OppLoans Word of the Week: Debt Snowball

word-of-week-debt-snowball

Paying off your debt is like losing weight: If you don’t have a plan, your chances of success are slim. Before you put a single red cent towards debt repayment, you need to have a strategy in place. Otherwise, you’ll find yourself sitting there, months later, staring at bills that seem just as high as before, wondering where you went wrong.

The Debt Snowball is one such plan: it is a method of debt repayment that keeps things simple. While not everyone thinks the Debt Snowball is the best way to go, most people would agree that it’s a far better plan than no plan at all.

How Does the Debt Snowball Work?

This image is probably familiar: A person rolls a snowball downhill and it keeps picking up more and more snow, getting bigger and bigger, so that by the time it reaches the bottom of the hill, it’s practically a snow boulder. Well, that is where the Debt Snowball got its name.

With a Debt Snowball, you lay out all your debts and you organize them from largest to smallest. Next, you set a strict budget that frees up as much money as possible for debt repayment. You continue making the minimum monthly payments on all your debts, but you take all that extra money and pay it towards your smallest debt.

Once that smallest debt is paid off, you take all that money and you start putting it towards your next smallest debt. But here’s the thing: you also add the money that you were paying towards your minimum payment on your smallest debt. For instance, if your smallest debt had a monthly minimum of $15, you would take that $15 and add it towards your next smallest debt.

Every time a debt is paid off, you add the amount you were paying towards its monthly minimum towards the next largest debt. This way, the amount you are putting towards debt repayment grows bigger every time a new debt is paid off.

The greatest benefit of the Debt Snowball is encouragement. By paying off your smallest debt first, you’re going to get that early victory that will help you keep going. Because making a plan is one thing, but sticking to that plan is something else entirely.

Now get rolling!

You can read more about the Debt Snowball in our Financial Terms Glossary and in our blog Want to Get Out of Debt? Then Let It Snow(ball)!

Last week’s entry: Term

Previous entries:

Credit Score

Cash Advance

Repossession

Rollover

Annual Percentage Rate

OppLoans Word of the Week: Term

word of the week - term

When it comes to personal lending, the term of the loan is pretty simple: it’s the length of time a borrower has before the loan has to be repaid. That’s it! A payday loan with a 14-day term has to be repaid in two weeks. An auto loan with a five-year term has to be repaid in … You guessed it: Five years. And a 30-year mortgage? It’s right there in the name, isn’t it?

Is the Term important?

Yes. For something that’s so incredibly simple, a loan’s term can be massively important. The length of a loan’s term often determines not only when, but how the loan is going to be repaid. It could be the difference between a loan you can afford and a loan that leaves you trapped in debt.

There are two basic kinds of loan terms: short-term and long-term. Let’s look at the differences.

Short-term

These are loans with terms under six months. In this category you’ll generally find payday loans, which average 14 days in length, as well as title and pawnshop loans, which are generally one month long. Because the terms for these loans are so short, they are usually designed to be repaid in a single lump sum. That means that the borrower doesn’t have to make any payments until the loan’s due date. But once that due date rolls around, the entire amount owed is due, including both the principal and the interest.

For this reason, many borrowers find lump sum repayment difficult. Instead of paying their loan off in a series of smaller, more manageable chunks, they have to come up with the money all at once. And when the terms of the loan are so short, this makes it doubly hard. This is why lots of people end up rolling over their short-term loans and paying additional interest in order to secure an extension on their due date. Maybe these loans aren’t so short-term after all!

Long-term

These are loans with terms longer than six months. They include most personal loans, auto loans, and mortgages. The vast majority of these loans are referred to as “installment loans” because they are designed to be paid back in installments. And rather than requiring that the loan be paid back all at once on the due date, these loans make repayment far more manageable for borrowers by requiring them to pay it back a little bit at a time. Payment is typically due once a month.

With long-term loans, the length of the term can also determine how much the loan costs overall. A loan with a longer term will usually have smaller monthly payments, but it will also cost more than a similarly sized loan with a shorter term. This is because a loan with a longer term will accrue interest for a longer period of time. The more interest that accrues, the more a borrower is paying on the loan. This is especially important to take into account when considering debt consolidation loans.

You can read more about Terms in our Financial Terms Glossary.

Last week’s entry: Credit Score

Previous entries:

Cash Advance

Repossession

Rollover

Annual Percentage Rate

OppLoans Word of the Week: Credit Score

Word of the Week: Credit Score

Remember when you were in high school and you got that D on a chemistry test (stupid valent bonds) and you thought to yourself, “Is this bad grade really going to affect my life?” Fast forward to the present day and you’ll see that, actually, that one bad grade maybe didn’t have a huge impact.

Well, there is one grade that matters more; in fact, it matters a lot more. This grade follows you around wherever you go. It follows you to the bank when you’re applying for a loan, it follows you to that new apartment you’re hoping to rent, it even follows you when you’re interviewing for a job! That grade is your credit score, and it might just be the most important grade you’ll ever get.

What is a Credit Score?

A credit score is a number that’s based on the information in your credit report, a document that tracks your history of credit use. Your credit report records data like how much credit you use, what kind of credit sources you’ve employed, whether you pay your bills on time, and whether you’ve ever been sent to collections or declared bankruptcy. Credit reports are created and maintained by the three major credit bureaus: TransUnion, Experian, and Equifax.

Your credit score takes all the information in your credit report and turns it into a single number; this number can then be used by lenders, landlords, and even prospective employers, to decide whether or not they want to do business with you. The higher your credit score, the better your credit.

What about FICO scores?

A FICO score is a type of credit score, but it also just so happens to be the score that’s most widely used. Most of the time, if somebody is talking about your “credit score”, they mean your “FICO score”. The FICO score was created by Fair, Isaac and Company in 1989. (The company has since changed its name to FICO.)

The FICO score is measured on scale from 300 to 850 (850 is a “perfect” score, and also not very realistic for anyone). Your FICO score weights different areas of your credit history more heavily than others. For instance, your payment history takes up 35 percent of your score and your total amounts owed takes up 30 percent. If your FICO score is below 630, you might have trouble getting a loan from a traditional lender. If that’s the case, you might consider taking out a safe, manageable, personal loan from OppLoans. OppLoans reports your on-time payments to the credit bureaus so you get the cash you need now and you can improve your credit score over time.

Read more about credit scores in our Financial Terms Glossary. You can also read more in the ebook Credit Workbook: The OppLoans Guide to Understanding Your Credit, Credit Report and Credit Score.

Last week’s entry: Cash Advance

Previous entries:

Repossession

Rollover

Annual Percentage Rate

OppLoans Word of the Week: Cash Advance

Word of the Week- Cash Advance

Your car breaks down on a remote country road. (Don’t worry, this isn’t the beginning of a horror movie.) You manage to call a tow truck, but the driver insists on being paid in cash. He tows you to a gas station, where they have a cash machine. Unfortunately, it’s the day before payday and your bank account is basically 99 percent cobwebs. Looks like your only option is using your credit card and taking out a costly cash advance. Your budget is extremely tight as it is; is this added cost something you’re going to be able to handle? (Okay, we lied. This is a horror movie.)

What is a Cash Advance?

A cash advance is a way for credit card users to withdraw cash when they really need it. They come with much higher interest rates than standard credit card purchases and there is no grace period. That high interest starts accruing the moment the cash hits your hand.[1]

How is a Cash Advance different than a regular credit card purchase?

When a person has a credit card, it’s basically like having a revolving line of credit that they can access directly. Any purchase they make using their card is added to their balance and begins to accrue interest at an average yearly rate of 15 percent. Luckily, people who closely track their spending and don’t spend more on their card than they can afford can avoid paying interest altogether. Pretty much all credit cards have a 30-day grace period before interest starts to accrue on a given purchase. If the person pays off their entire balance every month, their effective interest rate will be 0 percent.

With a credit card cash advance, the amount withdrawn is added to the card’s balance, just like with any credit card purchase.  But that’s where the similarities end. Credit card companies charge higher interest rates on cash advances than they do on standard purchases. The average Annual Percentage Rate (APR) for a credit cash advance is 24 percent! That’s almost 10 percent higher than the average rate on a credit card purchase.[2]

And the added costs don’t stop there. Credit card cash advances also don’t have that same grace period that standard purchases do. Not only are the interest rates higher, but that interest starts to accrue immediately. With a cash advance, there is no possibility of paying your balance off every month and paying 0 percent. Credit card cash advances also come with an added fee, usually 2 to 5 percent of whatever you withdraw.[3] You can read more in The Hidden Dangers of Cash Advances.

Previous Entries:

Repossession

Rollover

APR

References:

  1. Konsko, Lindsay. “What is a Cash Advance?” NerdWallet.com. Accessed September 16, 2016. https://www.nerdwallet.com/blog/credit-cards/what-is-a-cash-advance/
  2. Mecia, Tony. “The high cost of credit card cash advances.” CreditCards.com. Accessed September 16, 2016. http://www.creditcards.com/credit-card-news/cash_advances-cost-rates-1276.php/
  3. Martin, Allison. “4 Dangers of Credit Card Cash Advances.” Credit.com. Accessed September 16, 2016. https://blog.credit.com/2013/10/4-dangers-of-credit-card-cash-advances/

OppLoans Word of the Week: Repossession

Word of the Week- Repossession

Different types of loans come with different advantages, but they also come with different risks. And in the case of car title loans, they’re pretty much all risk. But if you’re looking for just one reason to steer clear of title loans, the threat of repossession should be enough. (Don’t get us wrong, there are so many reasons to avoid title loans. It’s hard to pick just one.) On average, one out of five title loan customers end up having their car repossessed.[1]

What is Repossession?

Repossession is most commonly associated with car loans, but really it can apply to any loan that’s secured by collateral. If a borrower defaults on their loan, the lender has a legal right to seize—or repossess—the borrower’s collateral. (The definition of “default” is going to vary depending on the terms of the loan agreement, but it’s basically a fancy word for “failing to pay the loan back.”) When a lender repossesses a borrower’s collateral,  they usually do so with the intent of selling it in order to make up their losses on the loan.

How does Repossession work?

With a car title or standard auto loan, the borrower’s collateral is their car, truck, SUV or motorcycle. Once the repossession process has begun, the lender might send someone with a tow truck or a spare set of keys to take the vehicle.

With a home mortgage, the borrower’s collateral is their house, and the repossession process is referred to as “foreclosure.” Foreclosure generally occurs once a person is at least four months behind on their mortgage payments. While the process varies state-by-state, it usually involves the lender giving the borrower ample public notice to leave the property.[2]

With a pawn shop loan, repossession is actually not necessary, because the borrower hands over their collateral to the lender before receiving the loan. They get their property back only once the loan is paid off.

What are my rights during Repossession?

This depends on where you live; different states have different laws that govern exactly what lenders can and cannot do during the repossession process. Generally, they cannot commit a “breach of the peace,” which includes verbal and physical threats, trespassing, and acts of violence.

Are there alternatives to Title Loans?

Absolutely there are. If you need a loan and don’t want to risk losing your car, house, or property, consider looking for an unsecured personal loan. Installment loans are loans that are paid back over time, rather than in a single lump sum. You’ll get a longer time to repay the principal (the amount you borrowed), and you’re not going to lose your car in the meantime.

But, as always, you’ll want to do your homework before taking out any loan. Avoid all payday loans: They won’t take your car but they’re just as predatory as title lenders.

Look instead to safe, Better Business Bureau-accredited lenders like OppLoans. With OppLoans, you’re in no danger of losing your car. Instead, you’ll get a lower rate and longer term installment loan that’s structured to help you now and make it easy to repay in the future.

You can read more about Repossession in our Financial Terms Glossary.

Last week’s entry: Rollover

Previous entries:

Annual Percentage Rate

References:

  1. Single-Payment Vehicle Title Lending. (2016, May). Retrieved from http://files.consumerfinance.gov/f/documents/201605_cfpb_single-payment-vehicle-title-lending.pdf
  2. “How does foreclosure work?” Consumer Financial Protection Bureau: Ask CFPB. Retrieved from http://www.consumerfinance.gov/askcfpb/287/how-does-foreclosure-work.html

OppLoans Word of the Week: Rollover

Word of the Week Rollover

If you’re shopping around for quick loans that can get you through to your next payday, be sure to read all the fine print. Not only do most of these fast cash loans come with high annual interest rates, they also require lightning-fast turnaround. In fact, the typical repayment term for a payday loan is only 14 days. Take a second and ask yourself: If you owed a lender $500 or more, would you really be able to pay that back in only two weeks?

Most payday loan borrowers can’t. That’s why they roll their loan over.

What is Rollover?

With short-term, same-day loans, the practice of rollover is extremely common. It’s basically an agreement between the lender and the borrower: The lender extends the due date on the loan so that the borrower gets more time to repay, BUT the borrower must pay additional interest charges.

Here’s an example of how it might work …

Brian takes out a $300, 14-day payday loan that costs $15 per $100 borrowed, or $45 total. Two weeks later, Brian can’t afford to pay off the $345 he owes. Instead, he pays the $45 he owes in interest and rolls the loan over. He gets an additional two weeks to pay the loan off, but will also have to pay an additional $45. By rolling over the loan once, Brian has effectively doubled the cost of borrowing from 15 percent to 30 percent.

Why is Loan Rollover Dangerous?

Every time a person rolls a loan over, they are increasing their cost of borrowing. Payday and title lenders know this, which is why they often encourage people to roll their loans over as much as possible. Most short-term loans are designed to be repaid in a single, lump-sum payment, which makes them even more difficult to repay.

Loan rollover can all too easily lead borrowers into a debt trap. As they continue to roll their loans over and over again, borrowers do not get any closer towards actually paying the loan off. Each payment they make goes only towards the interest, not the principal loan amount. This arrangement is very profitable for lenders, but it is pretty terrible for borrowers.

Read more about Financial Terms Glossary.

Last week’s entry: Annual Percentage Rate (APR)

A Payday Parable

Annual Percentage Rate Word of the Week

A Payday Parable

You’re applying for a payday loan, and you’re wondering why so many people are dead set against them. You check the interest rate and you think to yourself, “It says here that it’s only 15 percent. I guess 15 percent is a little high, but for someone with my credit score, this rate is fantastic!” So you sign up for the loan and go on your merry way …

Cut to three months later. You’ve had trouble repaying the loan and you’ve ended up rolling it over six times. You do the math and you realize that the amount you’ve paid so far in interest adds up to 90 percent of what you were loaned. 90 percent! In only three months! What happened to that 15 percent rate you got when you signed up for the loan? You dig out your loan agreement and you read it through again …

And that’s when you see it. Down there in the corner of the document. It says “Annual Percentage Rate: 390 percent” That’s a heckuva lot higher than 15 percent!

The True Cost of Borrowing

Whenever shopping for a loan, always make sure you check the Annual Percentage Rate, or APR. It is a standard unit of measurement in lending that will let you compare the relative cost of different loans, no matter how they’re structured. The APR measures how much a loan would cost if the principal loan amount were outstanding for a single year. It’s expressed as a percentage of the amount loaned, so a $1,000 loan that charged $100 in interest per year would have an APR of 10 percent.

What’s the Difference?

Now, you might be saying, “isn’t that basically the same thing as the interest rate?” Not quite. A loan’s interest rate is a very important part of its APR, but it’s not the whole thing. The APR measures the full cost of a loan, which means that it includes additional fees and interest above and beyond the simple interest rate. This is why financial advisors will always tell you to check the APR when applying for a loan or credit card. It’s how you know the loan’s true cost.

APRs in Payday Lending

With a payday loan, the stated interest rate only applies for the length of the loan term. So if you take a 14-day payday loan with a 15 percent interest rate, that rate only applies for 14 days. If you were to rollover the loan and secure an additional 14-day term, you would be charged an additional 15 percent. All of a sudden, the cost of your loan is 30 percent. Over the course of a full, 52-week year, a 15 percent rate every two weeks would add up to 390 percent. That’s the PAYDAY loan’s APR. And that’s ridiculously expensive.

Read more about the Annual Percentage Rate (APR).

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