, as we have seen, makers the borrower share the risk of fluctuations in the interest rate.  The shared appreciation mortgage makes the borrower and the lender partners in the appreciation of the mortgaged property.  In return for a lower interest rate, which may permit the purchase of a more expensive home, the borrower agrees to give the bank as mush as 50 percent of the increase in the value of the property when it is sold, or five years later.  Thus, if in fiver years the value of a $125,000 home increases to $175,000, the borrower would owe the bank one half of the $50,000 appreciation. 

This type of mortgage is likely to appeal to borrowers who foresee a rising market and plan to sell the home within the five year period.  There is, however, no certainly that within this period the value of housing in general or the mortgaged home in particular will appreciate.  If for any of a variety of reasons, you are forced to sell the property below market value, you will have to make up the shortfall from other funds in order to meet your obligation to the bank. Seguir leyendo Creative Financing-Shared-Appreciation Mortgages and Balloon Mortgages…

Creative Financing

Creative financing, which differs radically from the conventional types of home financing, tends to become popular when there are high interest rates, high housing prices, a recession, or a population shift and potential buyers cannot afford housing or potential sellers cannot find buyers.  In such situations, creative financing, although hazardous, may be the only route to home ownership.  When interest rates and the housing market are normal, it is wise to avoid this option.

Creative  financing is available in the four distinct forms describes below, all of them in one way or another linked to change in interest rates or property values.  They promise the borrower some very attractive advantages if interest rates should fall or housing prices should rise.  But, unfortunately, interest rates are almost completely unpredictable over the long term, and the value of a specific community may, for a variety of reasons, fall sharply even though housing in general is appreciating steadily. Seguir leyendo Creative Financing…

Adjustable-Rate Mortgages Loan

The fixed-rate conventional mortgage as discussed in previous blog is almost always preferable to any other kind.  But, alarmed by wild fluctuations in interest rates during the past two decade, many banks prefer to offer a mortgage with rates that are adjusted every year, three years, or five years to reflect changes in market interest rates.  Whether the longer or the shorter adjustment period is preferable depends entirely on the direction of market rates.  If rates begin to climb shortly after you have taken the mortgage, a long adjustment period locks you into a low rate, but just the opposite occurs if rates begin to drop when your mortgage is only a month old.

Regardless of the adjustment period, most banks do not change the rate arbitrarily.  Instead, the mortgage specifies that rates will be based on some widely publicized index—for example, the rates paid on one-year U.S. Treasury securities—plus an additional or so percentage points. Seguir leyendo Adjustable-Rate Mortgages Loan…

Conventional Fixed-Rate Mortgage Loans

There are several type of mortgage loans and understanding of each will help you determine the right one to choose from when financing your homes. The first in the series about loans we’re going to discuss is conventional fixed rate mortgage loans.

While the conventional fixed rate mortgage has to some extent been replaced by other types, it has by no means disappeared.

Although the fixed rate mortgage may appear to be more expensive than some of the alternatives, it is in many ways the most desirable kind of mortgage for most home buyers.

Interest rate and Terms 
As its name implies, this type of mortgage carries a fixed interest rate for its term, which may be as long as 30 years.   Generally each payment remains constant and includes interest and a portion of principal.  As the payments continue, the proportion applied to interest diminishes and the proportion applied to principal increases correspondingly. Seguir leyendo Conventional Fixed-Rate Mortgage Loans…