How Do Variable Interest Rates Work?

Variable rates can go up or down based on the performance of a “benchmark” rate, and this movement can mean higher or lower costs.

Taking out a personal loan can often mean getting bombarded by financial jargon. Here at the OppLoans Financial Sense Blog, it’s our goal to demystify a lot of these terms and break them down into simple language that a layperson can understand. So if you’ve ever wondered what exactly a “variable interest rate” is, you’ve come to exactly the right place!


What is a variable interest rate?

When it comes to borrowing money with a personal loan or a credit card, there are two kinds of interest rates that you’re going to encounter: fixed and variable.

“A variable interest rate is an interest rate on a loan or security that moves up and down over time,” explained Joe Bailey, Operations Manager at My Trading Skills (@MyTradingSkills). “It owes its fluctuation to being based on an underlying benchmark rate/index that changes from time to time.”

In contrast, he continued, a fixed interest rate does not fluctuate but remains steady throughout the life of the product.

When you’re borrowing, lending, or investing money, its all about managing your risk. Do you want smaller rewards that are much safer to achieve, or do you want to shoot for greater rewards that come with a higher likelihood of the whole thing going south?

So it is with variable interest rates: Sure, you can see lower rates, but you risk getting stuck with higher ones.

“The advantage here is if the underlying interest rate/index declines, so will the interest you will pay on your loan or security,” said Bailey. “Conversely, if this underlying interest rate/index goes up, you’ll end up paying higher interest on your loan facility. This means you will have to pay more money back to your lender.”

Here’s an example.

How do variable rates determine whether they should move up or down? By tying themselves to another interest rate and following its movements.

“In laymen’s terms, variable interest rate means an interest rate which is based on a benchmark interest rate or an index or simply market rates,” said accountant and blogger Rishit Shah of TallySchool.

Shah offered the following example to illustrate how this relationship works.

“You take a loan at 8 percent variable interest rate based on LIBOR (London Interbank Offered Rate). Now, if the LIBOR goes down, your interest rate also goes down. Similarly, if the LIBOR goes up, your interest rate also goes up.

“Therefore, it is called a variable interest rate because it varies or changes on the basis of some other benchmark rate, which in our example is LIBOR.”

Shah also clarified that variable rates are also sometimes referred to as “floating” or “adjustable” interest rates.

Benchmark rates: The prime rate and LIBOR.

In Shah’s example, he used a loan that was tied to the London Interbank Offered Rate or LIBOR rate. This is the rate that banks use to lend money to each other, and it is often used as a benchmark rate in foreign transactions.

For U.S. borrowers, on the other hand, a different rate is often used. If you live in the U.S. and are applying for a loan, that loan will likely be tied to the “prime rate” which is the rate that banks use when lending to their very best, most reliable customers.

“Variable interest rates are tied to the prime rate which is controlled by the federal reserve,” said Levi Sanchez CFP®, BFA™, founder of Millennial Wealth, LLC (@millennialwlth).

“The federal reserve controls monetary supply and therefore can influence interest rates. In a rising interest rate environment, variable interest rates used by consumers are also increasing. In a lower interest rate environment, the interest rates for consumers would, in turn, be lower.”

If you have a variable interest rate tied to the prime rate, it is likely set at a certain percentage above that benchmark. For instance: If your variable rate is five percentage points higher than the prime rate, a change in the prime rate from six percent to seven percent would cause your variable rate to change from 11 to 12 percent.

The pros and cons of variable interest rates.

Like most other things in life, both variable and fixed interest rates come with their respective pros and their cons. The difference is that those pros and cons will vary depending on larger economic forces, as variable rates are better in some market conditions than in others.

“If the benchmark interest rate goes down, your interest payments also go down and you have to pay less money in interest,” said Shah. But the reverse is also true. “You may have to pay significantly higher interest payments if the benchmark rate goes up. In other words, you won’t get a peace of mind since the rates are always fluctuating,” he added.

And for longer-term loans, Shah advised that the odds of your rate going up are much higher: “If you expect to keep a loan for a long time, the chances are greater that the interest rate might go up as, gradually, the economy grows and prices go up in the long run.”

Shah also laid out two additional benefits beyond the prospect of lower interest rates: Better access to credit and fewer penalties for early repayment.

“If your credit is not good enough, you can get a loan on a variable interest rate since it is based on a benchmark.” he said, adding that “in a variable interest rate mortgage, you don’t need to worry about penalties if you want to complete your mortgage payments early or switch the lender.”

However, access to credit always comes with a flipside: Just because you can take out a loan doesn’t mean you should.

Just like how borrowers with poor credit would do their best to avoid short-term no credit check loans (like payday loans, cash advances, and title loans), a variable interest rate available to someone with poor credit could be a sign of a predatory lender.

Watch out for low introductory rates.

Financial Analyst Trish Tetreault of FitSmallBusiness.com (@FitSmallBiz) explained the dangers that can come with the low “introductory offer” rates that come with many variable rate loans, especially for borrowers who have poor credit:

“In general, a variable interest rate will begin with a lower introductory rate and will rise and fall based on a price indicator. Often the low introductory rate seems manageable, but the gradual increase in rate over the course of your loan can result in an interest rate and payments that quickly become unaffordable.”

“Borrowers with less than perfect credit are often offered loans with variable interest rates and later find the rate increases to be unmanageable.  As such, it’s crucial to understand when your rate may increase, and whether or not there are caps on the amount the rate can increase.

If you have recently taken out a bad credit loan with an introductory rate, here is Tetreault’s advice:

“If your introductory rate is fixed for a certain period of time, use this time to improve your credit score.  As your credit score improves you’ll be able to qualify for loans that offer better rates and terms, and you may be able to refinance your way out of your variable rate loan.”

Know before you borrow.

If you want to take advantage of a variable interest rate on a personal installment loan, an auto loan, or a mortgage, you’re going to need to do some research first. The more knowledge you have, the more confident you can be in your decision, and the less likely you are to be taken advantage of and end up in a predatory cycle of debt.

To learn more about the ins and outs of personal finance, check out these related posts and articles from OppLoans:

Do you have a  personal finance question you’d like us to answer? Let us know! You can find us on Facebook and Twitter.

Visit OppLoans on YouTube | Facebook | Twitter | LinkedIN | Instagram


Contributors

Joe Bailey is the Operations Manager at My Trading Skills (@MyTradingSkills), a financial trading courses provider. His experience includes web development, UX and conversion rate optimization for both B2B and B2C.
Levi Sanchez is a CERTIFIED FINANCIAL PLANNER™, BEHAVIORAL FINANCIAL ADVISOR™ and Founder of Millennial Wealth, LLC (@millennialwlth), a fee-only financial planning firm for young professionals and tech industry employees. Levi’s been quoted in the New York Times, Business Insider, Forbes, and is a frequent contributor to Investopedia. He is an avid sports fan, personal finance and investing geek, and enjoys a great TV show or movie. His mission is to help educate his generation about better money habits and provide financial planning services to those who want to start planning for their future today!
Rishit Shah is a blogger for TallySchool and currently is in CA Final level from India, the equivalent of CPA Final level in the US. He has been featured on Accounting Today and US Chamber of Commerce recently. He is interested in finance, accounting, and taxation. In his free time, he loves to write poetry.
Trish Tetreault is a Financial Analyst at FitSmallBusiness.com (@FitSmallBiz).

The Broke Person’s Guide to Hanging With Friends

Don’t let your friends’ expensive tastes be the reason you rack up a pile of high-interest credit card debt—follow these expert tips instead!

You know what’s great? Friendship.

But occasionally friendship costs money. And if you have lesser financial means than your friends, things can get awkward fast.

Just imagine: one week your friends tell you that they’ve decided to go on a caviar bar crawl. You could maybe afford a single small tin, but they’ll be expecting you to try multiple tins at each new location! So you make up an excuse about having to stay home and wash your hair.

Next week they invite you out again. This time they’re planning to have a Mazzerati demolition derby and each of you will be expected to provide your own car. You OBVIOUSLY can’t afford this, so you tell them you’re still washing your hair and won’t be able to join them.

Week three rolls around and now they want you to join them in a game of space polo. You heard them correctly. They’re going to put a bunch of horses in space suits and then wear space suits of their own and ride the horses in space while trying to score goals by knocking a ball around zero gravity. Not only does this sound like animal abuse, but you definitely can’t afford it. You tell them you’re still washing your hair but now they’re just going to stop inviting you to hang out. Who wants a friend with such dirty hair after all?

So what can you do if you want to keep your friends but you’re on a tight budget? Short of taking out a personal loan to afford your social life, here’s what you can do.


Suggest the activities.

If you’re the kind of person who waits for someone else to suggest the group activity, maybe try being a slightly different kind of person. Just in that regard. You’re doing amazing otherwise!

“Suggest less expensive activities,” advised Leslie H. Tayne Esq. (@LeslieHTayneEsq), Founder and Head Attorney at Tayne Law Group (@taynelawgroup). “If your friends have a tendency to be a little lavish, consider suggesting less expensive or free activities. Days in the park, hikes, and bike rides are fun free things to do, especially in the nice weather. Find more reasonably priced restaurants around town and suggest those as alternatives to the pricier places.”

Kelan Kline of The Savvy Couple (@TheSavvyCouple) echoed the benefits of affordable physical and outdoor activities: “One of the best ways to hang with your friends and not break the budget is to choose an activity other than going bar hopping on the weekends. These tend to add up very quickly and before you know it you have dropped $50 on alcohol and a bad headache the next day.

“Instead, find some similar interests when it comes to physical activity. I’m almost 30 years old and still play basketball, racquetball, floor hockey, and ultimate frisbee with my friends on a regular basis. These activities are essentially free besides the gym membership. A good game night, campfire, or even a camping weekend can be very cheap entertainment with your friends.”

Have your friends over.

You can go one step further than just suggesting activities. You can bring the activities into your home! Hosting is a great way to offer something to your friends at little additional cost and when you’re done, you’re already home!

“Host at home,” suggested Holly Wolf, Director of Customer Engagement for SOLO Laboratories (@SOLO_labs). “I used this last week on vacation. Instead of going out to eat, we grilled lobsters at our condo. I made a salad, roasted asparagus, and offered refreshing libations. The dinner cost about $60 for four people. That’s a fraction of what dinner (and not a lobster dinner) would have cost in a restaurant. You can make a roasted chicken, salad, and baked potato for four people for about $12.”

And if you ask friends to bring some food and drinks, you can save even more!

Eat at home first.

Even if you will be going out with your friends, you can take some steps to guard against spending more than you know you should.

“Eat at home first,” recommended Success Mindset Expert Belinda Ginter (@unstoppablebelinda_). “If your friend group is going out to a nice restaurant for dinner or a pub for snacks and you really can’t afford it than eat first. Fill up, then you only need to chip in a few dollars to snack when you’re at the restaurant. This takes the pressure off. And if everyone is ordering an entree you can get away with an appetizer to be more cost-effective.”

Take advantage of general savings strategies.

General savings methods will also be helpful when it comes to hanging with friends on a budget. You just may have to do some research beforehand.

“Pretty much anything and everything is online somewhere, as are deals, sales, and coupons,” explained real estate professional Chantay Bridges. “Once you know what the plans are, do a little homework and find a way to do the same thing at a discount price. Whether it’s obtaining your tickets from a site that provides AAA, employee, or any other discounts. The trick is to find the same activity but do it for less.

“Discover ‘buy one get one free’ deals. Yes, they are out there. Whenever applicable, do buy one, get one free deal. You and a friend could split the cost of the one you buy or take turns getting the item that is free. Regardless of how you do it, your costs will be considerably less. If you’re going to an amusement park, Google ‘buy one get one free’ to wherever you are going and see what comes up. Don’t forget specials such as Legoland, when kids can go free with a paying adult pass. Be creative in your search and you’ll be surprised at all of the deals available at your fingertips.”

Be open with your friends.

At the end of the day, if these friends are really your friends, they should understand and be sensitive to your budget needs. It can be tough to be open about financial issues, but if you do, it can save you a lot of headaches and make your friendships stronger.

“Most of us have had the group of friends who always want to ‘just split it evenly because it’s easier,” empathized Tayne. “If you’re the one on a budget, those words may make your stomach drop. Stand up for yourself in those situations. If you only had a salad and a water, you shouldn’t have to pay for your friend’s filet mignon and Cosmo. It can be an uncomfortable conversation, but simply remind your friends that you had less and feel it’s only fair.

“It’s a good idea, then, to bring cash when you go out, because that can make paying for your portion of the bill simpler. Additionally, using cash will allow you to have a visual representation of how much you’ve spent, which can help keep you on track as well.

“It can be uncomfortable to talk to your friends about your financial situation. You certainly don’t have to give all the details of your finances, but if your friends continue to try to get you to do things you can’t afford, you may need to spell it out for them a little more. If they’re truly your friends, they’ll value spending time with you more than any specific activity.”

You may never be able to afford space polo. But when your friends understand your situation, they should be sympathetic enough to do some cheaper activities with you next time. And if they aren’t, maybe you need to start making some new friends. The last thing you want is a weekly game of space polo to leave you relying on no credit check loans, payday loans, and cash advances to get by.

To read more about saving money on everyday expenses, check out these other posts and articles from OppLoans:

Do you have a  personal finance question you’d like us to answer? Let us know! You can find us on Facebook and Twitter.

Visit OppLoans on YouTube | Facebook | Twitter | LinkedIN | Instagram


Contributors

Chantay Bridges is America’s leading mogul, who utilizes her gifts and abilities in outreach to her community and world around her. She is an exceptional Realtor, (translation: the one you want to hire), Author, Speaker and a keen philanthropist with a strong business acumen.
Belinda Ginter (@unstoppablebelinda_) is an industry leader in Emotional Kinesiology, Success coaching & Mindset. She is a  trained emotional Kinesiologist certified in BET and Mindset Expert with over 5 years of experience with 6,000 plus clinical coaching hours, working with thousands of clients worldwide.
Kelan and Brittany Kline aka The Savvy Couple are two thriving millennials that are daring to live differently. They started their personal finance blog in September 2016 to help others get money $avvy so they can live a frugal and free lifestyle. Brittany is a full-time 4th-grade teacher and Kelan runs The Savvy Couple full-time and works as a digital marketer. You can follow them here: FacebookTwitterPinterest, and Instagram.
Leslie H. Tayne, Esq. (@LeslieHTayneEsq) has nearly 20 years’ experience in the practice area of consumer and business financial debt-related services. Leslie is the founder and head attorney at Tayne Law Group (@taynelawgroup), which specializes in debt relief.
Holly Wolf is an executive with over 30 years of experience in banking and healthcare.

Is It Time for You to Buy a Home?

Buying a home is a major financial decision, which means you’ll want to do plenty of research, saving, and preparation before taking the plunge.

You’ll have to make some big decisions during your life. Two of the biggest decisions will likely be what career you choose to pursue, if any, and whether and when you plan to have children.

Those two choices will have a huge impact on almost every other aspect of your life, like deciding whether or not to buy a house. Coincidentally, deciding whether it’s time to buy a house is what this article is about. Wow, how convenient!

Whether you need a new place to live now or are anticipating needing a new place to live in the future, you may start wondering whether it’s time to buy a house. And if you are wondering, you’ve come to the right place.

If you aren’t, consider reading the article anyway. You wouldn’t want our hard work and the thoughtful insights from our contributors to go to waste, would you?


How long would you be staying there?

You can’t plan every aspect of your life. You might think you’re going to live in one home or even one city or even one country for the rest of your life, but life can change suddenly. Still, you’re going to want to be pretty certain about to settling down before you consider buying a house.

“My number one piece of advice is to consider how long you are likely to stay in the property,” recommended James McGrath, co-founder of the NYC real estate brokerage Yoreevo (@yoreevo). “If there’s a decent chance it’s going to be less than five years, they shouldn’t buy.

“The first reason is between the search and actually executing the transaction, buying is a long process. But that’s only half of it. When the time comes to sell, you have to go through it all over again. Like all other costs, the longer you stay in the property, the less significant they become.

“That leads to the second and more important reason which is the actual transaction costs. While every market will be different due to local taxes and other costs, in NYC, most owners will pay a total of around 10 percent to buy and then sell a property. That’s a huge amount of money and if you don’t give the property enough time to appreciate you’ll lose money, even if it appreciates slightly.

“Also related to this: One of the biggest benefits of owning a home is the ability to exclude capital gains on the sale of your primary residence. The longer you own your home, the more likely it is and the more you will take advantage of that.”

Are your finances in a good place?

You might have to get your financial house in order before you look into buying an actual home. And while that won’t necessarily be a fun or a quick process, it may be a necessary one.

“Do you have your finances in order?” asked Ali Wenzke (@AliWenzke). “Check your FICO score and consider the stability of your job or other income streams. Budget 20 percent for your down payment plus additional money for closing costs, home inspections, and attorney fees.

“Also, realize that owning and maintaining a home can be expensive, so budget for property taxes, utilities, and general maintenance costs.”

Can you qualify for a mortgage?

Even if your finances are manageable month to month, if you can’t qualify for a mortgage and afford the accompanying costs, it’s not the time to get a house.

“All other analysis regarding the feasibility of a property purchase is truly futile until a person has been pre-qualified for the acceptance of a mortgage,” warned Ron Humes, VP of Operations Southeast Region for Post Modern Marketing (@PostMM).

“The lender will review a prospect’s credit scores, debt to earning (DTE) income ratios, and financial portfolio to determine if they are a good risk for a loan and how much they may borrow. This should be the very first consideration in the thought process, and no other time should be spent until they know they can qualify for a purchase if they choose.

“The next important consideration in the decision for a purchase is the minimal capital needed to complete the transaction. The money needed for the down payment to secure a mortgage is three percent to five percent depending on the loan type.

“There is a VA product available to veterans that still allows no down payment, but one must also consider the closing costs and prepaid items. The prepaid items are the taxes and insurance that will be collected at the closing. The closing costs are the fees charged by the lender, appraiser, and the closing attorney in the processing and completion of the loan.

“There are strict rules as to the source of the funding for the purchase, so the prospect should ensure that their source of funds will be acceptable to the lender before proceeding.”

Are you willing to take a practice run?

Even if you can get approved for a mortgage and you think your finances are in order, it won’t hurt to make a virtual attempt.

“If you think you’re ready to buy a home, or if you want to get ready to buy a home, you need to do a financial test-run,” suggested Certified Financial Education Instructor Amanda L. Grossman (@FrugalConfess). “Figure out how much your monthly home expenses are going to be (for your dream home, then for a less-than dream home).

“This needs to include costs like your mortgage payment, your homeowner’s insurance, property taxes (divided out by 12 months), and maintenance costs (industry estimates are one to three percent of your home’s total cost, each year, spent in repairs/maintenance).

“Once you come up with a number, open up a savings account specifically for the purpose of doing your financial test-run. Then, each month for at least three months, ‘pay’ that amount of money into that savings account.

“How does it feel to make that payment each month? Do you still have cash flow left to pay your other bills, and to live a little? Or do you feel financial strain? This will help you both in figuring out if you’re ready to buy a home, and in helping you save up for the down payment. Which is a win-win scenario.”

Is there a better option available?

Sometimes it just might make more sense to continue renting for the time being, rather than jumping into home ownership.

“There are many factors that must be considered in the true cost of renting vs. owning,” explained Humes. “If we want to cut right to the chase, there is an easy way to understand this. No investor is going to purchase a property and rent it to another party without a built-in profit after all costs and expenses are paid.

“If an investor purchases a property and the total monthly payment for principal, interest, taxes, insurance, maintenance and management costs are $800 per month, the investor cannot lease that property for $800 per month because they have to calculate in a return on their invested money and a profit margin.

“The investor may lease this property for $1,100 per month with the tenant paying all utilities and the investor retaining the mortgage interest deduction (MID) write-off on their taxes. In addition, an investor will have to pay, and pass along to the tenant, a higher interest rate on the mortgage since it is considered a non-owner-occupied property and mortgage product.

“Therefore, in our example, the tenant could have purchased the same property for perhaps $600 per month instead of $1,100 per month and retained the MID tax write-off for themselves. The person considering a purchase over lease still needs to consider if they have the time to oversee the maintenance on the property.”

When you decide it’s time …

OK, you’ve taken all the above factors into account. Now it’s time to find the house you want to purchase. So … how do you go about that?

“After getting pre-approved for a mortgage, it’s time to look for a home you’ll love!” advised Luke Babich, CSO of Clever (@ListWithClever). “Make a list of variables you value: neighborhood safety, access to parks, proximity to entertainment, school district, the availability of public transportation, and rank how important each of these factors is to your home selection process.

“While it is possible to buy a home without an agent, finding a real estate agent you trust can really help you find a home that meets your standards, as agents have invaluable experience and knowledge of local markets. Go to plenty of open houses to scout out the area, get a feel for what’s on the market, and communicate your thoughts with your agent.”

And if it isn’t time …

Don’t get discouraged if it isn’t the time to buy a home yet. You can still begin preparing for when the time comes.

“If you are not in a place to buy a home just yet but know it is something you want soon, review your finances and make adjustments to start saving up,” recommended Jared Weitz (@jaredweitz), CEO and Founder of United Capital Source Inc. “Cut spending in certain areas, pick up a side hustle or move into a smaller place to rent and then allocate that money towards your down payment and investments.”

And preparing isn’t just about the serious business and money aspect.

“Begin making your dream home wish list,” advised Wenzke. “Would you love to live in a certain neighborhood or have an open floor plan or a gourmet kitchen? Once you have some ideas, use that list to find the perfect rental for you. You can test out your dreams before making a long-term financial commitment.”

Buying a home may be a big decision, but taking the necessary steps and time to figure out what makes sense for you will allow that decision to be more manageable. If you do get around to buying a home, drop us a line and we’ll bring you a nice housewarming meal!

To learn more about housing-related financial issues, check out these other posts and articles from OppLoans:

Do you have a personal finance question you’d like us to answer? Let us know! You can find us on Facebook and Twitter.

Visit OppLoans on YouTube | Facebook | Twitter | LinkedIN | Instagram


Contributors

Luke Babich is the Co-Founder and CSO of Clever (@ListWithClever), the free online service that connects you with top Real Estate Agents who can help you save on commission. Luke is also an active real estate investor with 22 units in St. Louis and a licensed Real Estate Agent in the State of Missouri.
Amanda L. Grossman (@FrugalConfess) is a Certified Financial Education Instructor at Frugal Confessions, where she helps Chief Family Officers (CFOs) control their finances so that they can save money to live their life by design. She’s a featured blogger at the Houston Chronicle, and winner of a 2017 Plutus Foundation grant to create the Mt. Everest Money Simulation: A Kid’s Money Educational Adventure.
Ron Humes is currently the VP of Operations Southeast Region for Post Modern Marketing (@PostMM); a full-service digital marketing company. He has been a realtor as well as an owner and principal broker of his own realty company for 20 years. He has been a custom home builder and owner of a remodeling company. He is an active investment property owner of flips and rentals. He has been a Property Manager for 20 years. He trains investors to purchase, flip and rent properties.
James McGrath is a co-founder of Yoreevo (@yoreevo), the tech-driven NYC real estate brokerage dramatically lowering transaction costs for buyers and sellers. Prior to founding Yoreevo, James worked in finance, most recently at Citadel where he researched the housing market.
Jared Weitz (@jaredweitz) has been in the financial services industry for over 10 years. Due to his extensive work experience and deep network of close financial relationships, he handles a multitude of different finance options for his clients and contacts. Over the years, he has held positions in some of the largest business financing companies in the U.S. Some of his roles have been: Underwriter, Director of Business Development, Managing Partner and currently, CEO of United Capital Source, LLC.
Ali Wenzke HSAli Wenzke (@AliWenzke), Moving Expert, moved 10 times in 11 years. Now she’s helping the millions of people who move each year by providing practical tips on how to make moving a happy experience at The Art of Happy Moving. After calling seven U.S. states home, Ali is now happily settled in the Chicago suburbs with her husband and three children. She doesn’t plan on moving anytime soon.

5 Times When a Personal Loan is a Bad Idea

If you’re considering a personal loan to pay for something like a vacation or to cover everyday expenses, you should stop and reconsider.

Unless you already have more money than you’ll ever need, you’re probably going to need a loan at some point.

(And if you do have more money than you’ll ever need, why are you reading this? You should be flying your own private helicopter, dropping cash on needy families. Of course, you might be reading this article while you’re doing that, in which case you should stop and focus on the flying and cash disbursal as reading while flying is very dangerous!)

… Anyway, there are many good times to get a loan!

“Loans are great for financial leverage,” advised Levi Sanchez, founder and financial planner at Millennial Wealth, LLC (@millennialwlth). “Meaning, they should be used in cases where access to capital to pay for an asset or education (in the case of student loan) isn’t readily available. If used for an asset, especially one that appreciates over time (such as a home), loans can be a great way to access them.”

So those are a few instances of good times to get a loan. What are some bad times to get a loan?


1. When you can’t afford a vacation.

We all need a vacation sometimes. It’d be nice to be able to go on whatever vacation you’d like, but there is not currently some sort of “federal vacation program” to provide for those who can’t afford their ideal vacation.

Until that legislation is approved, however, you may have to put some severe limits on the kind of vacations you take. And using a loan to pay for a vacation is never a good idea.

“Loans should not be used for expenses,” warned Sanchez. “Meaning, you shouldn’t use credit cards (without expecting to pay it off within the month to avoid interest charges) or personal loans to finance a big vacation.

“In doing so, you’d be clearly spending above your means and paying high-interest charges for holding a loan of that nature for a period of time.”

2. For regular bills.

Ideally, you’d only take out a loan as an investment in the hope that it’ll bring greater returns one day. But unfortunate surprises happen. If you have an unexpected medical expense or your car suddenly breaks down, you may find that a personal loan is your only way to cover the expense.

If that is the case, you’ll want to research all of your possible options to find the ideal, most affordable loan for your situation. The right loan with the right payment schedule can allow you to get through this setback in the best position possible.

However, if you’re finding yourself taking out a loan or even considering taking out a loan to pay recurring expenses, like groceries, rent, or utilities, then there’s a pretty significant problem afoot.

There are many expenses you can’t cut down on, but if you’re taking out loans for recurring expenses, you’ll just be getting further and further in the financial hole. Ask for help from a friend or family member if you have one or consider seeking out government assistance.

You probably already knew that taking out loans regularly is bad for your financial health, but just in case, now you know.

3. If you don’t have a plan to pay it back.

You should always make sure you have a payment plan before taking out any loan—whether it’s a mortgage, an auto loan, or a regular unsecured installment loan.

However, it might be tough in an emergency situation when you feel like you just need to get the cash as quickly as possible. And that’s doubly true if you don’t have good credit and your only options to borrow money are bad credit loans.

But taking a few extra steps in the short term can you leave you much better off in the long term.

“It is not a good time to get a loan if you don’t have a solid plan to pay back the loan,” advised Jaquetta T. Ragland, owner of YoungandFinance.com (@YoungandFinance). “Some people apply for a loan because they meet the qualifications but they have no plan in place to pay it back.

“This is dangerous because it can cause you to fall behind in your payments which will have a negative impact on your credit score because of missed payments. In addition, it could cause an increase in your interest rate which will also raise your monthly payment requirement.

“If you don’t have a solid plan in place to pay back the loan, it is not a good time to have one.”

4. If your credit needs improvement.

You can’t predict when the aforementioned financial emergency might happen. But if you can avoid taking out a loan when your credit needs improvement, you’ll be better off.

“You should also NOT get a loan if you don’t have good credit,” explained Jennifer Harder (@JenniferHarder4), Founder & CEO of Jennifer Harder Mortgage Brokers. “If you want a personal loan that has a better interest rate than a credit card, you’ll have to have some strong credit history.”

In order to avoid taking out an online loan or visiting a brick-and-mortar storefront to cover costs during a financial emergency, you’ll need to have a well-stocked emergency fund in place.

That way you can steer of high-cost no credit check loans (like payday loans, cash advances, and title loans) and cover those bills with money you already have—interest-free!

5. When a credit card could work.

Used improperly, credit cards can get you in a lot of trouble. But used properly, and paid off in full every month, they can be very useful tools that can help build your credit.

“With a strong credit score you can qualify for a zero percent APR credit card that meets the needs of your loan amount,” offered Jared Weitz (@jaredweitz), CEO and Founder of United Capital Source Inc. “Although many loans can have strong interest rates, nothing beats zero percent.

“If your finances are already very unstable, and you have reason to believe your income or employment situation may change in the near future, taking out a loan when finances are unsteady can hurt you long term if it becomes not possible to repay on time and you let the interest rise.”

When it comes to getting a loan, it’s all in the timing. And we hope these tips will help with yours. To learn more about how best to manage your finances, check out these other posts and articles from OppLoans:

Do you have a personal finance question you’d like us to answer? Let us know! You can find us on Facebook and Twitter.

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Contributors

Jennifer Harder (@JenniferHarder4) is a mortgage broker with over 30 years of management and sales experience. Throughout her mortgage career, Jennifer has helped hundreds of clients solve their financial challenges. Her motto is to focus on the client’s needs above all else.
Jaquetta T Ragland is the owner of YoungandFinance.com (@YoungandFinance) and is also a licensed real estate agent. She teaches personal finance education to empower individuals to make the right financial decisions in their lives.
Levi Sanchez is a CERTIFIED FINANCIAL PLANNER™, BEHAVIORAL FINANCIAL ADVISOR™ and Founder of Millennial Wealth, LLC (@millennialwlth), a fee-only financial planning firm for young professionals and tech industry employees. Levi’s been quoted in the New York Times, Business Insider, Forbes, and is a frequent contributor to Investopedia. He is an avid sports fan, personal finance and investing geek, and enjoys a great TV show or movie. His mission is to help educate his generation about better money habits and provide financial planning services to those who want to start planning for their future today!
Jared Weitz (@jaredweitz) has been in the financial services industry for over 10 years. Due to his extensive work experience and deep network of close financial relationships, he handles a multitude of different finance options for his clients and contacts. Over the years, he has held positions in some of the largest business financing companies in the U.S. Some of his roles have been: Underwriter, Director of Business Development, Managing Partner and currently, CEO of United Capital Source, LLC.

6 Summer Must-Dos for New College Students Who Want to Slay Their Finances

A personal finance checklist for college-bound high school seniors.

With a college acceptance letter in hand, most high school seniors are probably hoping for a lazy summer of sun and fun. But the carefree months will pass, and when fall arrives, students will be greeted with classes, homework, campus jobs—and tuition bills and other expenses.

To prepare for their next phase of life, students will undoubtedly take stock of clothing and dorm-room decorations. But it’s important that they look at their finances, too.

So what are the personal finance preparations incoming freshmen should wrap up before summer’s end? Here’s a checklist of six expert-recommended must-dos.

1. Practice Budgeting by Allocating Expenses

For many rising high school students, college will be the first time they’re responsible for managing their money. Ashley Lomelin of Allegro, LLC, suggested that students should spend some time this summer practicing budgeting.

“Not simple budgeting such as ‘spend less than you make,’ but learning to allocate your expenses for gas, school supplies and anything else they may be responsible for,” she said.

To do this, students should start by listing all of their expenses for a given month. Over the summer, these might include entertainment, food, and travel costs. Once the semester starts, things will change. Students should calculate the expected costs of the coming school year to “learn how many hours they should work, which can also help with dedication and a better skillset to looking for jobs after graduation,” Lomelin said.

2. Decide If You’ll Plan to Work

Any job that brings in income is a win, but for students, employment also offers the opportunity to gain work experience.

Brian Brandow, of the Debt Discipline blog, said that students need to decide whether they will work during the upcoming semester. This is one of the most significant financial decisions a graduating high school senior will make.

“Once this decision is made, it can give them an idea of how much money they should save during the summer,” he said.

Students can use their budget to determine how much they’ll need to make during the school year to cover their expenses. If costs are high, a summer job will allow them to get a head start by earning a few months’ worth of income.

“If they can save a higher percentage of their summer money, it can help them focus on school and avoid having to work many hours,” Brandow suggested. He gave an example of a student who plans to spend $100 each week. A typical semester runs 15 weeks, so this would total $1,500 per semester, or $3,000 for the year. “If they spend more or less every week, it will give them an indication of how much they may need to work during the school year to supplement their income,” he said.

In the opinion of Shaan Patel, founder and CEO of Prep Expert, a summer job is a necessity. Working during the summer allows students to start building an emergency fund.

“Even if you’re receiving substantial student aid, it never hurts to have money saved up and ready to use due to unforeseen circumstances,” he said.

Working doesn’t end with summer. There are plenty of opportunities on campus to make some extra cash. Federal work-study is one—it offers part-time jobs to undergraduate and graduate students with demonstrated financial need. Work-study encourages jobs related to the student’s area of study, as well as community-service-based work. Many campuses also have internship or co-op opportunities with student organizations, school departments, and local groups.

No matter the position, any job will earn students income and demonstrate to future employers that they’re hard-working and motivated.

3. Search for Scholarships to Pick Up the Slack

Summer is also a great time to search for scholarship opportunities.

“Scholarships are the best way to pay for higher education, but require some research and a lot of writing time,” Lomelin said. “If a student isn’t busy working, they can learn to also manage time to writing away potential scholarship pieces for school.”

While many scholarships are competitive, students who apply strategically and research examples of successful scholarship essays can boost their chances of taking home money for tuition costs.

4. Invest in a Secured Credit Card

When mismanaged, credit cards can have some pretty serious consequences. But there are ways to reduce the risks of traditional credit cards while maintaining the convenience and credit-building potential they offer. One such option? Secured credit cards.

“To help build credit without putting yourself into debt, invest in a secured credit card,” Patel suggested. “They’re great options to invest in because instead of getting a credit limit from a faceless company waiting for you to max it out, you personally back your own credit line.”

Secured credit cards can be opened for as little as a $200 deposit, Patel said. This makes them useful for handling small bills. Secured credit cards also give students an opportunity to start building a credit-boosting credit history.

“… as you make your payments every month to stay under limit, your credit score will grow without problem,” Patel said.

5. Get a Jump Start on Student Loans

Even though student loans don’t go into repayment until students have ended their full-time studies, it’s not a bad idea to actively pay off loans while still in college. Deborah Sweeney, CEO of MyCorporation, suggested preparing for those costs by setting aside money over the summer.

“Oftentimes, college students wait until post-graduation to begin paying off their loans,” Sweeney said. “Instead, get a jump start on your loans and pay them off with your extra summer cash.”

6. Think Long Term by Learning How to Manage Money

Leif Kristjansen, the founder of Five Year FIRE Escape, suggested that students should take advantage of summer downtime to bone up on personal finance.

“When you start out as a fresh college student you generally have very little money so anything you do isn’t going to have a large effect on your ability to retire or pay off your student loans,” Kristjansen said. “The one thing that is very beneficial though is learning what to do with your money once you have a reasonable income.”

One habit to start early, Kristjansen said, is investing.

“[T]ake a bit of money each year and invest it,” he said. “You have school work to do so I would recommend something simple like an index fund. You can monitor and learn about investing as you go through school and you will internally understand the value of investing and saving.”

Students can let these investments sit over the course of their education. Then, after four years for the money to grow, “you will know what to do with your money and how investing it can help you in your future,” Kristjansen said.

By relying on his investment knowledge, Kristjansen managed to retire in his early 30s.

“I think that was an education worth investing in!” he said.

Bottom Line

For college-bound high school students, summer offers one last chance to relax and spend time with friends. But there are preparations to make for the coming school year, and students shouldn’t neglect their finances when attending to them. These six summer must-dos will help incoming freshmen get their finances on track.

Contributors

Brian Brandow is a dad, husband, and personal finance blogger at Debt Discipline. He and his family have successfully paid off over $100,000 worth of consumer debt. Brandow works in his community championing financial literacy by speaking and launching financial literacy programs.
Leif Kristjansen is the founder of FiveYearFIREescape where he blogs about his early retirement and how others can do the same. Once upon a time, he worked as a scientist in high tech in Toronto, Canada, but after enough late nights and stress-filled days, he decided to get out. He quit working at 32 with a wife, kids, and a house in a pricey city. His wife even retired two years before. He accomplished this through saving, financial savviness, and rental houses which all started back in college.
Ashley LomelinAshley Lomelin is a marketing and communications professional with Allegro, a digital debit card bringing financial solutions to the underbanked and unbanked. Passionate about creating connections and bringing their community resources and literacy, she has secured publications in the finance world. She has also had the opportunity to work with ‘The Center for Financial Freedom,’ the education site by Allegro, by producing financial templates and research reports for their members.
Shaan Patel, founder and CEO of Prep Expert, grew up in his parents’ urban motel and attended inner-city public schools in one of the nation’s worst districts. Through hard work and determination, he achieved a perfect SAT score, which garnered him a quarter million dollars in scholarships and admittance to prestigious universities. He then created Prep Expert to share his perfect score strategies with students seeking to achieve their own dreams, aided by a successful appearance on ABC’s Shark Tank and investment capital from Mark Cuban. Patel is currently in residency at Temple University while still providing strategic leadership and management for Prep Expert.
Deborah Sweeney is the CEO of MyCorporation.com, which provides online legal filing services for entrepreneurs and businesses, startup bundles that include corporation and LLC formation, registered agent services, DBAs, and trademark and copyright filing services.

How did you prepare for college financially? Tell us your tips on Twitter at @OppUniversity.

5 Mistakes That Students Make with Their Summer Paychecks

Is summer cash filling your wallet? That’s a good thing—maybe.

Summer break is here! And after some much-needed R & R, many students will be starting another seasonal tradition: the summer job.

With paychecks that dwarf academic-year earnings, even part-time summer positions can provide a nice influx of cash. Depleted bank accounts will be refilled, but with an abundance of funds comes the temptation to spend.

Looking for ways to put your money to better use? Here are five common mistakes that students make with their summer paychecks—and five ways to avoid them.

Mistake #1: Spending First and Earning Later

When students land a summer job, they begin to muse about all the things they can use that future income to buy. Josh Hastings, founder of Monex Life Wax, warned that it’s tempting for them to start spending immediately—even before their first paycheck.

“When you work hard for your money during the summer months, make sure you don’t use the ‘spend first, earn later,’ approach,” Hastings warned. “Knowing you will be earning some money during the summer, some students will plan trips and other fun events with their money—not taking into consideration they could use the money to save for the upcoming school year.”

“Instead of taking out a student loan to cover the year’s rent, why not save up $4,000 to cover college rent and avoid the student loan?” Hastings asked.

This is a great point. Experts recommend that you save at least 20 percent of each paycheck. Fifty percent should go toward needs and the remaining 30 percent is left for wants. Considering that most students likely have fewer expenses and debts than older working professionals, bump this number up.

Hastings urged students to make sure they’re paying themselves first with their summer paychecks.

“Creating sound financial habits at an early age will always go a very long way down the road,” he said.

Mistake #2: Not Starting an Emergency Fund

College students need an emergency fund, much like everyone else. Even if college students don’t have many expenses and are likely relying on their family, financial aid, or a summer income, it’s still responsible to save up for the unexpected. Because let’s face it, the unexpected is going to happen—it’s just a matter of time.

Victoria Lowell of Empowered Worth suggested that students use a portion of their summer paycheck to start an emergency fund. This fund will ensure that students have money to use in dire situations, like a medical or educational cost.

“I suggest placing a portion, usually 10 percent, into an interest-earning account to begin to create an emergency fund,” she said. “A good credit rating and more liquidity are things that college age adults should prioritize.”

If you haven’t yet, open a checking and savings account. Many employers offer direct deposit so you can set up your summer paycheck to deposit into your preferred bank account. Then, set aside a portion for an emergency fund, whether that lives within your linked savings account or a separate high-yield savings account. Getting into the habit of saving up an emergency fund now will create healthy financial practices in the future.

Mistake #3: Starting a Retirement Fund Too Early

Here’s a question you probably haven’t pondered. Should full-time students start a retirement account? It turns out that this is a question that comes up frequently from both students and their families. Although experts have differing opinions, the consensus is mostly no.

“I often get calls from clients asking what their college-age children should do with their summer paychecks,” said Lowell, adding that “the first thing that comes to mind now that they have earned income is setting up a retirement account.”

“My suggestion is that they hold off for now,” she said. Her reasoning? “A retirement account will tie up these funds for about 30 years before [students] can access them penalty free, excluding certain situations.”

Students should wait to start contributing to their retirement funds after graduation, when they’ve secured a steady income. Maybe their company will even offer an employer matching program. In the meantime, summer earnings are better used for immediate educational expenses, like lessing student loans or paying off credit card debt.

“These monies should be used to first pay off any credit card debt they may have incurred during the school year,” Lowell said.

Mistake #4: Not Investing Money and Time Into Professional Development

Professional development can begin well before graduation and entering the workforce. This summer, students should consider spending time learning outside of the classroom. If not, it’s a missed opportunity for personal, professional, and financial gain.

According to Tom Dolfi, head of marketing in education technology, many students regret leaving professional development to the last minute or after graduation. Dolfi works with students who expressed disappointment at not developing “transferable knowledge and hard skills” about topics that are popular but not taught in their classes.

How can students build up their skills and ultimately their resume? Luckily we’re living in a time with endless possibilities to self-guide your side learning.

Students can take things like “online courses in order to become more proficient in using specific software (most of the times, the Office suite, Adobe suite of very industry-specific software),” said Dolfi.

Check with your university to see if they offer free or discounted software programs to their students. Then, browse the web to find free online courses to learn how to use the program. For instance, if you’re interested in learning how to code with Python this summer, watch a few technical videos through Codecademy. Alternatively, spend some of your summer money on an online course at a university or professional program that’s not offered at your home institution.

Other students may be interested in “attending workshops and networking events to connect with professionals working in the sector they are interested in,” Dolfi said.

Tap into your school’s professional and alumni network. Oftentimes the professional listserv will include a calendar of inexpensive networking events geared toward students in specific cities. Don’t be scared to reach out to a connection for career advice over a coffee introduction. A good rule of thumb is that you can’t predict where one introduction can take you, so put yourself out there. One friendly introduction can lead to another which can lead to an internship or job opportunity.

Mistake #5: Blowing Extra Money on Fun Instead of Investments

Quick scenario: Let’s say your educational costs are entirely covered by some combination of financial aid, grants, scholarships, and savings. No student loans. Hurrah! There’s even extra savings for an entertainment budget and a cushion for an emergency. What do you do with your remaining summer paycheck? What a dilemma, right? Well, according to Robert Farrington, the creator of The College Investor, you shouldn’t spend it on frivolous things. Rather, invest it and reap the benefits in the future.

Farrington suggested that a student who made $1,000 and invested it—while doing nothing with the initial investment—would potentially have around $13,000 in 40 years.

“Investing is a great way to save for the future, as long as a student is responsible and disciplined,” he said, adding that “[i]t doesn’t require a huge up-front investment, and it doesn’t require a lot of time or effort.” In fact, “[a]ll it requires is a small tolerance for risk, a dedicated time horizon, and an up-front time investment of an hour.”

We’re not necessarily talking about a traditional retirement account (401k or Roth), but if you find yourself in this ideal scenario then maybe you are the 1 percent who should consider investing for retirement. Investing can take any form, such as short-term certificate of deposits or long-term real estate holdings. Yes, even students (so long as they’re at least 18 years of age) can invest on their own.

“The big reason to start investing while in college is TIME,” said Farrington. “The earlier you start investing, the more time your money has to grow.”

The hardest part is changing your mindset to be patient and look toward the future. “It’s not sexy to see your $1,000 investing grow to just $1,080 by the end of the year,” he said. That measly $80 is discouraging to say the least. “But where you really see the gain is in the future.”

“By starting to invest at age 18 versus age 30, you have a 12-year lead over starting later in life. If students can get started investing at 18 years old, they only need to invest about $2,100 per year to be a millionaire by age 62. That number starts to go up the older you get. If you wait until 30, that number becomes $6,900 per year you need to invest—over three times the amount per year. All because of time.”

Why is it that time is the deciding factor in investments? It all has to do with compound interest, said Chase Lawson, author of “Financial Freedom.”

“Compound interest is an often-talked-about topic. It relates to building interest on top of interest, thereby creating a snowball effect and leading to a much larger future value than would be achieved with simple interest. The earlier you start to invest, the more of an impact compound interest will have, due to having a larger time horizon to experience the effects of it.”

This means that “students should start a habit of saving earlier in their lives,” Laswon said. Saving and investing is often an afterthought, but it shouldn’t be. “After all, your younger years will have a larger potential impact on your future net worth than you might otherwise believe.”

So, if you find yourself in this ideal situation with minimal expenses, then use your extra cash to invest in your future. “With so few expenses, this is the perfect time to start saving money,” he said, adding that you should “[u]se this time to build good habits and take full advantage of all the time you have left.”

Bottom Line

After a demanding school year, summer is a time for fun. But wise money management will pay off down the road. With a little planning, students can avoid these common mistakes and take critical first steps toward building financial health.

Contributors

Tom Dolfi is the head of marketing at Pathfinder, an edtech startup based in London. Pathfinder uses AI (machine-learning, data science and natural language processing) to power their career development platform and help students achieve their career goals. You can find him on LinkedIn.
Robert Farrington is the founder of The College Investor, which he started to showcase a variety of common sense personal finance and investing ideas to help millennials get free of their student loan debt and start building wealth for their future. He has had a passion for investing and all things related to personal finance since he can remember. When he was about 13, he even made enough income to pay taxes on. While in college and graduate school, he realized that most people were oblivious to investing and personal finance, even MBA students, so he ended up helping many of his peers. It was apparent that the #1 dilemma holding back millennials from investing and building real wealth is student loan debt. This led him to write “Student Loan Debt: Getting in Smart, Getting out Painlessly.”
Josh Hastings is a former high school athletic director at the secondary level who shifted his focus in 2016 to focus more effort on his entrepreneur endeavors. In 2017, he founded MoneyLifeWax.com, a personal finance site dedicated to helping millennials with student loans. With an emphasis on money and finance behavior, Josh started Money Life Wax to help millennials realize there are other ways to make money and be happy in the 21st century. You can find him on Facebook.
Chase Lawson is a graduate of Clemson University where he received bachelor of science degrees in accounting and financial management and a master’s in professional accountancy. While in school, he ran a successful six-figure business while helping coach and lead fellow college students. Finance has always been a focus of his, having started investing at a young age, and he is passionate about helping others achieve financial independence. He’s overcome over $20,000 of personal debt and a credit score in the 500s to become a homeowner in Austin, Texas, with multiple income streams and a credit score in the high 700s. He’s the author of a personal finance book, “Financial Freedom: Breaking the Chains to Independence and Creating Massive Wealth.”
Victoria “Vicky” Lowell is a financial educator dedicated to empowering women with the knowledge to become active participants in the planning of their financial future and well-being. While engaging in frank, open dialogue with women in the community, she came to realize the importance of educating women about their finances. To that end, in addition to financial planning, she enhanced her knowledge of the immediate and long-term financial implications of divorce as a Certified Divorce Financial Analyst® (CDFA®). In late 2018, she left UBS to follow her passion of helping women assert themselves fiscally and founded Empowered Worth, a resource for financial coaching geared toward educating women to not only meet their immediate economic needs but attain long-term goals. She provides the tools needed to empower women of all ages.

How are you planning on spending (or saving) your summer paycheck? Let us know over on Twitter at @OppUniversity.

5 Alternatives to an Expensive Overdraft Fee

The relative APRs for overdraft fees can average as much as 17,000 percent! Here are five options that will cost you less.

Overspend on your debit card, you’ll get hit with an overdraft fee. And while that might seem pretty annoying, it can actually be more much worse than that. With an average overdraft fee of $30 applied to every over-the-limit transaction—no matter how small—research from the Consumer Financial Protection Bureau (CFPB) found that they carry an average APR of 17,000 percent!

While many overdraft fees get incurred without the user realizing it, others might see these fees as an acceptable price to pay when they need to cover an unforeseen expense or surprise bill. Either way, there are better ways to handle your finances, ones that don’t involve APRs in the thousands.

Here are five alternatives to help you avoid expensive overdraft fees.


1. Link a savings account.

Technically, this is a kind of overdraft protection, but it’s one that comes with much more reasonable costs.

Most banking institutions will let you link a savings account to your checking account to serve as the first line of overdraft defense. When you overspend, money is taken from your savings account to cover it with only a small transfer fee on top.

Of course, this plan only works if you have money in the savings account, to begin with, and that means making a plan to start strategically socking your money away. If you don’t have an emergency fund, this savings account would be a great place to keep one—so long as you don’t make overdrawing your account a regular habit, as that will drain your rainy day funds away.

In order to start building your emergency savings, you’re first going to need a budget. If you don’t have one, here’s a handy guide—complete with a free downloadable budget spreadsheet—to get you started. Try following the principle of “paying yourself first” to ensure that saving money doesn’t take a back seat to everything else.

2. Use your credit card.

Many banking institutions will also let you link a related credit card to your checking account as a form of overdraft protection. While a savings account is a much better option than a credit card—as it doesn’t involve borrowing any money at all—a credit card can make a good second line of defense. And it’s still better than an overdraft fee.

If you find your bank account balance dropping dangerously low during those last couple days before payday, you might want to consider using a credit card to make some purchases instead of your debit card. That way, you’ll be sure to avoid overdraft fees altogether. (If you don’t notice when your bank account balance dips close to zero, sign up for account alerts.)

The one danger with using a credit card is that you’ll wrack up excessive debt, so make sure you pay those purchases off as soon as you can. Do so within 30 days and you’ll be able to avoid paying any interest at all! So long as this card is only being used in rare emergencies—and it’s getting paid off ASAP—this shouldn’t prove to be a problem.

3. Ask friends and family for money.

No one likes asking a friend or family member for money, but it’s a better alternative than incurring an overdraft fee. Like many of the options on this list, this is something you won’t want to make a habit of, but it can work pretty nicely as a one-off solution to the problem. Otherwise, you could put some of your close personal relationships in jeopardy.

The key to asking a friend or family member for money—even if it’s for a really small amount—is to make sure that both parties are perfectly clear on the terms of the agreement. If your friend thinks that you’re paying them back next Friday, whereas you planned to pay them back gradually over the next three Fridays, that’s a recipe for disaster.

To make sure that everybody is on the same page, it helps if you have an actual page! In this case, that means a written loan agreement. (That might sound like overkill, but it’s always better to be safe than sorry.) Here’s the good news: You don’t have to create your own! Just print out this free loan agreement template we created, fill in the relevant info, and you’ll be good to go!

4. Consider a personal loan.

If the shortfall you’re facing is on the larger side, you might want to consider taking out a personal loan to cover the expenses. Although this will mean incurring interest—which is something you always want to avoid whenever possible—the APRs that you’ll end up facing could be smaller with the right personal loan than you would encounter with an overdraft fee.

For folks with bad credit, however, their borrowing options will be a little more limited. They’ll have to choose between various bad credit loans and no credit check loans. And while short-term payday loans, title loans, and cash advances might seem like the better option, their quick turnaround and lump sum payments could end up trapping you in a cycle of debt.

Instead, you should consider a bad credit installment loan. These online loans not only let you borrow more money, but they come with smaller, regularly scheduled payments. Some bad credit installment loans—like the ones offered by OppLoans—even report payment information to the credit bureaus. This means that on-time payments could help improve your credit score!

5. Don’t use overdraft protection at all.

The point of overdraft protection is that it prevents your debit card or checks from being declined. But if you find yourself regularly overdrawing your account, then you should probably turn your overdraft protection off. While this might be a little more hazardous if you’re writing a lot of checks—as bouncing a check means incurring NSF fees—debit card users should strongly consider it.

Without overdraft protection, your debit card will simply be declined at the point of sale. While this can be embarrassing, it most likely won’t be the end of the world. In the meantime, you will be forced to start building better financial habits (like budgeting) that will help you spend within your limits and avoid overdrawing your account at all.

Most of the alternatives we have suggested in this article don’t address the root of the problem, which is spending more money than you actually have in your checking account. The sooner you get that under control, the better off you’ll be. To learn more about how you can instill better financial practices, check out these other posts and articles from OppLoans:

Do you have a personal finance question you’d like us to answer? Let us know! You can find us on Facebook and Twitter.

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Are You Financially Literate?

by Jessica Easto
A recent study broke down financial literacy into five key concepts that people needed to understand in order to be considered financially literate.

Financial literacy is important. Without it, people are more vulnerable to bad credit, financial scams, payday loans, no credit check loans, and other things that can threaten financial health. But according to the National Financial Capability Study (NFCS), only 63 percent of Americans are financially literate. Do you know where you fall?

Generally speaking, financial literacy is the ability to use your skills, knowledge, and financial resources to make good financial decisions and effectively manage your money. In order to do this, you need a firm grasp on certain financial concepts.

The researchers behind the NFCS identified five key concepts to help them evaluate the financial literacy of their participants: compound interest, loan terms, inflation, risk and diversification, and interest rates and bonds. In order to be considered financially literate, participants needed to have a basic understanding of four or more concepts. Let’s take a look at each of these concepts in more detail.


Compound interest.

Compound interest is a percentage that is added to a principal sum of money and its interest as it accrues over time on a deposit or a loan. In other words, it is interest on interest. Say you have $100 in a savings account with an interest rate of two percent that compounds annually. That means at the end of the year, you would have $102, and the next year, interest would be calculated on $102 instead of the original $100 deposit. By the end of the second year, you would have a total of $104.04, even though you didn’t add any more money to the account. It’s kind of like magic!

That’s the difference between compound interest and simple interest—simple interest would only be calculated on the principal amount, or $100 in our example.

Even though a two percent interest rate seems small, you can see how it can add up over time into something more significant. Because of this, compound interest can be your friend or your enemy. Sure compound interest is great when it comes to your savings account, but it’s not so great when the sum of money in question is a debt with the potential to grow, such as an installment loan.

That’s why it’s important to have a solid fix on compound interest. It can not only help you decide what kind of savings account is best for you, but it can also help you compare financial products, like personal loans, bad credit loans, and credit cards, and understand their real cost over time. Two loans could be for the exact same amount for the exact same length of time, but if one uses simple interest and one uses compound interest, one will clearly cost you less in the long run.

Loan terms.

When you take out a loan, you agree to a set of conditions, including the amount to be borrowed, the interest rate, and the term of the loan, or how long you have to repay the loan. One key aspect of financial literacy is understanding how the term of your loan affects the size of your payment. This concept goes hand in hand with the concept of interest, which we just discussed.

Let’s say you want to take out a loan for $1,000, and you get to choose between a term of one year or two years. Which option would result in a smaller monthly payment? That would be the two-year term, since you are spreading the same amount of money over more months. A one-year term would be about $83 a month, while a two-year term would be about $42 a month.

Who wouldn’t choose the two-year term, you say? Well, unfortunately, things are rarely that simple. Interest is always a factor. Consider what would happen if your $1,000 loan came with a five percent interest rate that compounded annually. The longer your loan term, the more you would pay in the long run, even with smaller monthly payments.

Inflation.

Inflation is the rate at which the costs of goods and services rises over time. In other words, it affects the purchasing power of our dollar. Back in the day, there used to be something called penny candy because it—you guessed it—cost a penny. (Look, it’s even in the dictionary!) Even the cheapest of today’s candy costs more than a penny. That’s inflation.

Many people think a certain amount of inflation is a sign of a thriving economy but that too much inflation is cause for concern, since that would massively devalue the dollar. Inflation is something that our government (the US Federal Reserve, specifically) tries to regulate at around two percent a year. That doesn’t always happen, and the average inflation increase since 1921 has actually been 3.26 percent a year.

Inflation of more than two percent but less than 10 percent is called “walking inflation,” and it’s considered to be not great but manageable. When interest rates increase to the 10 to 20 percent range, it’s called “running inflation” and can cause big problems, especially because incomes don’t automatically rise with inflation.

Inflation can also be different depending on what you’re talking about. For example, housing costs may rise over time at a different rate than food costs.

One key thing to think about is how inflation might affect you over the course of your lifetime. Let’s think about that savings account again and the purchasing power of the dollars inside of it. What if the interest rate of your savings account is 2 percent, but the average annual inflation rate is 3 percent? In 10 years, will your savings have more, less, or the same purchasing power as it does now? The answer is less. And if you don’t even have a savings account and your $100 is instead tucked away in a sock drawer earning 0 percent interest, your dollars’ purchasing power would be even less.

Risk and diversification.

Risk is a term that is used in investing as a way to characterize a financial decision’s degree of uncertainty and/or potential for loss. The higher the risk, the greater the degree of uncertainty and the potential for loss. Investors generally don’t make risky decisions unless the potential payout it great enough to justify it. Ever heard of the phrase “high risk, high reward”?

For ordinary people, the most likely place they encounter risk is when it comes to their retirement account, which is usually made up of a portfolio of different types of investments. Accounts with a wide variety of assets are less risky than those with few. This is called “diversification.”

Let’s say you come into $1,000 and decide you want to invest it. You’re deciding between (A) putting it all in the stock of one rising-star tech company or (B) contributing to a portfolio that will invest portions of the money in dozens of different assets, including the tech company’s stock. Sure, if you go with option A, that tech company could take off and your $1,000 could turn into $1 million. Or it could go bankrupt tomorrow and you could lose everything. If you go with option B, the majority of your money is still safe in other assets.

Interest rates and bonds.

A bond is a type of investment in which you loan an entity (like the government or a company) money to be paid back at a fixed date (aka the “maturity date”) with a fixed interest rate. It’s kind of like the tables have turned, and instead of, say, owing to the government on a $1,000 student loan, it owes you on the loan.

Governments and companies sell bonds to investors when they are trying to raise funds, and investors know exactly what the maturity date and interest rate are when they buy them—they do not change over time. And that brings us to a key takeaway when it comes to financial literacy: The value of a bond fluctuates depending on what the prevailing interest rates are at any given time. More specifically, as interest rates rise, bond prices go down. The opposite is also true.

Improving your financial literacy.

Now that you’ve read this post, you’re financially literate, right? Well, maybe. According to this recent Bloomberg article, achieving and maintaining financial literacy is difficult. It’s not something you earn once and keep forever. In fact, experts think that financial literacy is something that requires constant practice, which is not something average people have the opportunity to do. This might mean that, in order to be prepared for the times where you do need financial literacy, you may need to seek out ways to learn and practice your skills.

To improve your financial literacy and money management skills, check out the free standards-aligned courses that we offer through OppU. If you want to avoid predatory storefront and online loans—like short-term cash advances and title loans—becoming financially literate is a critical first step. To learn more, you can also check out these other posts and articles from OppLoans:

Do you have a personal finance question you’d like us to answer? Let us know! You can find us on Facebook and Twitter.

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Financial Literacy for Middle School

The ultimate guide to teaching financial literacy to middle-school-age children.

By the time kids enter middle school, many have had exposure to basic financial concepts but no formal instruction. And while they’ve started using money, they likely haven’t had many opportunities to put their knowledge to the test.

Because children in this age range are financially supported by their parents, the middle school years offer a low-risk opportunity to help them take their first steps toward building a strong foundation of financial literacy. So prepare them for financial independence by teaching them core concepts and skills. Discuss the more advanced topics that they’ll encounter as adults.

Here are the essential concepts that middle-school-age children need to know, and a list of the best age-specific online resources, apps, and games to teach them.

5 Key Financial Literacy Concepts for Middle Schoolers

1. Spending and saving wisely

For many tweens, the best part about having their own money is spending it. Whether they use it to buy a new shirt or a concert ticket, making that first purchase gives them a sense of independence.

Adults, however, can’t just buy whatever they want. They have to cover necessities and only then can they make “want” purchases.

Key Points

  • Starting a budget. Budgeting is a core financial literacy skill for all stages of life. It’s also a skill that middle-school-age kids can immediately put into practice. Creating a budget is simple. First, have tweens write down the money they make in a given month. Then, have them decide how they plan to spend their income. This should include “want” purchases, but kids should also designate some money for saving—experts recommend 20 percent.
  • Saving. Middle-school-age children should learn that saving isn’t a chore. Rather, saving gives them money to make large purchases they otherwise couldn’t afford. To do this, have them write down saving goals. Consider setting aside money for a “need” such as an education fund, but also incentivize kids by letting them decide on a fun goal of their own choosing—even if it’s a “want” purchase.
2. Money is earned through gainful employment

Money is earned, and to earn money, we must work. The career that people choose greatly impacts their income potential and for that reason, it’s important to be strategic when deciding on a career. Career exploration is important for kids because it will give them knowledge and information about career options and will encourage them to set career and educational goals.

Encourage middle schoolers to explore career options by taking quizzes, identifying interests, and engaging in mentorship programs. This will help them narrow down their options and prepare them for high school and beyond.

Key Points

  • Education. The level of education that people obtain impacts their potential earnings. This is also true of experience and training.
  • Career vs. job. A career is done over a long period of time and often requires a high level of training, experience, and education. A job, on the other hand, is usually short-term and requires less experience.
3. Making thoughtful and sound financial decisions

Decision-making is an important life skill, and when it comes to money, there’s a lot more on the line. This is why it’s important to make thoughtful and sound personal finance decisions.

Middle-school-age children should start with two financial decision-making concepts: comparison shopping and opportunity cost.

Key Points

  • Comparison shopping. Comparison shopping is an essential personal finance skill and one that has application for middle-school-age children. Teach kids to research products before making a purchase. Look for products that offer comparable value at a lower cost. Communicate that smart shopping can reduce costs just like limiting purchases can.
  • Opportunity cost. Opportunity cost is the concept that money used for one purchase comes at the expense of making other purchases. Use a concrete example to explain it. For instance, if your tween spends his or her entire allowance on a new shirt, there will be no money left for other purchases. Is the shirt worth it, or should the money be used for something else?
4. Insurance protects us from financial loss

While middle-school-age children are not responsible for securing their own insurance, it’s important that they understand its value and the potential consequences of not managing risk. Insurance costs money, but it protects people from losses that are much greater.

Key Points

  • Types of insurance. There is insurance for almost every kind of risk. The type of insurance that people require depends on their needs.
5. Effective ways to use credit and manage debt

While tweens won’t be able to buy anything with credit, it’s important for them to have an understanding—before they reach adulthood—of what credit is and how it’s used.

Key Points

  • Loans vs. credit cards. Consumers can borrow money by using a credit card or taking out a loan. When deciding which to use, borrowers should consider what they are purchasing, the interest rate, and the length of time they’ll have to pay it off.
  • Interest. Interest is the cost of borrowing money. Interest will make the purchase more expensive than if the purchase had been made without borrowing money to do it.
  • Risks of credit. Like most things, buying on credit comes with some risk. The greatest risk is missing a payment, and even just one missed payment can impact a borrower’s creditworthiness and increase the cost of credit in the future. Missing several payments can result in repossession or foreclosure.

Online Resources for Teaching Financial Literacy to Kids in Middle School

Here are some of our favorite tools to help middle schoolers learn financial literacy. All are free and can be accessed online. Also, be sure to check out our in-house financial literacy lessons at OppU. We offer free interactive videos and quizzes that teach the fundamentals of financial literacy and are appropriate for a range of ages.

1. Practical Money Skills

  • For students, educators, and caregivers
  • Provides lessons, games, and resources

Created by Visa in an effort to promote global financial literacy, Practical Money Skills is available in 19 languages and in 46 countries. It offers extensive educational resources that include personal finance articles, lesson plans, mobile apps, and games.

2. Cash Course

  • For students and educators
  • Provides lessons, guides, and financial tools

Cash Course’s mission is to teach financial skills that apply to real-world scenarios. To do this, Cash Course created a cultivated collection of financial tools including a Budget Wizard, quizzes, calculators, and articles and resources tailored to students’ needs.

3. Money As You Grow

  • For parents and caregivers
  • Provides lessons, worksheets, and activities

Money As You Grow is a product of The Consumer Financial Protection Bureau. This free resource was created to give parents and caregivers the tools they need to teach financial literacy to kids. Users have access to a wide variety of worksheets, articles, and tools that will lay the groundwork for students to learn money management skills. The topics covered create positive habits, attitudes, and skills to carry into adulthood.

4. MyMoney.gov

  • For youth, parents, and caregivers
  • Provides activities, games, and lessons

MyMoney.gov was established by the Federal Financial Literacy and Education Commission, a group of over 20 federal entities who work to strengthen financial capability and help all Americans gain access to financial services.

MyMoney.gov focuses on the five building blocks of money management—earning, saving and investing, protecting, spending, and borrowing. It offers an abundance of resource lists, curriculums, and games to help educators teach—and students learn—these vital skills.

5. Career Girls

  • For youth, parents, mentors, and educators
  • Provides lessons, videos, and activities

Career Girls is a nonprofit that aims to empower young girls through career exploration. It has over 10,000 video-based career guides that feature over 500 female role models in a variety of careers—particularly those in STEM. In addition to videos, Career Girls offers career quizzes, advice about college majors, and life and career lessons.

Apps and Games for Teaching Financial Literacy to Kids in Middle School

Have middle schoolers practice their new skills by downloading these apps and games.

1. Visa Financial Football

  • Cost: Free
  • Available for iOS and Android

As a part of Practical Money Skills, Visa and the NFL joined forces to teach financial concepts through a personal-finance focused game called Financial Football. Players answer personal finance questions to gain yardage and score touchdowns. Students can do some pregame training by completing student activities before entering the end zone. Financial Football is available in English and Spanish.

2. Lunch Tracker

  • Cost: Free
  • Available for iOS
  • Ages: 4+

Another notable resource from Visa, Lunch Tracker is an app that helps users manage their expenses and spending habits by tracking how much they spend on food. Some of the key features include a spending calculator and tips on ways to save. For Tweens, this app is a good way to see how snack spending can add up.

3. Oh My Cost

  • Cost: Free
  • Available for IOS
  • Ages: 4+

Oh My Cost! is a spending and budgeting app. Users set a monthly budget and record their spending and income by using icons to represent their purchases. For digitally minded middle-schoolers, Oh My Cost! is a great alternative to traditional paper-and-pencil budgets.

4. Practical Money Skills Calculators

  • Cost: Free
  • Available for iOS
  • Ages: 4+

Practical Money Skills created a calculator app that offers a suite of number-crunching tools. Middle schoolers can use it for everything from figuring out education expenses to calculating an emergency fund.

5. FamZoo

  • Cost: $5.99
  • Available for Android, IOS, and computers
  • Ages: 6-12

FamZoo is a virtual bank that helps parents manage their kids’ money. It works as a private online family banking system that puts parents in control of how they’d like to run it—parents are essentially the banker and kids are customers. “FamZoo” costs $5.99 and is available on Androids, IOS, and computers.


Do you have any tips for teaching financial literacy to middle schoolers? Tweet us at @OppUniversity and let us know!

What to Do if You’ve Been Put on the ChexSystems Blacklist

If you have a history of negative banking behavior, your ChexSystems report will prevent you from opening or maintaining a traditional bank account.

Good news for fans of NBC drama The Blacklist: It’s been renewed for a seventh season! It looks like high-profile criminal turned FBI informant Raymond Reddington’s story is far from over! How many more criminals are on his list? Will we finally find out why he only agrees to work with rookie profiler Elizabeth Keen? Or have we already found that out?

We’ll be honest. We’ve never watched The Blacklist. We just wanted to start off with a blacklist that people generally seem to like before we get into another blacklist that people generally do not like: The ChexSystems blacklist.

What is the ChexSystems blacklist and what should you do if you’re on it? We investigated to bring those answers to you, much like Raymond Reddington does, we assume.


The ChexSystem “blacklist”

Let’s just get this out of the way: there isn’t actually a “ChexSystems blacklist” in the sense that you could be put on a list that would prevent you from ever opening a new financial account. But ChexSystems does keep track of negative financial behavior regarding bank accounts, and if you have a lot of negative financial behavior, it will certainly make opening a bank account more difficult. So it’s more like a list with various shades of dark grey, depending on your financial behavior.

“ChexSystems is a consumer-report agency that identifies and lists consumers who have misused credit or checking accounts, through methods such as neglected payment fees or bounced checks,” explained Jared Weitz (@jaredweitz), CEO and Founder of United Capital Source Inc.

“CheckSystems provides a report and risk score to banks running credit reports. If you are put onto the list this doesn’t mean you are necessarily blacklisted from getting a new checking or credit account, but it will make the process more difficult.”

Unlike the three major credit bureaus, ChexSystems only keeps track of your financial mistakes and not your positive financial activities. That means the way to a sterling report is not bouncing checks or getting any overdraft fees, as well as always paying your bills on time. Also, don’t commit fraud. Even a little bit.

What to do when you’re on the “blacklist”

Unfortunately, getting off the ChexSystems “blacklist” can require an even longer time commitment than improving your credit score.

“Your name can remain on the list for five years, so begin by getting your finances in order, make payments on time, and keep your current accounts balance positive,” advised Weitz.

You should also make sure there aren’t any errors on your ChexSystems report. After all, why should you suffer for something you didn’t even do? You can request a copy of your report from ChexSystems’s website and also use the site to dispute any errors you notice.

Alternatives?

If your ChexSystems report is accurate, there isn’t much you can do about it other than getting your finances in order and waiting. But you don’t have to go without a bank account while you’re waiting.

“There are banks and credit unions that do not use ChexSystems,” suggested Weitz. “Seek out setting up an account with them to help during the process of financial recovery.”

You could also look into getting a second chance bank account. These bank accounts have higher monthly fees, higher penalty fees, can’t be opened online, and are closely monitored. They might not be as nice or convenient as a traditional bank account, but if you can’t find a bank that doesn’t use ChexSystems, it’s better than going without a bank account at all.

Without a bank account, you won’t have a safe place to store your money, won’t be earning any interest on your money, and won’t have a reliable place to cash your checks without being hit with significant fees. Some second chance bank accounts even have a graduation plan. If you use the account for a certain amount of time without any issues, you can graduate to a regular checking account ahead of schedule!

You may also be able to get authorized on another person’s account. Of course, that means you could mess things up pretty badly for them, so be sure to take that responsibility seriously and make sure that you trust each other and can communicate properly before signing onto anything.

What was that about credit scores?

For the most part, the same sorts of financial behaviors that keep you from getting flagged by ChexSystems will nurture your credit score. Paying your bills on time and not letting accounts fall into collections are always good ideas.

But there are certain additional activities you’ll have to keep in mind when trying to improve your credit score. Most importantly, you’ll need to build a credit history. The best way to do that is to get a credit card (or a secured credit card if you can’t qualify for a regular card) and use it responsibly month to month. Responsible credit card use means charging no more than 30 percent of your debt limit each month and paying off that amount in full each time the bill comes around.

An important part of avoiding excess debt is building up an emergency fund that you can use to cover unforeseen expenses. Otherwise, you could find yourself relying on no credit check loans and short-term bad credit loans (like payday loans, cash advances, and title loans) when times get tough. Even opting for a more affordable installment loan pales in comparison to not needing any loan at all!

Having a bank account and access to credit are two very important foundations of a healthy financial life. That’s why keeping on ChexSystems’s good side and nurturing your credit score are so vital. To learn more about managing your credit score, check out these other posts and articles from OppLoans:

Do you have a  personal finance question you’d like us to answer? Let us know! You can find us on Facebook and Twitter.

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Contributors

Jared Weitz (@jaredweitz) has been in the financial services industry for over 10 years. Due to his extensive work experience and deep network of close financial relationships, he handles a multitude of different finance options for his clients and contacts. Over the years, he has held positions in some of the largest business financing companies in the U.S. Some of his roles have been: Underwriter, Director of Business Development, Managing Partner and currently, CEO of United Capital Source, LLC.