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Is Getting a 401(k) Loan a Good Idea?

Don’t do it!

That’s the conventional wisdom about taking out a 401(k) loan. And as someone who took out one, left her job and found herself shelling out big bucks in taxes and penalties, I’m not about to argue with conventional wisdom.

However, people stretched financially thin may think otherwise. They may see their 401(k) account as a tempting source of cash. To help those of you thinking about dipping into your account, we want to take a moment to review what you need to know about these loans. I also contacted two Certified Financial Planners so you wouldn’t have to take my word for it.

I fully expected both planners to say 401(k) loans are nothing but bad news, and certainly, they both expressed extreme concern about people dipping into their retirement savings. But I was also surprised to hear that a 401(k) loan may make sense in some limited situations. Before we get to those, let’s start with the basics of 401(k) loans.

Basics of 401(k) loans

Named after a section of the tax code, traditional 401(k) plans allow you to put money aside, tax-free, for retirement. After a few years of regular contributions, these plans can carry a nice balance, which may start to look like a handy cash cow.

While there is no requirement that 401(k) plans allow loans, many do. Under IRS rules, those that do allow loans can let participants take out up to 50 percent of their vested account balance, or $50,000, whichever is less. Typically, these loans are paid back over a maximum of five years, although, in some cases, a longer payback period may be arranged. On occasion, the IRS issues special rules, such as after hurricanes Katrina, Rita and Wilma when those affected were allowed to take loans for their entire vested balance.

Loans from 401(k) accounts do charge an interest rate, but that money is paid back into the plan. This is one reason they may appeal to some workers. Rather than paying interest to a bank or other lender, the worker keeps the interest to pad their retirement account. In addition, repayments are made via a payroll deduction, which makes them convenient, another bonus for some workers.

Why they aren’t such a hot idea

Despite being an apparent source of easy cash, some finance experts say you should be keeping your hands off your 401(k).

“Your 401(k) is not a savings account,” says Mark Vandevelde, a CFP and wealth partner with Hefty Wealth Partners in Auburn, Ind. “It is money that should be set aside for long-term goals and never to be touched, in my humble opinion.”

As Vandevelde sees it, there are three problems with 401(k) loans:

  1. Lost investment gains that can reduce your fund balance at retirement.
  2. The risk of defaulting on the loan, which could result in taxes and a penalty.
  3. The chance you may reduce your 401(k) contributions to afford the loan repayment amount, which again could affect your fund balance at retirement.

“It’s not free money,” Vandevelde says. “You have to pay it back with regular payroll deductions. Many people end up reducing their actual 401(k) contributions to compensate for the amount they are having to pay back and, therefore, they actually aren’t saving as much.”

On its website, Principal Financial Group has an example of how this may play out. A 35-year-old who takes out a $5,000 loan and pays it back over five years may find himself with $52,000 less at age 65. The calculation assumes a $150 per-paycheck contribution that is decreased by $44 to accommodate the loan repayment.

Keith Klein, a CFP and owner of Turning Pointe Wealth Management in Phoenix, agrees with Vandevelde that a 401(k) loan shouldn’t be your first choice for cash.

“The key to remember is when you take money out, it has to be paid back in five years,” Klein says. “If you default, that money will be considered income, and you’ll have to pay taxes plus a 10 percent penalty.”

Plus, a lot can happen in five years, and if you find yourself taking a new job opportunity, you’d better be ready to pay up.

“A lot of people don’t realize what happens when you leave [or] get fired from your job and you have an outstanding 401(k) loan,” Vandevelde says. “It becomes immediately due and has to be paid in full. If you cannot pay it back, the remaining balance is considered a distribution and is subject to tax and a 10 percent penalty if [you’re] under age 59½.”

When a 401(k) loan might make sense

Despite the financial perils associated with a 401(k) loan, Klein says there may be times when it makes sense to take one out.

“Now, I’m not recommending you take loans out,” he says, “but there are circumstances when life doesn’t go perfectly.”

For example, an older worker who is losing a job may find taking out a loan and letting it default could be a better option than paying their bills with the credit card until they find other employment or are old enough to claim Social Security. While the money will become taxable income, the 10 percent penalty no longer applies once an individual turns 59½.

Divorce or disability could be other scenarios in which a 401(k) loan may be a better way to bridge an income gap in an emergency situation. Still, Klein says it’s not an ideal option. “Having a [cash] reserve is always the best answer,” he notes.

Both Vandevelde and Klein say that, unfortunately, far too many people rush into a 401(k) loan, or they use them for purchases such as vacations, cars or even big screen TVs. For those sorts of purchases, both financial planners agree a 401(k) is not the right source of money.

So going back to the question in the headline: Is getting a 401(k) loan a good idea? Given the drawbacks listed above, it’s probably not ever a good idea, but in some unique situations, it may be the best of your not-so-great options.

Of course, rather than waiting to find yourself in an emergency with limited options, a better course of action would be to get out of debt and bulk up your savings account now. If you’re not sure how, subscribe to the Money Talks News newsletter to get the best personal finance tips and advice delivered straight to your inbox each day.

For more tips on saving for retirement, watch the video below:

Watch the video of ‘Is Getting a 401(k) Loan a Good Idea?’ on MoneyTalksNews.com.

This article was originally published on MoneyTalksNews.com as ‘Is Getting a 401(k) Loan a Good Idea?’.

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Members urged to sell SSS stock shares for loan payment

To date, there are P608.63 million in delinquent accounts under the SSS stock investment and privatization fund loan programs

File photo

MANILA, Philippines – Despite the loan condonation program offered by the Social Security System (SSS) in the past, there are still some members who let their loans balloon under the Stock Investment Loan Program (SILP) and the Privatization Fund Loan Program (PFLP).

Thus, SSS is encouraging them to avail of the option to sell their shares of stocks under the said programs.

In the late 1980s, SSS offered the SILP to members as an opportunity to invest in the stock market.

As of end-2014, there are 3,037 delinquent SILP loan accounts, amounting to P304.44 million ($6.87 million), inclusive of penalties and interest.

In 1994, PFLP was offered to enable SSS members to participate in the initial public offering of Petron shares which at that time was entirely state-owned.

The PFLP was also open to SSS members who were interested in buying shares of stock of the Manila Electric Company (Meralco) that it was disposing at that time.

To date, there are 5,755 delinquent PFLP loan accounts, totaling P304.19 million ($6.86 million), with penalties and interest.

In September 2014, the Social Security Commission approved the option to sell shares of stocks to lessen these delinquent accounts that total over P608.63 million ($13.74 million).

How to sell shares

Under the option to sell shares, the member-borrower will execute a Special Power of Attorney authorizing the SSS to sell his shares of stocks at the prevailing market price, based on the quotation of an accredited broker and subject to the usual broker’s commission, taxes, and other fees.

Net proceeds from the sale of the shares of stocks will then be applied to the member’s outstanding SILP or PFLP loan balance.

“Any excess amount after application to the outstanding SILP/PFLP loan balance will be applied to his delinquent salary or housing loan, if any,” SSS senior vice president May Catherine Ciriaco said.

If none, or if there is still excess amount, then this will be refunded to the member-borrower, Ciriaco added.

The member though shall be required to pay the remaining amount either in cash, from a salary loan renewal, or from the final benefits (total disability, retirement, and death), if the net proceeds from the sale of the shares of stock are not sufficient to cover the outstanding SILP or PFLP loan balance.

However, the remaining balance will continue to be charged with interest and penalties until fully paid, SSS said.

Ciriaco clarifies that the option to sell shares is not the condonation program the members are waiting for, but it is the next best way for members to finally pay off their outstanding loans under the SILP and PFLP to ensure that they fully enjoy their SSS benefits without deductions. – Rappler.com

US$1 = P44.31

[…]

Have an unpaid loan with SSS? Read this

MANILA, Philippines – The Social Security System (SSS) is offering options for members who have failed to pay their loans.

The SSS said members with outstanding loans under the Stock Investment Loan Program (SILP) and the Privatization Fund Loan Program (PFLP) can avail of an option to sell their shares of stocks under the two programs.

“Despite loan condonation programs that we have offered in the past, there are still quite a number of SSS members who have let their unpaid SILP and PFLP loans balloon into staggering amounts due to penalties and interest,” said SSS Senior Vice President and concurrent Officer-In-Charge for Lending and Asset Management May Catherine Ciriaco.

The SSS said as of 31 December 2014, there are 3,037 delinquent SILP loan accounts with a total of P304.44 million, inclusive of penalties and interest.

There are also 5,755 delinquent PFLP loan accounts, reaching P304.19 million with penalties and interest.

In September 2014, the Social Security Commission approved the option to sell shares of stocks, as a way to lessen these delinquent accounts.

Under the option to sell shares, the member-borrower will execute a Special Power of Attorney authorizing the SSS to sell his shares of stocks at the prevailing market price, based on the quotation of an accredited broker and subject to the usual broker’s commission, taxes and other fees.

The net proceeds from the sale of the shares of stocks will then be applied to the member’s outstanding SILP or PFLP loan balance.

“Any excess amount after application to the outstanding SILP/PFLP loan balance will be applied to his delinquent salary or housing loan, if any… If none, or if there is still excess amount, then this will be refunded to the member-borrower,” Ciriaco said.

However, if the net proceeds from the sale of the member-borrower’s shares of stock are not sufficient to cover the outstanding SILP or PFLP loan balance, then the member shall be required to pay the remaining amount either in cash, from a salary loan renewal, or from the final benefits (total disability, retirement, and death). However, the remaining balance will continue to be charged with interest and penalties until fully paid.

“While this is not the condonation program that members are waiting for, the option to sell program is the next best way for members to finally pay off their outstanding loans under the SILP and PFLP to ensure that they fully enjoy their SSS benefits without deductions,” Ciriaco said.

Members interested to apply for the option to sell shares program can contact Teresita Badiola or Ma. Divina Cadorna at the SILP Section of the SSS Member Loans Department, 11/F of the SSS Main Office, or call 435-9862 and 920-6401 locals 5887 and 5915 for further details.?

[…]

Bloomberg the Company

(Bloomberg) — Allied Nevada Gold Corp., a miner that finds itself on the wrong side of a currency swap, hired a financial adviser to negotiate with lenders as its access to cash wanes, according to three people with knowledge of the situation.

Moelis & Co., the New York-based investment bank, is set to lead talks for the Reno, Nevada-based company as it prepares to restructure $543 million of borrowings, said the people, who weren’t authorized to speak publicly.

Allied Nevada has had to draw down on its $75 million short-term loan as its liability on the swap grows while the Canadian dollar depreciates versus its U.S. counterpart, according to a Nov. 3 regulatory filing. The gold and silver miner’s swap converts Canadian dollars from a C$400 million ($319 million) bond underwritten by Scotiabank and GMP Securities LP into U.S. dollars.

Tracey Thom, a spokeswoman for Allied Nevada, didn’t return messages left for comment. Andrea Hurst, a spokeswoman for Moelis, declined to comment, as did Myra Reisler, a spokeswoman for Scotiabank in Toronto.

Debtwire reported Allied Nevada’s hiring of Moelis last month.

The troubles with its out-of-the-money currency swap have exacerbated the company’s cash-flow issues as it seeks to build out its Hycroft gold and silver mine in Nevada. Allied Nevada has just over a half month at current spending rates before it exhausts its cash on hand, according to data compiled by Bloomberg.

Currency Bet

The company began amassing what on Sept. 30 was a $36.8 million out-of-the-money swaps liability as the Canadian dollar weakened. The currency depreciated 13 percent relative to the U.S. greenback in the past six months, according to data compiled by Bloomberg.

It must post the equivalent of 22 percent of its mark-to-market liability on the swap to two banks that serve as counterparties, according to the Nov. 3 filing. It had posted $11.9 million in cash and letters of credit against its revolving loan as collateral on the $54 million liability on Sept. 30.

Allied Nevada increased the amount it posted for the swap collateral to at least $14.2 million on Nov. 30, borrowing further against the revolving loan to do so, according to a Dec. 5 statement.

Shares Drop

Allied Nevada didn’t always have to post collateral for its swap liabilities. The requirement came into force in December 2013 when two banks pulled out as lenders of its revolving loan. When they left, the security they held as lenders couldn’t be used as collateral anymore for any swap liability the company incurred.

Bank of Nova Scotia, lead underwriter of Allied Nevada’s bond, arranged the swap and took on counterparty risk as part of the bond-financing package it offered the company in May 2012, when the Canadian dollar was trading near parity with its U.S. counterpart.

Proceeds of the bond were used to fund the expansion of the company’s Hycroft Mine, according to a May 16, 2012 statement.

Allied Nevada shares plunged 11.4 percent to 93 cents at 3:32 p.m. in New York. That’s the same price the stock closed at on Dec. 9, when it sold shares and warrants at heavily discounted prices on Dec. 9 to raise $21.5 million.

The company is the most-shorted publicly traded stock among gold miners, according to data compiled by Bloomberg. Allied Nevada’s market capitalization of $117 million today compares with more than $3 billion in 2012.

Forecast Downgraded

Allied Nevada has struggled to turn a profit at Hycroft. It downgraded its gold and silver sales forecast for 2014 after encountering difficult conditions at the mine. It said Jan. 21 it expects 2015 production will be “very similar” to last year while the company focuses on improving costs and efficiencies.

The company isn’t expected to generate any meaningful free cash flow this year, Brian Quast, a Toronto-based analyst at Bank of Montreal, said in a note later that day. Quast, who had previously predicted increased gold and silver output this year, said his expectations now looked “optimistic.”

It’s also running low on funds, with just $1.3 million of cash and cash equivalents at the end of November. It could borrow just $12.8 million more on its revolving loan on Nov. 30, according to the Dec. 5 statement.

Allied Nevada is trying to arrange financing for a mill project at the Hycroft mine that would allow the company to recover more metals and boost profits at its operation. While it’s received “significant” interest, progress has been hindered by volatile markets and commodity prices, the company said in the Jan. 21 statement.

The price of gold dropped 28 percent in 2013, the first annual decline in 13 years, declined another 1.7 percent last year and remains 36 percent below the September 2011 record of $1,923.70.

To contact the reporters on this story: Laura J. Keller in New York at lkeller22@bloomberg.net; Cecile Gutscher in Toronto at cgutscher@bloomberg.net

To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net; Shannon D. Harrington at sharrington6@bloomberg.net Kenneth Pringle

[…]

Pros and Cons of Reverse Mortgages

Over the last decade, reverse mortgages have been marketed as an easy way for seniors to cash in their home equity to pay for living expenses. However, many have learned that improper use of the product – such as pulling all their cash out at one time to pay bills – has led to significant financial problems later, including foreclosure.

In actuality, there are some cases where reverse mortgages can be helpful to borrowers. However, it is imperative to do extensive research on these products before you sign.

Reverse mortgages are special kinds of home loans that let borrowers convert some of their home equity into cash. They come in three varieties: single-purpose reverse mortgages, Home Equity Conversion Mortgages (HECMs) and proprietary reverse mortgages.

Who can apply? Homeowners can apply for a reverse mortgage if they are at least 62 years old, own their home outright or have a low mortgage balance that can be paid off with the proceeds of the reverse loan. Qualifying homeowners also must have no delinquent federal debt, the financial resources to pay for upkeep, taxes and insurance and live in the home during the life of the loan.

Consider the following pros and cons as a starting point for trying or bypassing this loan choice. Even though HECM loans require a discussion with a loan counselor, you should bring in your own financial, tax or estate advisor to help you decide whether you have a safe and appropriate use for this product.

Pros of reverse mortgages:

They’re a source of cash. Borrowers can select that the amount of the loan be payable in a lump sum or regular payments. Proceeds are generally tax-free. Final tax treatment may rely on a variety of personal factors, so check with a tax professional. Generally, they don’t impact Social Security or Medicare payments. Again, important to check personal circumstances. You won’t owe more than the home is worth. Most reverse mortgages have a “nonrecourse” clause, which prevents you or your estate from owing more than the value of your home when the loan becomes due and the home is sold. Reverse mortgages may be a smarter borrowing option for some downsizing seniors. With proper advice, some borrowers use them to buy new homes.

Cons of reverse mortgages:

You may outlive your equity. Reverse mortgages are viewed as a “last-resort” loan option and certainly not a singular solution to spending problems. You and your heirs won’t get to keep your house unless you repay the loan. If your children hope to inherit your home outright, try to find some other funding solution (family loans, other conventional loan products) first. Fees can be more expensive than conventional loans. Reverse mortgage lenders typically charge an origination fee and higher closing costs than conventional loans. This adds up to several percentage points of your home’s value. Many reverse mortgages are adjustable rate products. Adjustable rates affect the cost of the loan over time. If you have to move out for any reason, your loan becomes due. If you have to suddenly move into a nursing home or assisted-living facility, the loan becomes due after you’ve left your home for a continuous year.

Bottom line: Reverse mortgages have become a popular, if controversial, loan option for senior homeowners. For some, they may be a good fit, but all applicants should get qualified financial advice before they apply.


Jason Alderman directs Visa’s financial education programs. To Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney.

[…]

Fitch Rates CSMC Trust Series 2014-11R

NEW YORK–(BUSINESS WIRE)–

Fitch Ratings assigns a rating to one group of CSMC Trust series 2014-11R, a U.S. RMBS resecuritization:

Group 17 Securities

–$5,373,000 class 17-A-1 ‘BBBsf’.

The Rating Outlook is Stable.

Fitch is not expected to rate the following classes:

–$1,632,800 subsequent exchangeable class 17-A-2;

–$816,000 initial exchangeable class 17-A-3;

–$816,800 initial exchangeable class 17-A-4.

CSMC 2014-11R is comprised of 17 groups. Fitch is rating one bond in one of the groups (Bond 17-A-1 in group 17). Each group is a resecuritization of an ownership interest in a residential mortgage-backed security. As a resecuritization, the securities will receive their cash-flow from the underlying security. The Fitch-rated group is collateralized with class A-2 from Deutsche Alt-A Securities Mortgage Loan Trust series 2007-RAMP1. While the mortgage pool has performed worse than initial expectations, performance has stabilized and improved in recent years.

Fitch’s stressed mortgage pool loss assumption in the ‘BBBsf’ rating scenario is approximately 50% of the underlying pool. Fitch assumes home prices decline 20% below their sustainable levels in a ‘BBBsf’ rating scenario. The principal balances of all subordinate classes of the underlying transaction have been entirely written down. However, the underlying class A-2 benefits from a sequential payment priority that effectively provides approximately 38% subordination for principal recovery in the underlying transaction. The new resecuritization class 17-A-1 benefits from additional credit support of 23.3% as a percentage of the A-2 class (approximately 14% as a percentage of the underlying pool balance).

Ocwen Loan Servicing (Ocwen) is a primary servicer of the underlying mortgage pool. Fitch recently placed Ocwen’s servicer rating on Rating Watch Negative due to concerns raised by the New York State Department of Financial Services (NY DFS). The NY DFS has alleged significant issues with Ocwen’s systems and processes, especially relating to borrower requests for mortgage loan modifications. Ocwen’s increased risk is mitigated by the presence of Wells Fargo Bank, N.A. (Wells Fargo; rated ‘RMS1’ by Fitch) as Master Servicer.

This transaction contains certain classes designated as Initial Exchangeable Securities and another as a Subsequent Exchangeable Securities.

For Group 17, classes 17-A-3 and 17-A-4 are Initial Exchangeable Securities and class 17-A-2 is a Subsequent Exchangeable Security. For the Fitch rated group, interest is paid pro-rata and principal is paid sequentially.

KEY RATING DRIVERS

Key rating drivers include the performance of the underlying pool as well as the collateral characteristics, such as sustainable loan-to-value ratio (sLTV), credit score and geographic concentration. For the Fitch rated group, Fitch ran various prepayment speeds and loss timing scenarios in its analysis of the deal structure. This analysis was done to determine that the cash flow to the senior bond rated by Fitch would not be exposed to losses as a result of potential alternative cash flow timing stress scenarios.

RATING SENSITIVITIES

Fitch analyzes each bond in a number of different scenarios to determine the likelihood of full principal recovery and timely interest. The scenario analysis incorporates various combinations of the following stressed assumptions: mortgage loss, loss timing, interest rates, prepayments, servicer advancing and loan modifications.

The analysis includes rating stress scenarios from ‘CCCsf’ to ‘AAAsf’. The ‘CCCsf’ scenario is intended to be the most likely base-case scenario. Rating scenarios above ‘CCCsf’ are increasingly more stressful and less likely outcomes. Although many variables are adjusted in the stress scenarios, the primary driver of the loss scenarios is the home price forecast assumption. In the ‘Bsf’ scenario, Fitch assumes home prices decline 10% below their long-term sustainable level. The home price decline assumption is increased by 5% at each higher rating category up to a 35% decline in the ‘AAAsf’ scenario.

The group-to-bond association for the Fitch-rated group is as follows: Group Seventeen represents a 14.29% interest in the Deutsche Alt-A Securities Mortgage Loan Trust series 2007-RAMP1, Class A-2. Fitch’s ‘BBBsf’ rating for class 17-A-1 reflects the credit risk of the underlying transaction and the additional subordination provided by the new resecuritization trust. The underlying collateral pool for Deutsche Alt-A Securities Mortgage Loan Trust series 2007-RAMP1, class A-2 consists of fixed-rate and hybrid ARM mortgage loans. As of Nov. 25, 2014, Fitch estimates the loans remaining in the underlying pool had an original weighted average (WAVG) credit score of 689, an estimated current combined loan-to-value of 98% and a sustainable loan-to-value of 102%. The top three state concentrations are New York (12%), Florida (11%) and New Jersey (9%). Approximately 36.5% of the remaining pool is delinquent.

For further information, see CSMC Series 2014-11R Representations and Warranties Appendix, published December 2nd, 2014.

Additional information is available at ‘www.fitchratings.com‘.

Applicable Criteria and Related Research:

–‘Global Structured Finance Rating Criteria’ (May 2014);

–‘U.S. RMBS Master Rating Criteria,’ (July 2014);

–‘U.S. RMBS Surveillance and Re-REMIC Criteria’ (June 2014);

–‘U.S. RMBS Loan Loss Model Criteria’ (November 2014);

–‘Counterparty Criteria for Structured Finance and Covered Bonds’ (May 2014);

–‘U.S. RMBS Cash Flow Analysis Criteria’ (April 2014);

–‘Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds’ (January 2014);

–‘Rating Criteria for US Residential and Small Balance Commercial Mortgage Servicers’ (January 2014).

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=961875

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY’S PUBLIC WEBSITE ‘WWW.FITCHRATINGS.COM‘. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE ‘CODE OF CONDUCT’ SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Security Upgrades & DowngradesFinanceFitch Ratings Contact:

Fitch Ratings

Primary Analyst

Ryan O’Loughlin

Analyst

+1-212-908-0387

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Committee Chairperson

Grant Bailey

Managing Director

+1-212-908-0544

or

Media Relations

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com […]

9 Scary Things Consumers Do With Their Money

The upside of fear

Fear can be fun. That’s why we like to watch horror movies, dress up as ghouls and goblins for Halloween and ride roller coasters. But fear can also be a useful tool. It motivates us to keep our cholesterol down and be cautious drivers, for instance. With that in mind, here are nine scary things consumers do with their money. If you’re guilty of any of the following, be afraid — be very afraid.

Auto title loans

With this scary loan, you leverage your car to get quick cash. Often, no background or credit check is necessary. You hand over the title to your car, and all you have to do is pay back the loan, plus interest. You will pay the loan back, of course. But because you may not be able to afford the interest rate (often 25 percent), you’ll probably take out another auto title loan. Don’t do it — this road is a dead end.

Payday loans

According to The Pew Charitable Trusts, 69 percent of first-time borrowers use a payday loan to fund a recurring expense, like the mortgage or food, and not an unexpected emergency. This is worrisome because if you’re having trouble paying regular bills and need a payday loan, you probably don’t have extra cash to pay for this loan. Like an auto title loan, payday loans are predatory. The lender is the predator. You are the prey.

Buying rent-to-own products

Rent-to-own stores are popular for a reason. If you need a refrigerator, a bed or a television, you can furnish your home for a low weekly price. But you’re going to live with a lot of financial stress. Many rent-to-own stores charge 100 percent or more for furniture, appliances and electronics. Over several years, you can easily find yourself paying $3,000 to own a $900 TV.

Carrying a large balance on your credit card

Carrying a balance isn’t cause for panic if you can pay off the balance in a short period of time. What’s scary is when you carry a large balance you can’t pay off for years. If you owe $10,000 on a credit card with an interest rate of 15.2 percent, it will take you 12 years to pay off the card if you’re just making the minimum payment (often 4 percent of the balance). You would pay $4,539 in interest on the $10,000 principal.

Racking up bank overdraft fees

If you’re spending freely and don’t realize your account balance is dangerously low, you can easily accrue overdraft fees. The problem? Not only are the fees high, but the banks are making a fortune out of your misfortune. The Consumer Financial Protection Bureau explains how devastating these fees are: “Put in lending terms, if a consumer borrowed $24 for three days and paid the median overdraft fee of $34, such a loan would carry a 17,000 percent annual percentage rate.”

Gambling

Do we really need to explain why this is a bad idea? Last year, The Wall Street Journal analyzed a database of 4,222 Internet gamblers from 2005 to 2007. Of the top 10 percent of bettors, approximately 95 percent lost money. It’s one thing to go to a casino once a year or play the lottery occasionally, but when you’re doing it fairly regularly, you’re risking money that could pay your mortgage, credit card debts, retirement or your child’s college.

Claiming Social Security too early

This isn’t on par with gambling or taking out a dangerous loan, but the money you’re giving up is frightening, especially if your finances are wobbly. The earliest you can claim your benefit is age 62, but it will be 25 percent smaller than if you wait until your full retirement age of 66 or 67. If you’re in good health and can wait to claim, you’ll get an extra 8 percent a year between your full retirement age and age 70.

Chronically paying bills late

To forget every once in a while is human. But if you’re constantly paying bills late, like your mortgage, cable and utilities, consider that every bill likely has a late fee of 10 to 15 percent of the total monthly payment. That means you often have 10 to 15 percent less cash than you expected every month. And with credit cards, late fees often cause interest rates to climb, not to mention damage your credit score.

Not saving for a rainy day

According to Bankrate.com, 26 percent of Americans have no savings reserved for emergencies, and 24 percent have less than three months’ worth of savings. This often isn’t due to reckless behavior; for many, it’s just an unfortunate reality. But not saving for a rainy day deserves to be on this list. If you haven’t saved for an emergency and something bad happens, you might think you have no choice but to pay bills late or worse, take out a very scary loan.

More From US News & World Report

10 Ways Consumers Are Often Duped
12 Simple Ways to Raise Your Credit Score
10 Mistakes You’re Making in Your 401(k)
LoansPersonal Finance – Lifestyle […]

Are student loan borrowers being ‘driven into default’?

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By Jonnelle MarteOctober 16 at 7:06 AM
(iStock) Student loan borrowers are not getting enough help avoiding default, according to a report released Thursday by the Consumer Financial Protection Bureau. The report, which focused on private student loans, analyzed more than 5,300 complaints filed in the 12 months ending in September. The total number of complaints jumped by 38 percent from the previous year. Many came from consumers who said they weren’t given enough help when they have trouble paying back their loans. “We are hearing from consumers that they are driven into default because private student loan companies are not providing concrete loan modification options,” CFPB Director Richard Cordray said in a statement. Private student loans tend to come with more limited repayment options and fewer options for discharging the debt when compared to federal student loans. People with federal loans are able to apply for income-based repayment plans, which cap monthly payments based on a person’s pay. Some borrowers can also see loans forgiven after 10 years of payments if they take public sector jobs. Others may qualify after 25 years of payments. Among the chief concerns about private loans — some borrowers said they don’t get enough guidance about what loan modifications are available and what they need to do to qualify. Borrowers said those details were not easy to track down on the Web sites for their lenders or for the loan servicers, the companies that are responsible for collecting payments. Some people who sought help were presented with temporary fixes that weren’t easy to enact, the report found. For example, some people were told about forbearance, which lets them temporarily suspend payments, but the enrollment process can be complicated and sometimes requires hefty fees. After getting stuck, some of those borrowers are ending up in default, the CFPB noted. “Student loan borrowers aren’t saying we want to be off the hook,” said Rohit Chopra, CFPB’s student loan ombudsman. “They’re saying we want to pay this back.” Total student loan debt outstanding has reached more than $1.2 trillion, according to the CFPB. More than 7 million Americans have defaulted on their student loan debt, the agency says. The consequences of default can be devastating. More seniors are carrying debt into retirement and having Social Security benefits garnished because of it. Sometimes, the loans they carry into old age were taken out to help pay for a relative’s education. Default is also something many recent graduates will be looking to avoid as soon as the grade period for paying student loans comes to a close. The CFPB also released new tools meant to help people struggling to pay off student loans, including a sample letter that borrowers can use to request smaller monthly payments from their loan servicers. The agency also released a worksheet that can help people figure out how much they can afford to pay monthly after covering basic living expenses. Read More:
A guide to paying off your student loans

How debt loads are changing for young and old consumers

Student loan refinancing saves cash–for those who don’t need it

Jonnelle Marte is a reporter covering personal finance. She was previously a writer for MarketWatch and the Wall Street Journal.

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Avoid Online Payday Loan Scams | WREG.com

MEMPHIS, Tenn. — It’s hard to miss all the signs for the payday loan stores on what seems to be nearly every corner in some Memphis neighborhoods.

Banned in Arkansas, but still available in Tennessee, consumer advocates have long warned against the high-interest loans.

WREG spoke with a customer, who didn’t reveal his identity on camera, who was highly aware of the risks.

“So you’re talking about you’re repaying a loan that you know is high interest, but it’s hard to get out of it once you get in it,” the customer admitted.

That cycle of debt is one thing, but experts say there is a greater risk that consumers need to know about.

Better Business Bureau President Randy Hutchinson talked about the dangers of online payday loans with the On Your Side Investigators.

Instead of walking into a brick and mortar store to get a loan, consumers now have more and more options to get payday loans online. Some of the traditional stores have simply added the option to their websites while others are online only.

Experts say while online payday loans may seem more discreet and convenient; there are some serious risks to consider.

“You add the security risk, the risk of identity theft that you’re providing information to somebody that’s online,” explained Hutchinson.

Hutchinson says part of the problem is that customers have no idea who they’re exchanging information with, or if the company is even legitimate!

He also says the company may not even be licensed to do business in your particular state.

The Federal Trade Commission recently helped shut down a Florida based company that was supposed to be offering payday loans to customers, but instead, just stole their money.

In another case, Hutchinson says some of the people never even applied for a loan.

“One of the companies just bought information from somebody else and starting setting up phony loans,” Hutchinson explained.

Whether you’re applying for a payday loan at a store or online, understand the fees and risks, check the company out and pay close attention to your bank account.

The gentleman WREG spoke with says the combination of a tight budget and a family emergency led him to the payday loan store, but he has some advice for others.

“If you can stay away, do so.”

Contrary to popular belief, lots of payday loan customers are working and middle-class families.

Experts say cheaper loan options include getting one from the bank, credit union or even a finance company.

There’s also a cash advance from a credit card, or simply borrowing from a relative.

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Evaluating All Your Alternatives With Payday Loans – Security and …


Evaluating All Your Alternatives With Payday Loans September 24, 2014

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Cash… Sometimes it is a several-letter expression! If finances are some thing, you want much more of, you really should think about payday loan. Prior to deciding to jump in with the two feet, ensure you are generating the ideal determination to your scenario. These write-up contains details you may use when it comes to a payday advance.

It may be beneficial to look about prior to deciding over a paycheck loan company. Various loan companies will provide distinct costs and cost distinct charges. In the event you go for your initial give you get, you could possibly wind up paying far more. Looking around will save you a lot of cash.

When determining if your payday loan suits you, you have to know the quantity most payday cash loans enables you to obtain is just not too much. Typically, the most money you can find from your payday loan is all about $1,000. It might be even lower if your revenue is not too high.

You might like to look into the business along with the regards to the financing upfront, for you to do this prior to decide on a cash advance. Ensure there is a good track record and therefore the problems are crystal clear. Frequently once we are dealing with a financial turmoil, we track out what we don’t wish to listen to and later on locate ourselves in very hot water above it.

Just because you might have bad credit does not always mean you cannot get yourself a payday advance. So many people could truly take advantage of a payday loan.Will not even take the time trying to get 1, simply because they have poor credit. Most companies will, the truth is, supply you with a pay day loan, just provided that you are hired.

Make every endeavor to get rid of your payday advance promptly. In the event you can’t pay it back, the loaning organization might make you rollover the money into a replacement. This another one accrues their own group of service fees and fund fees, so technically you happen to be paying out those service fees two times for the similar funds! This may be a significant strain on the bank account, so plan to pay for the bank loan off of immediately.

Find out the regulations in your state about payday loans. Some creditors try and pull off increased interest levels, charges, or a variety of service fees they they are not lawfully able to ask you for. Most people are just happy to the loan, and you should not issue this stuff, making it easier for loan providers to carried on acquiring aside with them.

Make sure you remain up to date with any tip adjustments in terms of your payday advance financial institution. Legal guidelines is usually becoming passed on that alterations how creditors can operate so be sure you recognize any tip adjustments and just how they affect both you and your personal loan prior to signing an agreement.

Need a wide open communication funnel with your lender. Should your payday loan financial institution can make it seem to be nearly impossible to go over the loan with a people, you may then be in a poor business deal. Good firms don’t work in this way. They have got an open type of interaction where you can make inquiries, and obtain responses.

Spend time shopping around prior to deciding to invest in one loan company. You can find a great deal of diverse pay day loan companies, each and every may have different rates, and other terms with their financial loans. If you take some time to have a look at a number of organizations, you can save a lot of your challenging-gained funds.

Make a note of your payment due times. After you get the pay day loan, you will have to shell out it back again, or at best create a payment. Even though you neglect each time a transaction date is, the business will make an effort to withdrawal the amount through your checking account. Listing the days can help you recall, so that you have no problems with your banking institution.

It is vital to merely utilize one cash advance firm. When you use several payday advance organization, it will probably be tough to pay the financial loan off of. It is because the lending options are due and payable on the after that paycheck. In addition to the expected date, these loans have very high fascination.

Since you now provide an boost knowledge about what exactly is involved with pay day loans you must sense significantly better about getting one. The main reason lots of people have a hard time obtaining a payday advance is because don’t know very well what is included in buying one. However, you may make knowledgeable selections soon after nowadays.

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