Line of Credit

Line of Credit
A line of credit is a flexible loan that grants a borrower access to money (up to a specified maximum amount determined by the bank or lender). Interest is only charged on the money that the borrower chooses to use.

What is a Line of Credit?

A line of credit is a type of loan that provides a borrower access to a certain amount of money. As long as they do not exceed that maximum amount, the borrower can withdraw funds as they see fit. That maximum amount that a borrower can withdraw is called the “credit limit.” Interest is only charged on funds that the borrower withdraws.

With a typical bank loan, a borrower receives their funds in a single lump sum then pays off the principal and interest for that entire amount. But with a line of credit, the borrower is able to withdraw any amount of money up to their credit limit and will only have to repay what they actually borrowed. Additionally, interest will only accrue on funds that have been withdrawn.[1]

How does a Line of Credit work?

A line of credit (LOC) is what’s referred to as a “revolving account.” This means that you can withdraw funds within your limit, pay them off, and then withdraw them again if needed. Borrowers have the choice to pay off their balance in full or make minimum payments and maintain a balance on the line of credit.  There are some lines of credit where the available funds do not replenish as the line is paid off. These are referred to as “non-revolving accounts.”

When you get an LOC you’ll have a “draw period” and a “repayment period.” The draw period is the time during which you’re using the account and withdrawing funds as needed. This can last for up to 10 years depending on the terms set by the lender. When the draw period ends, the LOC goes into its repayment period: the time during which the total balance and interest are repaid. Additional funds cannot be accessed during repayment unless the line is renewed.[2]

What are the different types of Lines of Credit?

A majority of credit lines are unsecured loans that come in two different forms: personal or business. This means that many lines of credit won’t require you to offer up any collateral. However, there are secured lines of credit as well, like a Home Equity Line of Credit (HELOC). To get a HELOC, you’ll contact a mortgage lender or financial institution and offer up your home as collateral in order to secure the funds. In cases where the borrower still owes money on their first mortgage, the HELOC is secured by the value of your home above and beyond what is still owed on that mortgage. If you fail to make your payments on a HELOC, the lender can then seize your property to make up for their losses. A HELOC would be considered a personal line of credit.[3]

Personal lines of credit can be difficult to obtain if they’re unsecured. They’re generally only offered to those with high credit scores. The credit limit for these products is typically much higher than a normal credit card limit, and all the bank has to secure the loan is your word. A business line of credit works just like a personal LOC; the difference is that you can only use those funds for business purposes.

What are the Pros and Cons of Lines of Credit?

The appeal of a line of credit over a credit card or personal installment loan is cost: the Annual Percentage Rate (APR) for an LOC is usually much lower. They also come with higher limits, which makes the purchase of big-ticket items possible. The flexibility of an LOC is another reason people opt for these over traditional loans. Using an LOC gives you the power to choose how much money you withdraw, how often, and for what purpose.

There are many advantages to using a line of credit, but there are also disadvantages. If you choose a HELOC, you run the risk of having your home seized if you don’t make your payments. And you may not even be able to get an unsecured line of credit unless your credit score is very good. Most LOC’s come with adjustable interest rates, which means the lender can increase your interest rate and monthly payments. Make sure you know the terms of the LOC before agreeing to one.[4]

References:

  1. Fay, Bill. “Line of Credit” Debt.org. Investopedia. Accessed August 3, 2016. https://www.investopedia.com/terms/l/lineofcredit.asp

  2. “How a Line of Credit Works” Banking.com. Accessed August 3, 2016. https://banking.about.com/od/loans/p/lineofcredit.htm

  3. Barrymore, John “How Lines of Credit Work” HowStuffWorks Money. Accessed August 3, 2016. https://money.howstuffworks.com/personal-finance/banking/lines-of-credit.htm

  4. Warden, Peter “Pros and Cons of a Personal Line of Credit” LendingTree. August 11, 2015. https://www.lendingtree.com/personal-loan/pros-and-cons-of-a-personal-line-of-credit-article

Give Me Some Credit: Line of Credit VS Credit Card (3 of 3)

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By this point you’re probably familiar with what a credit card is and how to use it. What you may not be as familiar with are other credit-based products, how to get them, and how they work. One of these products is referred to as a “line of credit”, and while it does have many similarities to a normal credit card account, there are also some big differences.

What is a line of credit?

A line of credit is a flexible loan that you can find through a bank or other financial institution. With a regular loan, you’re issued a certain amount of money, and charged interest on that amount until you repay the loan in full. A line of credit however, provides you with a credit limit (similar to a credit card) that you can borrow from, while only paying interest on the amount you use. Just like credit cards, lines of credit will maintain a revolving balance if not paid in full after each purchase.[1]

The similarities

Credit cards and lines of credit have many things in common. As mentioned above, both options allow you to make minimum payments and maintain a revolving balance, or pay off the entire balance at the end of each month. Regardless of which one you choose to get, it’s always a good idea to pay the balance in full and avoid high amounts of interest.

Another similarity is that both of these options have a preset limit. This means you can only spend up to a certain amount. In addition, your payments and activity will be reported to the credit bureaus whether you’re using a credit card or line of credit. This is why it’s important to always make timely payments no matter which one you’re using.[2]

The differences

While a line of credit and a credit card may seem like the same thing, there are many key differences that separate them. First, people choose to use them for very different reasons. A credit card is generally used for everyday purchases and spending, while a line of credit is more for big-ticket items and business expenses. Because of this, the limits vary widely for both options. A line of credit will usually be offered with a higher limit than a normal credit card account, which also means that a line of credit is harder to obtain. Your credit score and history of borrowing will affect whether you can get either of these, but you’ll likely need a very good credit score to access a line of credit.[2]

Credit cards are considered unsecured loans, as there’s no collateral involved. Lines of credit can also be unsecured, but there are secured lines of credit called “Home Equity Lines of Credit” which are backed by the value of your home. This means if you’re unable to pay, the financial institution is allowed to sell your home to make back their money.[1]

Another key difference between a line of credit and credit cards is that credit cards usually have 0% APR introductory offers for a specified amount of time, while a line of credit will probably not have any such offer. Credit cards also typically come with a rewards program based on the provider, and it’s rare to find a line of credit with a rewards program.[2]

Credit cards and lines of credit each come with a wide range of terms and options. Knowing the differences and similarities between these two products can save you a lot of time and money. We recommend doing a fair amount of research before committing to either of these products. Read the fine print, do your homework, and you’ll find the right product for your lifestyle and financial situation.

Read the other parts of our Give Me Some Credit series:


References

  1. Simpson, Stephen D. “The Basics of Lines of Credit” Accessed August 1, 2016. www.investopedia.com/articles/personal-finance/072913/basics-lines-credit.asp
  2. YKiernan, John “Line of Credit vs. Credit Card: Difference, Cost” Accessed August 1, 2016. https://https://www.investopedia.com/articles/personal-finance/072913/basics-lines-credit.asp

Give Me Some Credit: The Risks and Rewards (2 of 3)

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Having a credit card in 2016 feels like a necessity. The majority of Americans carry and use credit cards on a regular basis. Purchases range from everyday items like groceries, to vacations and expensive home appliances. However, just because they’re widely used doesn’t mean credit is 100% safe. In fact, if you aren’t aware of best practices prior to spending, you may find yourself with “bad credit“, burdened with more debt than you can handle, or both.

The Risks

Too many cards

Most of us have received credit card offers in the mail, but you shouldn’t accept every offer you receive. Especially with credit cards.

Carrying multiple credit cards is like asking to be in debt. It’s difficult to manage several balances on many different cards. Additionally, depending on the card, you may be subject to annual fees, which add up quickly. You also run the risk of damaging your credit and your ability to borrow in the future. Transferring balances does not rid you of debt, it simply changes your terms, conditions, and (in some cases) your Annual Percentage Rate (APR). Carrying one or two credit cards will be easier to manage, monitor, and pay off.[1]

Maxing out your card

Spending up to your credit limit will lead to a lower credit score, which can damage your financial future. When determining your score, Fair Isaac Company (FICO) will look at how much credit is available to you, and how much of that you’re using. This is referred to as your “utilization ratio” which is a fancy way of saying the amount of credit you’re using. The less credit you need, the better. People with a high credit utilization ratio will have a lower credit score and may have other financial difficulties.[2] Utilization ratios are like golf — lower is better.

Minimum payments

Credit cards make people feel like they can purchase things they can’t actually afford. The idea of buying something now without having cash on hand is pretty appealing. This causes people to rack up high balances on their cards, then only make minimum payments because that’s all they can afford. This allows the interest to build and leads to being in debt for a longer amount of time (read more in What You Should Know About Interest Rates).

By not carrying a balance on your credit card, you’re ensuring that you’ll pay little-to-no interest, and you’ll keep that utilization ratio low.[1] Check out this minimum payment calculator to see how paying the minimum will really effect you.

Cash advances

Taking out a cash advance through your credit card is not a safe option for quick cash. The average interest rate for a credit card cash advance is about 8.5% higher than the normal purchase interest rate. In addition, the interest on a cash advance will start accruing immediately, whereas with a regular credit card purchase there’s typically a grace period. It may be an easy option, but it could cost you big time.[2]

The Rewards

Rewards programs

Most credit cards today offer benefits and perks to customers. Some offer airline miles based on your purchases, while others may offer 0% interest for a specified time period after you sign up. Most cards also provide cash back rewards programs — your purchases are worth points which can be redeemed for cash. It may take some shopping around to find the rewards program that fits your lifestyle. If you travel a lot, you may want a card that provides airline miles. If not, find a card with a good introductory rate so you don’t have to pay interest for a little while.

Build your credit score

When used correctly, credit cards can actually help boost your credit score. Making payments on time and maintaining a very low balance (or no balance at all) will look good on your credit report and over time could raise your credit score, leading to better options for cards and loans in the future.[3]

Easy to monitor

Credit cards make tracking your spending simple and convenient. Paying with cash can make it difficult to track your spending patterns, but with a credit card you can access all your transactions online in a few seconds. Pay close attention to your charges and transactions so you can easily spot credit card fraud.

Credit cards can be a useful tool when used correctly. Abusing the power of credit cards however, can lead to deep financial issues that take years to solve. Make sure you know what you’re getting into before you decide to use your credit card.

Note: If you’re regularly maxing out your credit cards, or getting denied additional credit, you may consider a personal loan to help get you the cash you need. OppLoans personal installment loans can actually help solve that problem in more ways than one: OppLoans reports on-time payments to credit bureaus which means you not only get the money you need now, but you can actually rebuild your credit over time. Give us a call today at (800) 990-9130 or click “Apply Online” below to find out more!

Read the other parts of our Give Me Some Credit series:


References

  1. Bell, Kay. “10 Worst Credit Card Mistakes” Accessed July 26, 2016. https://www.creditcards.com/credit-card-news/help/worst-credit-card-mistakes-6000.php
  2. Peterson, Lars. “7 Dangerous Credit Card Mistakes You’re Making” Accessed July 26, 2016. https://money.usnews.com/money/blogs/my-money/2015/07/16/7-dangerous-credit-card-mistakes-youre-making
  3. Yuille, Brigitte. “Credit Cards: Pros and Cons” Accessed July 26, 2016. https://www.investopedia.com/university/credit-cards/credit-cards6.asp

FICO Score

FICO Score
A FICO score is a credit score developed by the FICO company. These scores are created using information from a person’s credit report about their history of using credit and managing debt.

What is a FICO score?

The FICO score was created by Fair, Isaac & Company in 1989. (Their name was shortened to FICO in 2003.) FICO scores are used by lenders to help predict a borrower’s behavior and assess their creditworthiness. Lenders can use a borrower’s FICO score to determine whether they are likely or not to pay their bills on time and how much credit they will be able to handle. Scores developed by FICO can also be used to forecast if a specific borrower’s account could end up included in a bankruptcy filing.[1]

While there are other kinds of credit scores in addition to FICO, most lenders still use FICO scores when deciding whether to offer you a loan or credit card. They will also take your score into account when deciding the terms of your loan, especially the interest rate. Banks may also use FICO scores when approving checking and savings account applications and setting the terms of those accounts.[2]

FICO scores range anywhere between 300 and 850; and the higher the number, the better with a score. While any loan carries risk for both the borrower and the lender, borrowers with high FICO scores are considered by lenders to be a relatively safe bet. For borrowers, that high score translates into more loan approval, lower interest rates, higher maximum limits, and more favorable terms.

How do I know if I have a good FICO score?

Basically, if you have a FICO score that’s 680 or above, you have a good score. And if you have a score that is 720 or above, you have a great score. While these ranges are not 100% official, here are the five basic tiers:

RangeQuality
720-850Great Credit
680-719Good Credit
630-679Fair Credit
550-629Subprime Credit
300-549Poor Credit

How are FICO Scores created?

FICO scores are based on the information collected by the three major credit bureaus : Equifax, Experian, and TransUnion. This information is put together into a document called a credit report. The report tracks a person’s history of credit use over the past seven years. It includes information their payment history, their amounts owed (both past and present), the length of their credit history, their recent credit inquiries, and their mix of different credit types.

When FICO creates a person’s credit score, they weight some of these factors more heavily than others. The breakdown looks a little something like this:

Payment History — 35%: Does a person have a good track record of making their payments on time? This category also includes information on whether or a not a person has ever had an unpaid account sent to a debt collector.

Amounts Owed — 30%: This looks at how much debt a person currently has outstanding. It also takes into account how much credit a person has used in relation to the maximum amount they have available.

Length of Credit History — 15%: How long has a person been using credit? All other factors being equal, a longer history is generally better.

Credit Mix — 10%: This factor takes into account the different kinds of credit that a person uses: from personal, auto and home loans to credit cards, student loans and lines of credit.

New Credit Inquiries — 10%: This category includes any requests for new credit that a person has made. Generally, too many credit inquiries in a short period of time is seen as a red flag.[3]

Is the information on my credit report always correct?

No. Credit reports can and do contain errors or false information, like a collections account that was settled but is still being reported as open. It’s always a good idea to check your credit report personally to make sure that all the information on it is correct. If you find an error, you can dispute it with the appropriate credit bureau.[1] Under federal law, each bureau is required to provide each individual with one free copy of their credit report per year. However, they will only provide the report if you request it. To request a free copy of your credit report, just visit AnnualCreditReport.com.

It’s also important to know that the data on a person’s credit report can vary depending on which credit bureau has produced the report. This means that your FICO score could also vary from one credit bureau to another. FICO also has different variations on its basic scoring model, which are tailored to different types of lenders. This means that if you are applying for a mortgage or car loan, your score might be different than it would be if you were applying for a credit card. A borrower could have several different FICO scores, even if they are all calculated from the same credit agency’s data.[3]

How can I figure out my FICO score?

There are four main ways a borrower can check their FICO score. First, borrowers can check their credit card or loan statement.  Many major credit card companies and some auto loan companies have begun to provide FICO scores for all their customers on a monthly basis.[4] Second, a non-profit credit counselor can provide a borrower with a free credit report and FICO score. Not only that, but they can help people interpret their score and the information contained their credit report.

Third, a borrower can use one of the many websites that have an offer for a “free credit score.” Some of these sites are funded through advertising and not charge a fee. Other sites may require that you sign up for a credit monitoring service with a monthly subscription fee in order to get your “free” score.[4] Lastly, you can buy your score directly from one of the three main credit reporting companies or from FICO themselves.

What can I do to change my FICO score?

If you have a lower credit score, it is often referred to as having “bad credit.” This can prevent lenders from giving you a loan or credit card. However, it is possible to change your credit score.

Re-establishing your ability to make a payment on time, only applying for credit that you actually need, not using too much of the credit that is available to you, and checking your credit score once a year are all ways to boost and maintain a higher credit score. In the long term, that higher score will help you get approved for better loans and credit cards, with lower rates and better terms. FICO and credit scores can change over time based on your credit behavior; taking control of what matters is key.

References:

  1. “What is a FICO Score?” Accessed July 16, 2016 Credit.com
  2. “What’s in Your Score?” Accessed July 16, 2016 MyFICO.com
  3. “What is a FICO Score?” Accessed July 16, 2016 ConsumerFinance.gov
  4. “Where Can I get my FICO Score?” Accessed July 15, 2016 ConsumerFinance.gov

Credit History

Credit History
A borrower’s credit history is a complete record of how well they have managed their debts. This information is collected and organized in their credit report.

What is Credit History?

A borrower’s credit history is a complete record of how they have managed their debts. Your credit history includes how many accounts you have, how long each account has been open, total amount of available credit that’s been used, whether or not payments are made on time, and the number of recent credit inquiries.[1] This information is then collected into a document called a credit report.

What is a credit report?

Credit reports are collected and maintained by credit bureaus, also known as credit reporting agencies. The credit bureaus then sell those credit reports for a fee to lenders. Lenders and financial institutions use these reports to decide whether or not to grant a loan to an individual.[2] They use credit reports and credit scores, which are based on credit reports, to determine if a potential borrower is creditworthy. In the United States, there are three major credit bureaus: Equifax, Experian and TransUnion.[3]

What is a credit score?

A person’s credit score is basically a numerical grade that indicates whether or not they are creditworthy. The most common type of credit score is the FICO score, which was created in 1989 by Fair, Isaac & Company. (The company changed their name to FICO in 2003.) The FICO score uses a scale from 300 to 850; 300 is the lowest (or worst) score, and 850 is the highest (or best).

How is my Credit History used to determine my credit score?

A FICO score is based on the information found in a person’s credit report. The scoring process weights some factors as more important than others. According to FICO’s website,[4] the score is weighted like so:

Payment History35%
Amounts Owed30%
Length of Credit History15%
Credit Mix10%
New Credit Inquiries10%

There are many different factors in a person’s credit history that can impact their credit score. The most important factors in determining your credit history are your history of making payments on time, and how much debt you currently owe. It is also important that a person not have used too much of the credit available to them. This means that maxing out your credit cards will hurt your credit score.

When it comes to the length of a person’s credit history, longer is generally better. If you have just recently started using credit, it could take a while for your credit score to improve. Credit mix is another factor; credit mix means the variety of different types of debt that you carry like student loans, mortgages, credit cards, etc. A diverse mix is generally preferred. Lastly, your credit score takes into account whether you have any recent credit inquiries (which are discussed below in more detail).

How can my Credit History hurt or help my credit score?

A notice of debt collection will always negatively affect a person’s credit score. These are unpaid, past-due accounts that have been sent to a third-party collection agency. These are businesses that contact borrowers and urge them, often unpleasantly, to pay what they owe. Some debt collectors are known for their aggressive, borderline-illegal tactics.[5] Depending on the size of the debt, a debt collector can even take a person to court and have their wages garnished. When a bill or account has been sent to collections it is seen on your credit report as a derogatory mark.

One factor that can positively affect an individual’s credit score, and overall creditworthiness, is the average age of their open credit lines. Basically, the longer you have a well-managed credit line, the better it looks to potential lenders. If a borrower has a credit card and has been able to make every payment on it for several years, they have demonstrated that they are a responsible borrower.[6]

A person’s credit history not only contains the total number of accounts they currently have open, it also includes any past or closed accounts that they have had in the past seven years. These accounts include ever type of debt: credit cards, personal loans, auto and student loans, and mortgages. Having multiple, well-maintained lines of credit in their credit history will positively impact a person’s credit score. However, it’s typically not recommended to open several new lines of credit simply to increase your total number of credit accounts.

The number of hard inquiries made to your credit history can also affect your credit score.

What is a credit inquiry and how can it affect my credit score?

There are two kinds of inquiries that can occur on your credit report: hard inquiries and soft inquiries. While both types of credit inquiries enable a third party, such as you or a lender, to view your credit report, only hard inquiries can negatively affect your credit score.

These inquiries occur when a financial institution checks a borrower’s credit in order to decide whether or not to approve them for a loan or line of credit. A hard inquiry may occur when you apply for any of the following: auto loan, student loan, business loan, personal loan, credit card, or a mortgage.

The other type of inquiry that can happen on your credit report is a soft inquiry. These type of inquiries occur whenever a person or company checks a borrower’s credit report as part of a background check. They also occur when a person is pre-approved for a credit card offer or when a person is checking their own credit score. Soft inquiries can occur without your permission, but they will not affect your credit score.

A person’s credit score is usually penalized when several hard inquiries occur within a short period of time. Frequent applications often indicate a borrower who is desperate for credit, and thus, is unlikely to be creditworthy. While one hard inquiry might knock a few points off a credit score (if any), multiple hard inquiries in a short amount of time may cause significant damage.

How can I improve my Credit History or my credit score?

Your credit history and credit score can both be improved over time by making regular on-time payments. Changing spending, repayment, or budgeting behavior is a critical first step to rebuilding credit history. With consistent effort over time, your credit history will reflect a more creditworthy borrower.

References:

  1. “Credit History”. Accessed July 12, 2016 Investopedia.com
  2. “What is a Credit Bureau?” Accessed July 12, 2016 https://www.investopedia.com/terms/c/creditbureau.asp
  3. “What is a credit report?” Accessed July 12, 2016 https://www.investopedia.com/terms/c/creditbureau.asp
  4. “What is my FICO Score?” Accessed July 12, 2016 https://www.myfico.com/crediteducation/whatsinyourscore.aspx
  5. “What is Debt Collection?” Accessed July 12, 2016 https://credit.about.com/od/debtcollection/a/whatcollection.htm
  6. “What is a Credit Score?” Accessed July 12, 2016 https://www.creditkarma.com/article/credit-score-factors

The “Interest rate” is the price of money. In other words, an interest rate is the amount that a lender charges to loan out money—it’s designed to be high enough to cover the risk and fees involved in making a loan. Certain loans have very low risk and thus very low interest rates, like mortgages. Personal loans to people with low credit ratings have more risk, so they tend to have higher rates.

Like any price, sometimes the amount you pay is worth the services you receive, and sometimes it is not.

What is APR?

Interest rates are usually expressed as annual percentage rates (APR). This is the rate you would pay if you borrowed money for an entire year, without paying any of it back.

Let’s look at how it works with a payday loan. You pay $15 to borrow $100 for two weeks—an interest rate of 15%. That’s not the annual percentage rate, though. APR is the interest calculated over a full year.

And, if you don’t repay any part of the loan, the amount owed can become huge. Let’s suppose you take out a payday loan with a 15% fee on the first of the year. You roll it over every two weeks without paying off any of the amount borrowed. Look how quickly the total amount grows: in two months, you owe more money than you borrowed.

 

Initial Amount Borrowed

Fee

Total Amount Owed

Total Interest Owed

January 1, 2016

$100.00

$15.00

$115.00

$15.00

January 14, 2016

 

$17.25

$132.25

$32.25

January 28, 2016

 

$19.84

$152.09

$52.09

February 11, 2016

 

$22.81

 $174.90

$74.90

February 25, 2016

 

$26.24

 $201.14

$101.14

March 10, 2016

 

$30.17

 $231.31

$131.31

March 24, 2016

 

$34.70

 $266.00

$166.00

April 7, 2016

 

$39.90

 $305.90

$205.90

 

What happens is that you are charged interest on outstanding interest. It’s a phenomenon called compound interest, and it is incredibly powerful. Or, as the bankers like to say, those who do not understand compound interest are doomed to pay it.

Buy the numbers

In almost all states, the interest rate on a loan must be quoted as the annual percentage rate (APR) to help you compare the rates being offered by different lenders. The equation used to calculate it is:

(1 + r)t = 1 + APR

It’s not as hard to calculate as it might seem. The r in the equation is the interest rate charged each period, written as a decimal, and t is the number of time periods in a year. So, if the interest rate were 3% a month, you would find the APR to be 42.58%.

The problem is that some lenders charge rates that are well above what they need to make to offset their risk. The payday loan, with 15% interest charged every two weeks, has a huge APR:

(1 + .15)26 = 1 + 36.76

That number, by the way, is 3,676%. Yikes!

Usury is the practice of charging excessive rates of interest. It is outlawed in many states, but not all. Even states that regulate interest set a maximum rate, but some lenders charge less. That’s why it’s pays to shop around.

Now, the compound interest calculation assumes that you can roll the loan over every two weeks without paying off even part of the principal, and that’s not going to happen. One way to reduce the total amount of interest paid is to make regular payments of both principal and interest.

Build a better credit score

The other way to reduce the amount of interest paid is to build a better credit score. That reduces the risk to the lender, which means that the rate charged will be less.

One way to build your credit is to make regular, on-time payments on your debts. If you take out a personal loan, make sure the lender reports on-time payments to credit unions, this can help build (or repair) your credit. 

Understanding interest rates can help you make smarter financial decisions in the long run. It’s information that you can use to improve your financial future.

Why OppLoans

OppLoans is the nation’s leading socially-responsible online lender and one of the fastest-growing organizations in the FinTech space today. Embracing a character-driven approach to modern finance, we emphatically believe all borrowers deserve a dignified alternative to payday lending. Currently rated 5/5 stars on Google and LendingTree, OppLoans is redefining online lending through caring service for our customers.

The Finance Olympics: 4 Steps To Win Gold

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We are 24 days away from the 2016 Summer Olympics!

Right now, athletes all over the world are putting the finishing touches on their routines and mentally preparing for a dip in Rio’s most “interesting” waters. But you can get the same Olympic-level thrill of achievement today. So lace up those running shoes, grab that badminton racket, and practice your synchronized swimming routine, because it’s time to go for the gold in the personal finance Olympics!

1. Choose Your Event

The key to success in athletics and in personal finances is to know your game. Be aware of what you do well and what you don’t. You’re not going to see the U.S. basketball team doing gymnastics, or racehorses giving it their all in Greco-Roman wrestling (though we would pay good money to watch that). It all comes down to choosing a single event (for now) and giving that your best shot.

What do you want to work on this summer? Do you want to save money? Cut your expenses? Reduce your debt?

Start by choosing one financial goal, and then go for the gold in that. Sites and apps like MoneyManagement.org, Mint, and CreditKarma.com can help you assess your financial situation and get started training today with financial planning tools like worksheets, calculators, and more, to attack your specific money goal.

2. Get a Trainer

Let’s face it—we all need help sometimes. Most great athletes wouldn’t be where they are today without the help of a good trainer. Behind every Rocky, there’s a Mickey. Behind every Lance Armstrong there’s… never mind, bad example. There’s no shame in needing help, whether you’re training for the Olympics or trying to get rid of your debt.

If your aren’t sure where to begin, start by seeking out a non-profit credit counseling organization. These agencies offer advice on managing your money, paying off your debts, budgeting, and more. Credit counselors are certified to help people in all sorts of financial situations. Any legitimate credit counseling organization will send you information about the agency and the services they provide without requiring money or information from you in return (read more in Bad Credit Helper: How To Shop for a Credit Counselor). If they request money up front, that’s a red flag.[1]

If you think you need credit counseling assistance, check out this list of reputable agencies provided by the U.S. Trustee Program.

3. Know Your Opponent

If you’re a boxer, then your opponent is the guy swinging at you. If you’re a rugby player, it’s the other team. If you play handball, your opponent is…well we’re not exactly sure. The ball maybe? (We don’t know handball.) But if you’re not reaching your financial goals, your opponent could be your credit score.

Your credit score is a numeric representation of your credit-worthiness. If your score is high (680—720) that’s good! If it’s low (300—629), then your credit score is actually causing you to have higher interest rates on on your credit cards and loans. Scores are important and they do fluctuate with your financial behavior. A high score can be lowered by missed payments, a low score can be improved over time by making regular, on-time payments.

The first step toward improving your credit score is to know what it is. That’s why it’s extremely important to request a free copy of your credit report once a year. Understanding your credit score will enable you to improve it. Having a good credit score will lead to lower rates on loans, and could save you a significant amount of money on larger purchases like a home or car.

You can get a free copy of your credit report at AnnualCreditReport.com.

4. Find the Winning Strategy

Just like an Olympic athlete, you’re going to need to be prepared to work hard to improve your situation. You may not need to start practicing water polo, but you can apply the same discipline to your finances.

Budgeting is going to be key. Just like an Olympian tracks their progress and times their sprints, you’ll also want to keep detailed notes of your income and spending habits. Creating a budget is as simple as writing down all of your monthly expenses and then seeing how much money you have left after they’re all paid. This leftover amount will be your disposable income, which you can choose to spend, save, or invest. A credit counselor can also help with creating a solid plan for your monthly and long-term budget.

Creating a budget and sticking to it will win you the bronze. Using that same budget to pay off all of your debts will get you the silver medal. And if you create a good financial plan, stick to it, pay off all of your debts, and then start saving money, well friend, you’ve just won the gold medal of personal finance.

OppLoans

In the race to achieve financial success, you’ll want to make use of every tool and resource at your disposal. Choosing a goal, working with financial professionals, checking your credit score and budgeting are all essentials. But what if the solution you need is simply money now?

OppLoans is a modern finance company that provides safe, affordable, and quick personal loans. Our application process is fast and easy, our rates are up to 125% lower than other lenders, and you can get your cash as soon as the next business day. Apply for the installment loan that’s right for you today by clicking “Apply Now” below or calling (800) 990-9130 today.

References:

[1] “Choosing a Credit Counselor” Consumer.ftc.gov Accessed June 29, 2016.

They say everything’s bigger in Texas. If they’re referring to the costs and risks associated with auto title loans, they aren’t wrong.

Most people have probably heard about the predatory nature of payday loans and title loans. These dangerous products take advantage of consumers through extremely high interest rates (averaging 300% APR[1]) and unreasonable terms. By this point, we should know enough to stay away from these costly loans. Unfortunately, there are many who wrongly believe these are their only options in a time of need.

Those with bad credit, lower income, or lack of financial know-how are falling into the traps of predatory lenders every day. For these consumers, an affordable and safe personal loan seems out of reach. Banks and credit unions typically have high standards for issuing loans, and those with low credit scores are usually left behind. This leaves people wondering where they can get the money necessary for rent, unexpected repairs, or emergencies. And if they have a checking account or own a car, then they may be tempted to pursue a predatory loan.

Due to the high likelihood of borrowers getting stuck in a cycle of debt, some states now enforce laws to prevent such practices. Some cap the amount of interest a lender can charge, while others may set a maximum loan amount or minimum repayment period. But if you live in Texas (or “The Wild West of Auto Title Lending”, as we like to call it) you’ll find that there are little-to-no regulations keeping these dangerous loans in check. And even the regulations that do exist come with loopholes that allow these predatory lenders to basically do whatever they want—at your expense. Read our “Texas Payday Loans: Subprime Report” for more details in the situation in Texas.

Due to the high likelihood of borrowers getting stuck in a cycle of debt, some states now enforce laws to prevent such practices. Some cap the amount of interest a lender can charge, while others may set a maximum loan amount or minimum repayment period. But if you live in Texas you’ll find that there are little-to-no regulations keeping these dangerous loans in check.

Why are title loans so dangerous?

In order to understand how dire the situation in Texas is, you’ll first want to have a firm understanding of exactly what a title loan is and how it works. A title loan is a short-term, high-cost, secured loan that uses your vehicle as collateral. The process for getting one is fairly simple if you own a car. You’ll be required to offer your vehicle title to the lender in exchange for the loan. The lender will then assess your car, truck, SUV, or motorcycle and offer you cash based on a fraction of what the vehicle is worth. Usually borrowers receive about 25-50% of the value of their vehicle, and the loan is due back within about 30 days. Because of the short repayment period and high rates and fees, it’s not out of the question to see triple-digit APRs for title loans.[2]

This is dangerous because repaying a large amount of money in only 30 days can be difficult. And if you aren’t able to pay off the loan you may encounter one of two things. First, the lender may choose to extend the loan to give you more time to pay, but will charge you additional fees and interest to do so. The second possibility is that the lender will take your vehicle away and sell it through a process called reposession.

Title loans are dangerous no matter where you live. Not only are you risking the loss of your vehicle, but you’ll undoubtedly be repaying a lot more than you initially borrowed. This is why many states have chosen to enforce laws that restrict or regulate auto title loans. So why is Texas so far behind?

What makes Texas different?

The law in Texas says that title lenders can’t charge more than 10% interest. That would be great—if that’s actually what happened. The law also states that there’s no cap on the amount of additional fees lenders can charge.[3] In Texas you’ll likely end up paying about $23 for every $100 borrowed. These high fees combined with the interest rate mean unsuspecting borrowers may be stuck with an APR (Annual Percentage Rate) upwards of 500%.[4] So how does this happen despite the 10% law? Good question.

Texas auto title lenders are actively exploiting a loophole in order to charge whatever they want. Title lenders are registering themselves as Credit Access Businesses, which is basically a middle man between the consumer and the company offering the loan. Sadly, there are no regulations on how much CABs can charge. Once a title lender is registered as one, they can charge whatever interest and fees they want as long as the third party that’s providing the loan only charges 10%.[3] Needless to say, this is pretty shady.

Auto title and payday lending is a $4 billion-a-year industry in Texas that preys on families and individuals struggling to get by.[5] They’re filling their pockets by hurting the Texas residents that need help the most. Within the first three quarters of 2014, payday and title lenders had repossessed over 32,100 vehicles from Texas residents.[6]

Auto title and payday lending is a $4 billion-a-year industry in Texas that preys on families and individuals struggling to get by.

Ann Baddour, Director of the Fair Financial Services Program for Texas Appleseed (an Austin group that advocates for those in poverty) said it best in a 2014 New York Times article: “Losing a vehicle, for a family that’s living very close financially to the edge, it’s devastating to people. They can’t get to work; they can’t take the kids to school; they can’t go to doctor’s appointments.”[5]

Texas is one of a handful of states where lenders can get away with this behavior. Title loans there cost borrowers about twice as much as they do in other states. These loans prey on the hardworking, struggling individuals and families throughout the state. There needs to be more protection for these people from the greedy and destructive nature of these companies.

This lack of care and protection for Texas residents has caught the eye of the Consumer Financial Protection Bureau, who said as of 2015 that they are on the edge of new regulations that would cut into the profits of the $46 billion title loan and payday loan industry.[5] This will undoubtedly come as good news for the hardworking people of Texas.

How to stay safe

But what can you do in the meantime to make sure you’re equipped to spot and avoid these dangerous loan products? Well the first step is knowing what to watch out for. With title loans it’s pretty simple: If the lender is asking for your title as collateral for a short-term, cash loan, then you should consider other options.

Another thing to watch out for—whether it’s a title or payday loan—would be deceptive behavior. Make sure any lender you’re dealing with discloses the actual interest rate in terms of APR. This is the amount of interest you would pay if you had the loan for an entire calendar year. It’s a clearer indication of how much you’re actually going to pay for borrowing. It’s different than the monthly interest rate because APR includes any and all additional fees and charges. If the lender is focusing on the monthly interest rate, it may be because they don’t want to show you the APR, as it will be significantly higher.

It all comes down to reading the fine print. Even if you think the lender is legitimate, you always need to read the details and know the terms of the loan. Make the lender explain every single fee, additional charge, and the interest rate. Don’t ever sign anything without knowing the monthly interest, the APR, the length of the repayment term, and all the additional fees—No matter how much they rush you or pressure you. And if you’re dealing with a predatory lender, they most certainly will.

If you want to take it a step further from just protecting yourself from the perils of predatory lenders, there are actions you can take. While there are certain cities in Texas that have passed regulations to curb this dangerous practice, there are still many that have not. You can make a difference by reaching out to your local and federal legislators to tell them how important and pressing this issue is. Find the contact info you need at Texas Legislature Online. Contact your senators, legislators, and other representatives. It’s important that they see how the lack of rules and regulations for these companies affect the people of Texas. (If you have more questions or concerns, or you’d like to learn more about lending in Texas, contact the Texas Fair Lending Alliance.)

One alternative to dangerous title loans, is a safe personal installment loan from OppLoans. Our unsecured loans come with longer terms, lower rates and you’ll never be in danger of losing your car. You can get a quick decision today by clicking “Apply Online” below.

One alternative to dangerous title loans, is a safe personal installment loan from OppLoans.

Why OppLoans

OppLoans is the nation’s leading socially-responsible online lender and one of the fastest-growing organizations in the FinTech space today. Embracing a character-driven approach to modern finance, we emphatically believe all borrowers deserve a dignified alternative to payday lending. Currently rated 5/5 stars on Google and LendingTree, OppLoans is redefining online lending through caring service for our customers.

References

  1. Cafiero Giusti, Autumn. “The consumer perils of a car title loan.” BankRate.com. October 29, 2013. Accessed May 26, 2016. BankRate.com
  2. Neiger, Christopher. “Why car title loans are a bad idea.” Cnn.com. October 8, 2008. Accessed May 26, 2016. CNN.com
  3. “Car-Title Loan Regulation.” ConsumerFed.org. December, 2012. Accessed May 26, 2016. ConsumerFed.org
  4. “FAQs” Texas Fair Lending Alliance. 2013. Accessed May 26, 2016. TexasFairLending.org
  5. Maclaggan, Corrie. “Thousands in Texas Lose Cars Amid Calls for Loan Restrictions” The New York Times. August 23, 2014. Accessed May 27, 2016. NYTimes.com
  6. Berard, Yamil. “The Debt Trap: Texans taken for a ride by auto-title loans” Star-Telegram. February 14, 2015. Accessed May 27, 2016. Star-Telegram.com
  7. Texas Payday Loans: Subprime Report

In essence, debt consolidation simply means combining several different outstanding debts into one lump sum. It can make people’s lives a lot easier to only have one loan payment per month, rather than several.

People may choose to consolidate various kinds of debts including student loans, credit cards, medical bills, and personal loans. There are also several methods for consolidating your debts including taking out a large personal loan to cover multiple debts, and then slowly pay off that new loan over time.

Methods of Consolidation

Debt consolidation isn’t a one-size-fits-all solution. Here are the different types of debt consolidation that could be right for you.

Debt Consolidation Loans

The standard option would be a debt consolidation loan. This means taking out one large loan to cover multiple smaller debts. While this can be a helpful, it only makes real financial sense if you can find a loan with a better interest rate and more manageable payments. Plus, getting a debt consolidation loan with a longer term than your current debts can mean that you’ll pay more in total interest over time.

Debt Management Plans

A Debt Management Plan (DMP) is a method for tackling debt that’s used by credit counselors. These are non-profit agencies that work to help people better manage their personal finances. You can only start a DMP if it is recommended as a plan of action by your credit counselor, and they won’t recommend you for one if something simpler like better budgeting will help you manage your debt load.  Under a DMP, your credit counselor will work with your creditors to secure more manageable terms on your debt, such as lower interest rates or longer repayment periods. Once all the creditors have signed off on the plan and the DMP is in place, you make one payment to the credit counseling agency and they split that among your creditors. While the DMP is in effect, you are restricted from taking on any new debts. Using a DMP can affect your credit score negatively, but once you complete the plan (which could take up to five years depending on your situation) you’ll be debt free.[1]

Debt Settlement

Debt settlement is another form of consolidation. This option, however, can be much riskier than the previous two. Debt settlement companies attempt to lower your principal with your creditors, so the total you owe is more manageable. Unfortunately, some creditors refuse to work with debt settlement companies because they frequently have suspicious reputations. Additionally, this option can negatively impact your credit score. If you do choose to work with a debt settlement company, don’t pay any fees until the debts are settled, and make sure to get in writing the total you’ll owe, the fees they’re charging, and how long it will take to repay.

All-American Debt

While debt consolidation can be a helpful financial tool, it’s only a remedy to a symptom rather than a solution to the bigger problem—Americans are carrying unmanageable amounts of debt.

According to a 2015 debt study by NerdWallet, the average American household carries $130,922 in debt, of which $15,762 is credit card debt.[2] This is an astounding amount of debt. And that’s the average household. Much of this debt is made up of student loans and mortgages. Both of these are considered to be good debts as they could potentially end up strengthening your finances over time. And depending on where you live, you probably need a car, and thus need an auto loan. These kinds of debts are expected, and even helpful, as you may not have been able to buy your car or attend college without a loan.

It’s not the auto loans, mortgages, or student loans that are concerning. The glaring issue here is credit card debt. Based on the amount of credit card debt that the average American carries, it’s clear that many people don’t have a firm grasp of their finances.

Credit cards typically come with high interest rates, and there’s no added financial benefit of having credit card debt like there is with a mortgage or a student loan. Yet the average American carries a running balance on their card.

The Root of the Problem

A lack of financial literacy is driving the debt problem in America.

Economists surveyed Americans over the age of 50, and asked them three questions about things like interest and inflation. Only a third of the participants answered all three questions correctly. They also ran a more in-depth survey of high school students and the results were not surprising. 40 percent of American students surveyed had scores that put them in the lowest level of financial literacy.[3]

Credit card debt research has also discovered that those who are not as financially literate are much more likely to do things that end up leading to more fees and charges, such as only making minimum payments or going over their credit limit. There’s even a study that suggests that one third of the fees and charges paid by those who are less financially literate are directly due to a lack of knowledge on the subject. Basically, if they knew more about debt and finance, they would have saved money.

It also appears that financial literacy is not as common in low-income areas, and those with less education are more likely to make financial missteps. Many financial institutions are taking advantage of that fact. Payday, pawn shop, and title lenders are a few examples. These types of lenders are notoriously predatory, and rely on borrowers’ lack of financial know-how in order to make more money.

Payday, pawnshop and title lenders rely on borrowers’ lack of financial know-how in order to make more money.

If more of the American population was financially savvy the total personal debt would be significantly less. Those who are financially literate are planning for their future through retirement accounts, investments, and mortgages. They’re also able to manage credit cards better than those with little financial knowledge.

The Financial Industry Regulatory Authority’s Investor Education Foundation released data showing that requiring personal finance courses for high school students results in better average credit scores and lower rates of debt delinquency.[4] However, the number of states that require students to take an economics class has been dropping over the past two years. Only 17 states require students to take a course in personal finance.

Only 17 states require students to take a course in personal finance.

We need more financial education for children in school. Schools often require kids to take home economics so they know some basic life skills, but we’re too frequently leaving out one of the most critical skills necessary to leading a successful life: money management. If children were required to learn basic money skills throughout grade school and high school they’d be less likely to take on unmanageable amounts of debt.

While consolidation is a possible solution to individual debt problems, it’s only needed in the first place due to a general lack of financial awareness. If borrowers educate themselves and better manage their money and debt, they won’t be tempted to take on payday loans, title loans, or massive amounts of credit card debt.

Why OppLoans

OppLoans is the nation’s leading socially-responsible online lender and one of the fastest-growing organizations in the FinTech space today. Embracing a character-driven approach to modern finance, we emphatically believe all borrowers deserve a dignified alternative to payday lending. Currently rated 5/5 stars on Google and LendingTree, OppLoans is redefining online lending through caring service for our customers.


References

  • [1] Fay, Bill “What is Debt Consolidation?” Retrieved June 22, 2016 Debt.org
  • [2] Issa, Erin “2015 American Household Credit Card Debt Study” Retrieved June 22, 2016 NerdWallet.com
  • [3] Cooper, Marianne “Why Financial Literacy Will Not Save America’s Finances” Retrieved June 22, 2016 TheAtlantic.com
  • [4] Schwartz, Shelly “US Schools Get Failing Grade for Financial Literacy Education” Retrieved June 22, 2016 CNBC.com

Get in Shape: Consolidate! (3 of 3)

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Part III: Don’t Stop Believing

Hold onto that debt-free feeling…

The longer someone waits to start making healthy choices, the worse the damage to their body is. And it’s true with finances as well: The longer you delay taking action on your debt, the more you’ll hurt your long-term financial future.

In Part I of this series, we laid out making a budget. In Part II, we discussed reducing your expenses and increasing your income. Now we’re going to talk about the hardest part: not giving up.

Pace Yourself

Sticking to a plan to pay down your debt quickly is going to be much harder than actually making the plan. In this way, it’s really no different than going the gym or sticking to a diet. There’s going to be a lot of stuff that you want to buy that you won’t be able to. Little pleasures, like that extra cup of Starbucks, that movie ticket, or that Friday night dinner out at your favorite restaurant are going to be set aside in the name of getting out of debt.

But just like diet “cheat” days, there are ways to enjoy some of those little pleasures on the cheap, too! Lots of movie theaters have a discount night, often on a Monday or a Tuesday. If you just wait a few days to see the hot new Marvel movie, you can save yourself a lot of green. (And it goes without saying that you should skip the concessions; $7.00 for a small soda is not a wise investment.) You can also look for specials at your favorite restaurant, and limit that extra cup of Starbucks to one a week.

Some people are able to live on basically nothing, just like some people are able to basically live at the gym. Odds are, you’re probably not one of these people—and you shouldn’t try to force yourself to be. Know your limits and pace yourself; that way, you’re much more likely to succeed.

Keep Your Eyes on the Prize

Being in debt stinks, there’s no two ways about it. Constantly fretting about whether or not you’re going to be able to afford your bills will take a heavy toll on your nerves. And a lot of the ways that people deal with stress are not healthy: they eat junk food or they smoke or they drink too much. That leaves you feeling worse and it ends up eating into money that could be put to better use.

Getting out of debt is going to open up a world of new possibilities. It will improve your credit score, which will leave you with better lending options in the future. It will relieve the burden of constant worrying, which will make it easier to make healthy lifestyle choices. It will also do wonders for your self-esteem, which can make you productive at work, more agreeable in your personal relationships, and just generally make you happier.

In short: getting out of debt is worth the effort. So when you get a second, write yourself a letter that details exactly what living with burdensome debt is like, and all the ways it’s driving you crazy. Keep this letter by your bedside table—or even carry it with you—and read it once in a while to remind yourself what you’re getting away from.

It’s all too easy to get discouraged and go back to your old habits. (Anybody who’s tried to lose weight and knows this.) More importantly, it’s way too easy to forget just how bad things used to be. Take steps to remind yourself. It’ll help you stay the course.

Leave Room for Savings

Lastly, while getting out of debt is super important, so is building up your savings. Lacking a rainy-day fund is what leads many people to taking out burdensome loans in the first place. Unforeseen expenses arise—like car repairs or a medical bill—and they don’t have the funds to pay for it. And people with poor credit scores in particular end up taking out predatory payday loans, bad credit loans, or title loans in order to afford those costs. This doesn’t just trap them in debt, it can lead to a cycle of debt, which is even worse.

At some point while you’re paying down your debt, you’re probably going to have a surprise expense. Life is funny that way. (Not ha-ha funny, just brutally unfair funny…which is to say, not funny at all.) And that expense could easily knock you off your game. It could undo all this great progress you’ve been making. Not only will it put you further into debt, but it could make you give up on paying down the debt you already have. It’ll cost you money now, and it’ll cost you money later.

So make sure to make room in your budget for saving! Having a savings, even if it’s just a couple hundred dollars in an envelope, is way better than having nothing at all. Our advice is to shoot for an even $1,000 and go from there. This is one way where getting your finances in shape can actually be easier than getting your body in shape. Trust us, if people could build up a $1,000 calorie savings for when that McDonald’s craving hits, they would do it in a heartbeat. You won’t regret it.

Consolidate!

Now this is where things get really interesting: You’ve taught yourself some safe financial practices and changed the way you spend (and save). Good for you! So how can you really take yourself from in-shape to a financial Olympian? Or how about just debt-free?

The answer may be to take out a “Debt Consolidation Loan.”

Think of it like “Cross Fit” for your finances, helping you shed those excess debts and tighten your credit score. Plus, debt consolidation doesn’t mean buying a DVD where a large sweaty man yells at you for an hour.

With debt consolidation, you take out one large loan—preferably at a much lower interest rate—to pay off all your smaller loans, credit cards and other debts. Not only does this lower the number of payments you have to keep track of, but scoring a lower interest rate could save you even more money over time. Consolidating your debt can be a big step towards getting your debt in shape. By taking out one big loan to pay off all your smaller loans, cards, and other debts, you can reduce not only how many payments you make each month but how much you’re actually paying. Plus, getting a loan with a lower annual percentage rate (APR) can potentially save you thousands.

But just like exercising more isn’t the only part of getting in shape, debt consolidation isn’t the only step you should take in order to achieve financial stability. Once you’ve consolidated your debt into one place, what you should be doing is trying to pay down that debt as fast as possible. The longer someone waits to start making healthy choices, the worse the damage to their body is. And it’s true with finances as well: The longer you wait to take further action on your debt, the more damage you’ll do to your long-term financial future.

To get started on a lower-interest debt consolidation loan today, click “Apply Online” below. It’s easy. You won’t even break a sweat!