Should You Refinance Your Installment Loan? 4 Factors to Consider

Whether or not refinancing is right for you will likely come down to your specific financial situation—but these questions can still help you sort things out!

We write a lot about borrowing here on the OppLoans Financial Sense Blog. We write about how folks with bad credit should avoid payday loans, about how people can go about borrowing money from friends and family members, and how one can responsibly maximize their credit cards rewards without racking up excess debt.

But there’s one aspect of borrowing that we don’t write about so much: refinancing. This post is an attempt to rectify that because refinancing is a really important part of borrowing! So if you have an installment loan—whether it’s a traditional unsecured personal loan, an auto loan, a bad credit loan, etc.—here are four factors you should keep in mind when considering whether or not to refinance.


1. Do you need it?

This might seem pretty basic, but it never hurts to go over the basic building blocks of responsible financial behavior.

When a person is refinancing their loan, they are usually doing one of two things: They are either borrowing more money or they are borrowing the same amount of money with new payment terms and a new interest rate. This factor generally applies to the former.

If you’re refinancing your installment loan in order to take out more money, you first need to sit down and have a very honest conversation with yourself about why you’re doing it. Is it to pay for something that’s more of a “want” purchase, or is this a very important “need” like an unexpected car repair?

If it’s for a “want” purchase, then you probably shouldn’t refinance. Instead, take a look at your budget and see where you can cut back in order to make the purchase without credit. And if you don’t have a budget, then you should definitely start one! For tips, check out our Beginner’s Guide to Budgeting.

Now, if you’re refinancing your loan in order to pay for a “need,” then you’re on much more solid ground. Still, it wouldn’t hurt to take a look at your finances and see if you can cover that bill without borrowing. Refinancing means more payments (which can have their benefits) and more interest (which doesn’t). Make sure it’s your best financial option before committing.

2. The size of your payments.

Now, if you are refinancing for the same loan amount, just at a longer term and/or with a better interest, you should take a look at what your new payments are going to look like.

Here’s the good news: They’re probably going to be smaller! The same amount of money stretched over a longer period of time will mean less money put towards each individual payment. That’s great!

Take this exercise a step further: What are you going to be doing with the extra room that you’re creating in your monthly budget? Is this money that you’re going to just be spending? Because that’s probably not the best use for it!

Look at what you can do with those extra funds. Consider using them to build an emergency fund or to bolster the emergency fund that you already have. You could also have them automatically deposited in a retirement account, where they will grow and earn interest.

And remember: Smaller payments are great, but more payments overall still mean paying extra money towards interest. Is that extra room in your budget worth those additional costs? Calculate the total amount you’ll be paying in interest to help you weigh the overall effect that refinancing would have on your financial wellbeing.

3. Interest rates.

The one thing you should never be doing is refinancing a loan at a higher interest rate than what you were paying previously. That just doesn’t make any sense. If you find yourself needing to refinance at a higher rate, it’s probably because you made a big financial misstep elsewhere that you are now scrambling to correct.

Now, if you are refinancing at a lower rate, congratulations! You’re clearly doing something right. Still, just because you’re being offered a lower rate doesn’t mean you should take it. Similar to what we discussed in the previous section, that longer payment term likely means paying more in interest charges overall—even if you’re getting a lower rate!

Our advice here is the same as it was up above: Do the math and weigh the benefits. If you end up paying less money in interest overall, that’s one thing. But paying interest for a longer period of time means that you need to weigh the benefits of those lower rates and smaller individual payments. Still, the more productive you can be with that extra money you’re saving, the better.

4. Your credit score.

This factor mostly applies if you have a bad credit installment loan. Unlike many bad credit lenders—the kind who are hocking short-term no credit check loans like payday loans, title loans, and cash advances—some installment lenders like OppLoans report their customers’ payments to the three major credit bureaus: TransUnion, Experian, and Equifax.

If your lender reports to the credit bureaus, then every payment that you make on your installment loan gets recorded on your credit report. That’s important, because your payment history is actually the single largest factor in determining your FICO score, making up 35 percent of the total. This means that any on-time payments you make on your bad credit installment loan are actually helping your score!

Now, this isn’t really a good enough reason on its own to refinance your loan. However, it’s not for nothing if each additional payment you make translates to another positive mark on your credit report. If your score improves enough, you could even graduate to more affordable loans and credit cards in the future! At the very least, it’s something to seriously consider.

In the end, whether or not you should refinance your installment loan is going to come down to your individual financial situation. The best you can do is take all these factors into account, triple-check all your math, and make the most informed decision possible.

Want to steer clear of bad credit loans? Well, you’re going to need good credit! To learn more about how you can fix your credit score, 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.

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So Your Utilities Were Cut Off … Now What?

Unless it happened totally by accident, having your utilities cut off is probably a symptom of larger issues with how you manage your money.

The winds of winter may get cold, but there are few things nicer than being inside and warm as the frightful weather rages outside. Just close your eyes and imagine it. Or, rather, open them so you can keep reading, but imagine it anyway:

You’re sitting in a big comfy chair. You’re holding a giant mug of hot cocoa with little marshmallows, and it’s warming your hands but it’s not so hot that you can’t drink it comfortably.

The TV is playing a calming Christmas movie. Something about a businessman who never spent time with his family and then he was hit by a car but an angel let him relive his last week on Earth.  Now he can spend more time with his family, but at the end of that week, he’s still going to die.

But… come on… you know he’s going to end up getting to live somehow and they’ll all have a happy ending just in time for Christmas.

Yet, as that happy ending is approaching, the TV shuts off, along with the heating and lights.

Your utilities have been cut! Now what?!


Figure out if it was a mistake.

If you knew you weren’t going to be able to pay your utility bills, you probably should have done something earlier. But we’ll get to that later. For now, let’s assume this came out of nowhere. You had sent in the check or had autopay set up but something went wrong somewhere because one or more of your utilities are not present. Now it’s time to do some detective work.

“The first thing to do is call your power or water company to see if it was a mistake,” advised Sophie Kaemmerle, Communications Manager for NeighborWho (@UseNeighborWho). “If it happened due to failure to pay your bill, ask for an extension until you can get what you may be short on, or simply pay it right away if you just forgot.”

If it was a mistake, you’re going to have to give the utility company a stern talking to. Or a polite, but firm talking to that makes clear you need those utilities back.

“If our utilities get cut off mistakenly, the immediate priority is to get service restored to minimize disruption to ourselves and any other family or friends living with us,” explained finance writer and Middle Class Dad Jeff Campbell (@middleclassdad1). “While it’s rare for utilities to get cut off truly through no fault of the resident, it can happen.”

“While you can call or live chat with some providers, assuming they mistakenly applied your payment to someone else’s account,” said Campbell, “your best strategy is to go to the utility company in person and ideally pull up your bank’s payment system on your phone (since you presumably won’t be able to print anything at home) and show that the payment cleared your bank. If you paid in cash in person, simply show the receipt for the payment.”

And if it wasn’t a mistake …

Even if you know you’re going to come up short on a utility bill, it could still be worth trying to reach out to the company.

“The best thing to do if you utilities get cut off is to contact organizations that help with utilities,” advised life coach Katrina Mckissick. “They may be able to help pay all or a portion of the bill to restore your utilities.”

“It is always wise to call the electric company before it’s due to cut off and make payment arrangements. Most electric companies offer that but it has to be done before the service is disconnected.”

“If they get cut off because you weren’t able to pay them, still call the utility company and explain that you weren’t able to pay them,” suggested financial coach and author Karen Ford. “Ask them what you can do to get them turned back on.”

“Many times, when this question is asked, the company may not require the entire bill be paid, but a partial payment or partial payments to be paid are set up. Kindness will go a long way with them.”

In the meantime …

If the utilities aren’t switched back on immediately and you don’t have another place to stay, you’re going to have to find ways to cope until they come back.

Kaemmerle offered some tips for roughing it without certain utilities: “Keep lots of bottled water on hand for drinking and bathing. Be sure to have enough for each person in the household to have two gallons per day for at least a week. Wipes and bar soap will help with being able to wash as well. Have a stockpile of non-perishable foods that won’t need to be kept cold or cooked before being eaten.

“Purchase a portable charger for necessary electronics, such as phones or computers. Make sure you keep it charged and check that it still works periodically. If your lights go out, grab some battery powered lanterns or candles. Just be very careful where you place them so a fire does not burn down your home.

“To keep the food in your fridge from spoiling; get a good quality cooler or a small, portable generator to run it on. If you need to use up your food quickly because you have no cooler, you can cook it on an outdoor grill, or inside on a portable butane stove. Eat the food that will go bad the quickest first, and then move on to non-perishables to have as little waste as possible.”

And the next time …

If you’ve ever been worried about missing a utility bill, there are steps you can and should take to try to prevent that from happening, either again or for the first time.

“Some tips to keep you from forgetting is to set a reminder a week before the due date, so you are aware of it,” Kaemmerle told us. “It will also help to set aside a fraction of the bill each time you get paid between bills.”

“For example, four checks a month would need one-quarter of the bill set aside per check so you will have the full amount already saved when needed. Another helpful tip if you tend to be forgetful is to set up automatic payments for your utility bills.”

Campbell offered his own take: “Utilities getting cut off due to lack of payment is overall indicative of a larger financial problem. You need to first get on a written monthly budget and really scrutinize and prioritize how your money gets allocated.”

“Utilities would obviously be at the top of the list along with rent or mortgage and food. Cut all unnecessary expenses while you get your budget going. Money problems, aside from being created by not having a plan (ie: budget) are the product of either an income problem, a spending problem, a debt problem, or a combination of all three.”

“It’s often hard to figure out what to focus on until you have a budget,” he said. “Then you can determine which of those three areas needs the most improvement and you can begin to make a plan for that.”

Losing access to your utilities is never fun. But with proper preparation, it hopefully won’t happen to you!

One thing you definitely shouldn’t do when your utilities get cut off is to take out a predatory no credit check loan or short-term bad credit loan (think payday loanscash advances, and title loans) in order to pay your bill. To learn more about how you can take control of your finances and avoid situations like this, 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.

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Contributors

Jeff Campbell (@middleclassdad1) blogs on all things Personal Finance, Parenting, Relationships & more at NewMiddleClassDad.com. He is a Dad, Husband, Martial Artist and worked for over 2 decades as a leader for Whole Foods Market.
Karen Ford is a Master Financial Coach, Public Speaker, Entrepreneur, and Best- Selling Author. Her #1 Amazon Best Selling Book “Money Matters” is a discovery for many.  In “Money Matters” she provides keys to demolishing debt, shares how to budget correctly, and gives principles in wealth building.
Sophie Kaemmerle is Communications Manager for NeighborWho (@UseNeighborWho). NeighborWho’s mission is simply to help you better understand your neighborhood. Learn about your neighbors, the houses on your street, current and past owners, access property reports and lookup public records. Public records are aggregated to compile in-depth reports on properties & people—NeighborWho provides a wealth of information at your fingertips.
Katrina Mckissick is a life coach. Her great passion is helping people to work through issues they face in life. She helps clients find healthy perceptions of themselves so they can be complete, healthy, whole and safe. She provides resources and tools to help others live an amazing life.

Unlike Payday Loans, a Bad Credit Installment Loan Could Actually Help Your Credit Score

Payday loans might seem like a good solution when you’re hard-up for cash, but a bad credit installment loan could set you on the path to a better credit score.

When people take out a payday loan, they’re not usually thinking about their credit score. And why would they? The whole reason they’re turning to a payday loan is that they have poor credit in the first place. When a financial emergency rears its ugly head, and they need to cover those extra expenses, a payday loan is their best bad option.

But is it? We won’t keep you in suspense: No. No, it is not. There are several reasons why a person should take out a bad credit installment loan instead of a short-term payday loan. Lower interest rates are one. More affordable payments is another. When considering the reasons to take out an installment loan over a payday loan, those two are the most important.

In this post, however, we’re going to focus on a third reason: The right bad credit installment loan could actually help improve your credit score. Here’s how.


Payment history is important to your score.

Your credit score is the single most important number in your financial life. It determines what kinds of personal loans you’ll be able to access and the rates that you’ll pay for them. The most common type of credit score, the FICO score, is scored on a scale from 300 to 850. The higher your score the better, with 680 being the rough divider between good and not-so-good credit.

Your FICO score is created using information from your credit report, which is a document that tracks your history as a credit consumer over the past seven years. (Some information, like bankruptcies, stays on your report for longer than that.) You have three different credit reports, actually, one from each of the three major credit bureaus: Experian, TransUnion, and Equifax.

While the formula that FICO uses to create their score is top-secret, there is one thing we do know, and that’s the five different weighted factors that are used to create them: Payment History, Amounts Owed, Length of Credit History, Credit Mix, and New Credit Inquiries.

Of those five factors, Payment History is the most important. It makes up 35 percent of your total score—with your Amounts Owed coming in a close second at 30 percent. Payment history takes into account whether or not you pay your bills in full and on-time.

This is why one late payment can do some serious damage to your score—and why building up a positive payment history is crucial to raising a score that’s down in the dumps.

Find a lender who reports your payments.

Traditional lenders like banks always report payment information to the credit bureaus. But when it comes to bad credit lenders, the practice is far less common. Places that offer no credit check loans like cash advances or payday and title loans don’t care about their customers’ credit scores, so why would they report their payment information?

Well, it turns out that doing so can really help their customers! Positive payment information that’s reported to the credit bureaus gets added to a person’s credit report, meaning that it then gets factored into their credit score. More positive payment information will eventually translate to a higher score!

Then again, short-term bad credit loans like payday and title loans are meant to be paid off in a single lump sum payment (one that many customers have trouble affording). Plus, they wouldn’t have that much payment information to report anyway … unless you include the large portion of their customers who have to roll over or reborrow their loans and get trapped into a predatory cycle of debt …

Lenders like OppLoans, on the other hand, offer bad credit installment loans that are designed to be paid off in a series of regular payments—and they report their customers’ payment information to the bureaus. This means that every on-time payment you make on your installment loan is a positive mark on your credit report.

Taking the financial long view.

When you have bad credit and no money in savings, it can be hard to think about anything other than the financial problem that’s sitting right in front of you. When you have to get your car repaired in order to get to work the next morning, why would you care about the impact a given loan would have on your credit score? You’ve got bigger fish to fry!

But if you’re always taking the short-term view, you’re never going to fix the real problem. Ignoring your credit score means getting stuck with high interest rates and loan payments that will eat up a sizeable chunk of your budget. Instead of putting money into savings in order to build an emergency fund, all those extra funds will go towards fees and interest.

Breaking the debt cycle isn’t easy, and it’s not something that a single loan is going to solve. But choosing a safe, affordable installment loan that will help build your credit over a predatory payday loan is a good first step to take. To learn more about putting your finances on a more solid footing, check out these related posts and articles from OppLoans:

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

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Payday Loans vs a Line of Credit

Inside Subprime: Dec 17, 2018

By Jessica Easto 

If you are looking for ways to manage expenses, you may have run across the term “line of credit.” What is a line of credit? And how is it different from, say, a payday loan? On its face, a line of credit may seem similar to other financial products, but it’s important to understand the differences.

A line of credit is a type of loan that both businesses and individuals can use to access money for a certain amount of time. When individuals do this, it’s called a “personal line of credit.” The lender, such as a bank, that issues the line of credit establishes a “credit limit,” which is the maximum amount of money you can borrow from them.

Personal lines of credit are usually used in specific situations where personal loans don’t quite make sense. They may be used when an individual knows they will need to spend money over a period of time, but they aren’t sure how much it will cost—such as with a restoration project, a wedding, or healthcare expenses. Lines of credit may also be used when month-to-month cash flow could be an issue, such as with an independent contractor whose income fluctuates significantly month to month.

Payday loans, on the other hand, give you the specified amount of money in one lump sum, while lines of credit let you borrow money as you need it over what is called a “draw period.” This can last for a long time, up to 10 years. You only have to pay interest on the money you borrow (as opposed to the full sum of your credit limit), and you can choose to paydown your debt as you go or wait for your repayment period to make minimum payments. (In this way, a line of credit is similar to a credit card.)

Payday loans, on the other hand, are marketed as a way to tide you over to your next paycheck. Because of this, the repayment terms are very short (usually no more than 14 days), and the loan amounts tend to be quite small (just a few hundred dollars). A line of credit can be extended for several thousands of dollars. It all depends on your credit score, which is another key difference.

In order to qualify for a personal line of credit, you need good credit—usually a score of 680 or higher. To get a payday loan, you don’t need any credit. Usually you just need a bank account. Payday loans are usually targeted at vulnerable populations who don’t have many options when it comes to managing their finances.

Payday loans are a form of predatory lending. And even though they are banned or regulated in many states, they are one of the most toxic types of loans available. They tend to use unfair or obscured loan terms, which often push borrowers further into debt. On the other hand, lines of credit are considered a safer way to borrow money.

One way to compare the two is to look at their annual percentage rates (APR), which accounts for the cost of interest and any other fees that borrowers will pay over the course of a year. Payday loans regularly have APRs around 400 percent. The APR of lines of credit fluctuate depending on your credit history and other factors.

When it comes to money management issues, one of the best things you can do it learn how to protect yourself from predatory lending and learn more about your options when it comes to expense management.

For more information on payday loans, scams, and cash advances and title loans, check out our state financial guides including CaliforniaIllinoisTexasFlorida and more.

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Credit Utilization Ratio: What It Is, Why It’s Important, and How to Master It

If you have credit cards, make sure you’re not putting too much money on them at any one time. Utilizing too much of your total credit limit can hurt your credit score.

Your credit score is very important. We’ve mentioned that before, but we’re going to mention it again. And then again after that. And then at least three more times.

And why do we keep saying it? Because it’s true! Your credit score is very important. It can determine whether you’re able to get a loan and at what rate. Given the importance of borrowing money in modern day life, this will affect whether you’re able to get a mortgage or credit card or car or apartment or sometimes even a job. Without a good score, the only loans you’ll be able to qualify for are bad credit loans—and the wrong bad credit loan could set you back big time.

Unfortunately, understanding your credit score isn’t always as easy as it should be. For example, how much money you currently owe makes up almost one-third of your total score. But the credit-scoring formula doesn’t just take into account how much you owe, it also accounts for what’s called your “credit utilization ratio.”

But what is your credit utilization ratio, and how do you keep it healthy? You probably aren’t sure, or else you wouldn’t be reading this article. Or maybe you have a pretty good sense of it but you were looking for some additional tips. Either way, read on!


So what is this “credit utilization ratio” anyway?

We spoke to the experts to find out how they would describe credit utilization ratios. Now we’re bringing those explanations to you, curious readers!

“Your credit utilization ratio is the relationship between your credit card limits and your account balances (as they appear on your credit reports),” explained Michelle Black (@MichelleLBlack), credit expert and founder of CreditWriter.com.

“It describes the percentage of your available credit which you are actually using. Revolving utilization is hugely influential over your credit scores. It’s nearly as important as your payment history. In fact, an impressive 30% of your FICO credit scores are largely based upon your revolving utilization ratios.”

Here’s an illustrative example from Leslie H. Tayne Esq. (@LeslieHTayneEsq), Founder and Head Attorney at Tayne Law Group (@taynelawgroup):

“Your credit utilization ratio is the percentage of your allotted credit that you owe. “It includes all of your lines of credit and all of your balances. For example, if you have two credit cards each with $6,000 lines of credit for a total of $12,000, and you are carrying a balance of $1,000 on one and $2,000 on the other, your credit utilization ratio is 25 percent.”

What kind of number should you aim for?

Now that you know what your credit utilization ratio is, what does a good credit utilization ratio look like?

“I suggest to my clients that they try to use only 30 percent of the available credit, and never max out a card, meaning do not use every dollar of the utilization,” Tayne told us. “I recommend keeping your credit utilization ratio under 30 percent to prevent it from negatively impacting your credit score.

“This should apply to both your individual cards and your cumulative total. Having a high credit utilization ratio tells creditors that you’re most likely spending a lot of your income on debt payments, meaning you may be a higher default risk. Having a high utilization rate can affect whether you qualify for loans or what your interest rate will be if you are approved. The best credit utilization ratio, of course, is zero or under 10 percent.”

Black echoed this sentiment:

“Ideally, you should aim to keep the revolving utilization ratios on your credit reports as low as possible. Best practices include paying off your credit card balances in full each month. Additionally, it is a good idea to pay off your full balance a few days before the statement closing date on your account. Doing so will ensure that your statement will show a $0 balance and that a $0 balance will be reported to the three credit bureaus for the upcoming month.”

Keeping it 30 (or lower).

So what steps can you take to improve your credit utilization? Well, one of the best ways is by paying off your balances in full and early, as Black mentioned.

Kelan Kline of The Savvy Couple (@TheSavvyCouple) offered a couple additional methods for keeping a healthy credit ratio:

Ask for a credit line increase. We do this every 6-12 months and it works out very well. This will allow you to spend more money on a certain credit card without having to worry about using too much of your credit limit.

Get another card. You can always have more than one card open which can help spread out spending during higher spending months like the holidays. It’s always important to remember that credit cards are NOT meant to hold a balance from month to month. Being responsible is even more important when you have more than one card.”

By keeping your credit utilization ratio low, you’ll be keeping your credit score in a better place. Follow all this advice, especially the parts about paying all of your bills off in full and on time, and a better credit future will be in your grasp.

When you’ve got a lousy credit score, an emergency expense might leave you stuck with predatory no credit check loans like payday loans and cash advances. This is one of the many reasons why maintaining your score is important! To learn more about how credit scores work—and how you can improve yours—check out these related posts and articles from OppLoans:

What else do you want to know about credit scores? Let us know! You can find us on Facebook and Twitter.

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Contributors

Michelle Black is a credit expert, freelance writer, and founder of CreditWriter.com. You can find her on Twitter @MichelleLBlack.
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.

Want a Great Holiday Gift for Your Grandkid? How About Helping Them Pay for College!

While it’s traditional for most holiday gifts to be a surprise, this is one instance where you’ll definitely want to sit down with everybody first and coordinate.

Recently, we conducted a nationwide survey asking grandparents how much money they spent on holiday gifts for their grandchildren. On average, we found that grandparents spent around $218 per grandchild, with clothing, toys, and gift cards as the most popular types of gifts purchased.

But for grandparents who are financially secure, there might be a better type of gift they can give for the holiday season. If their grandkids are planning to attend college, they could help them pay for it!


It’s a gift that’ll keep on giving.

A college education these days is pretty dang expensive. According to Jack Schacht, founder of MyCollegePlanningTeam.com (@CollegePlanTeam), the average cost of an in-state public college is $24,610 while the average cost for a private college is $49,320, per CollegeData.com. He also notes that tuition is the “second largest expense most families will ever tackle, as tuition continues to increase at twice the rate of inflation.”

So it’s no surprise that many students have to take out tens of thousands of dollars in loans in order to pay for their college education, a situation that’s caused the nation’s total student load to balloon to almost 1.4 trillion!

“No wonder so many grands want to help their grandchildren out,” observed Schacht, citing a survey from Fidelity Investments which found that “more than half of American grandparents are either helping to fund their grandkids’ tuition or planning to do so down the road.”

But Schacht also warns that it’s not as simple as simply writing your grandkids a big check and calling it a day. “A monetary gift to your grandchild may result in a tax event on your end or interfere with financial aid eligibility on theirs,” he said. “In order to avoid such financial perils and pitfalls, grandparents need to do some research and planning.”

Don’t let this gift be a surprise. 

It’s fairly normal when giving holiday gifts to keep their contents a secret. After all, it’s the only way you’ll get that fantastic look of surprise and delight when they open it!

But when you’re giving this particular gift, Schacht recommends that you do the exact opposite. Before you do anything, you should sit down with your children and your grandchild and tell them about your plan.

Why? Well, if you don’t coordinate your gift, it could end up biting you in the behind, big time. Here are two examples he provided that illustrate why coordination is so key:

“According to IRS guidelines on gift exclusions, you can give up to $15,000 a year to your child or grandchild without paying gift tax. However, that monetary gift to your grandchild will count as untaxed income, which may reduce his or her aid eligibility on their FAFSA (Free Application for Federal Student Aid).

“Ditto if you want to pay your grandchild’s college tuition directly. The IRS may not count it as a gift from you, but depending on the college, your payment may negatively impact your student’s eligibility for aid.”

Schacht pointed out that this won’t be a problem if your grandchild isn’t eligible for need-based aid in the first place. So how do you know if they’re eligible or not?

This is one of the tricky parts. According to Schacht, “You may not know unless you first determine your EFC (Expected Family Contribution) which is determined by family income and who in the family earns the income. It is also determined by assets, who owns those assets, and in which accounts the assets are held.”

Clearly, there’s a lot more to this process than there is to buying your grandkids a couple loot crates in Fortnite. (And if you don’t understand what that reference means … to be honest we don’t really know what it means either, so you’re in good company.)

Start by looking into a 529 savings plan.

When you give your grandkid some pocket money, the transaction is pretty simple. You take the money from your wallet and place it in their hand. That’s it.

But contributing to their college is a little bit more complicated. Enter 529 savings plans. These are tax-advantaged, state-sponsored investment accounts that can be used to pay for the beneficiary’s future education costs, including room and board, tuition, and mandatory fees.

The plans also carry tax benefits, like tax breaks on contributions and no taxes on withdrawals used to pay for education costs. However, it’s worth noting that these benefits vary from state to state. If you want to learn about 529 savings plans or 529 prepaid tuition plans, check out this Investor Bulletin from the SEC.

According to Schacht, 529 savings plans owned by a grandparent come with many advantages, including the fact that they aren’t factored into the student’s FAFSA, which should help them qualify for additional aid.

But that doesn’t mean these plans are perfect. “However—and it’s a big however—once funds are withdrawn to pay for tuition, distribution is considered income on your student’s FAFSA for the next two years,” cautioned Schacht.

“Once again, eligibility for financial aid may suffer. As a result, some experts suggest holding off making contributions from your 529 plan until students are college juniors and have filed their last FAFSA.”

“Even once you decide to pursue a 529 plan,” he added, “there is still plenty to learn and consider.”

But don’t forget you have other options beyond 529s.

Don’t stop your research with 529 plans. While they are very popular, they are hardly the only game in town when it comes to funding a college education. Schacht laid out some of the competition:

“You can also consider a Uniform Gift to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) account. These typically offer more investment options than 529 plans but involve turning control of the account over to the student when they reach a specific age.

“Another big problem with these accounts,” he added, “is that they are assessed as a child asset on the FAFSA and those assets are assessed at a much higher rate than those held by a parent. In addition, there are Coverdell Education Savings Accounts (ESAs), which offer a whole different set of pros and cons.”

Make sure you look into all of these accounts before you make your final decision. A little research up front will pay out big time once your grandchild finally heads off to school.

In summary: You’ll need to do your homework.

“Helping your grandchild fund their college education is truly a gift that will last a lifetime,” said Schacht. “But in order to make the most of it, you need to do your homework.”

This is advice that applies to pretty much any financial decision, large or small. Going in blind or simply choosing the first option you see could lead to major problems down the line. None of us liked doing homework in school—we bet your grandkids don’t—but we also know that much of that homework was incredibly valuable.

“Talk to your grandchild and/or their parents about their goals and plans. Do your research as a family. And by all means, take advantage of the many resources and experts that are available to you,” said Schact. “Together, you can ace this!”

If you enjoyed this article, check out these related posts from OppLoans:

What other questions do you have about paying for college? We want to hear from you! You can find us on Facebook and Twitter.

Visit OppLoans on YouTube | Facebook | Twitter | LinkedIN


Contributors

Jack Schacht is the founder of MyCollegePlanningTeam.com (@CollegePlanTeam), a Naperville, Illinois based organization that brings together experts from both the academic and financial services communities who work in coordination to help families find the right college for the right price.  Contact him at (630) 871-3300 or MyCollegePlanningTeam@gmail.com.

How To Tell If Your Car Loan is Predatory

For people who absolutely need a car, falling into the clutches of a predatory auto lender could spell true disaster.

Depending on where you live, a car may be a necessity, but dang it if the things aren’t really expensive! Most people can’t just plop down a suitcase full of cash and purchase a car on the spot, even a used car. And that means if you want to get a new car, you’ll probably need a loan.

Unfortunately, many predatory lenders know that cars are vital and that people without great credit scores or financial histories won’t necessarily be able to access a proper loan to get the car they need.

So how can you tell if the car loan you’re considering is predatory? Buckle in and find out!


Double-decker interest rates.

If your credit rating is in the high 700s or beyond, you’re in a good position to get a “good” car loan. You can go to an established bank or credit union, apply for a secured installment loan and get your car purchase funded at an interest rate under 4 percent.

You’ll be able to pay that loan back in regular, manageable monthly payments, and those payments will be amortizing, so you’ll be paying off some of the principal and some of the interest with each payment. That means, barring disaster, you shouldn’t get stuck in a debt hole you can’t pay off.

If your credit score is not so hot, however, you’ll have to get the auto loan equivalent of a bad credit loan, and that means going somewhere other than a bank: either a “Buy Here, Pay Here” dealership or from some other kind of sub-prime lender. And that’s where you need to be very careful because here there be many predatory loans!

“The simplest definition of predatory lending is financing that imposes high interest rates or overly restrictive loan conditions,” explained RJ Mansfield (@DebtAssassin1), consumer’s rights advocate and author of Debt Assassin: A Black Ops Guide to Cleaning Up Your Credit. “For instance, uncommonly short repayment terms and interest rates over 10 percent on an auto loan.”

Read that contract very, very carefully.

Predatory lenders thrive on confusing contracts. And let’s face it, “confusing contracts” is a pretty redundant pair of words. Do you actually know what you’re agreeing to when you sign into iTunes? We don’t either.

But if you’re getting a car loan, it’s very important that you read that contract very carefully. Maybe even consider bringing in a friend who has some knowledge on loan contracts, if you have one.

“I advise consumers to take the time to read and understand their obligations under any contract,” Mansfield told us. “If they don’t understand something, ask. If they don’t get an answer they can live with, walk away.”

What sort of traps might be in that contract? Many predatory lenders will tack on as many “junk fees” as possible. You should be suspicious if you see things like “rust proofing” and “vehicle service contracts.” As Mansfield said, don’t be afraid to ask about anything and everything. If they’re trying to rush you into a deal, that’s a bad sign.

Beware of giant down payments.

Most car purchases require some kind of down payment. This is money you’re expected to pay upfront before receiving the car. If you have good credit and can get a proper car loan, you should probably expect to pay around 10 to 20% of the car’s total price as a down payment.

Of course, you could pay more if you’re able to and want to, and then you won’t have to pay as much interest in the long run.

But if you’re only given the option for a much higher down payment, that should be taken as a red flag. Predatory car lenders want to get as much money upfront as they can because their payment terms are so difficult to manage, they know it probably won’t be long before the borrower can’t make their payments and the car is repossessed.

A huge down payment allows them to get as much money as they can before seizing the car and selling it someone else, starting the process over again.

Make the best judgment you can.

If you have good credit, a lot of money saved up, or a potential co-signer, you’re in a good car buying situation.

If you don’t have any of those things and you need a car… well, unless you can win one for cheap at a police auction, you’re going to have to figure out what negative loan aspects you can manage within your budget.

You should try to avoid as many of these predatory aspects as you can, but you’ll probably have to make some concessions.

“If you have a credit score of under 660 you are either going to be declined, asked to make a substantially higher down-payment than normal or approved at an extremely high interest rate,” acknowledged RJ.

“If you must have a car is that predatory or helpful? The most important factor in an borrowing is, ‘Can I afford the monthly payment?’”

We’ve given you the warning signs to look out for, but at the end of the day, you have to take stock of your needs and make a decision. We get that owning a car might be a complete and total necessity. Hopefully, this advice will help you shop around to find best (or maybe just the least bad) car loan you can.

If you have bad credit, you’ll need to watch out for more than predatory car loans. Short-term no credit check loans like payday loans, title loans, and cash advances could also put your finances in danger. To learn more about borrowing money when you have bad credit, check out these related posts from OppLoans:

What other questions do you have about predatory lending? We want to hear from you! You can find us on Facebook and Twitter.

Visit OppLoans on YouTube | Facebook | Twitter | LinkedIN


Contributors

RJ Mansfield (@DebtAssassin1) is a consumer’s rights advocate and author of Debt Assassin: A Black Ops Guide to Cleaning Up Your Credit

5 Questions to Ask Yourself Before Taking out a Bad Credit Loan

Once you answer these questions, that short-term loan payday loan you’ve been eyeing might not look like such a great idea anymore.

Borrowing money when you have a lousy credit score isn’t easy. There are tons of lenders out there offering easy approval loans, but it can be really hard to figure out which of them are worth it. And choosing the wrong bad credit loan could end up wrecking your finances for a long time to come.

That’s why we want to make the process a bit easier for you. Here are five important questions that you should ask before taking out a bad credit loan. The answers to these questions should go a long way towards guiding your decision—and helping you make the right one.


1. What’s the annual interest rate?

Okay, so this is a question you should be asking about any personal loan, not just a bad credit loan. But it’s also true that loans for bad credit—even the good ones—are going to come with much higher interest rates than standard personal loans. Choosing the wrong bad credit loan could end up costing you hundreds or even thousands of dollars in additional interest.

When you look at the interest rate for short-term bad credit loans like payday loans, you’ll often see an interest rate in the range of $15 per $100 borrowed. That seems a bit high, sure, but you know that this is the cost of borrowing money with poor credit. (These rates will also vary depending on what state you live in.)

But with those sorts of loans, the simple interest rate doesn’t tell the whole story. You also need to look at the annual percentage rate, or APR. This is a standardized metric that measures how much a loan would cost over the course of a full year, letting you make cost comparisons across all different kinds of loans.

Let’s return to that $15 per $100 borrowed rate: For a two-week payday loan, that cost works out to an APR of 391 percent. That’s a lot! And while it might not seem like annual rates would matter when it comes to short-term payday loans, they definitely do. We’ll explain more in later sections.

In fact, when it comes to short-term loans, those sorts of sky-high interest rates are pretty common. Title loans, which are secured by the title to your car or truck, come with average APRs of 300 percent, while cash advances loans are pretty much just payday loans using a different name.

Checking out a bad credit installment loan could be a good way to sniff out lower annual rates, but your best bet will come with joining a local credit union, many of which offer Payday Alternative Loans (PALs) that come with a max interest rate of 28 percent. Our advice is to join a credit union now so that you’ll be able to access a PAL later.

2. Is the loan amortizing?

While the overall interest rate on your bad credit loan is going to be important, you’ll also want to make sure that the loan is amortizing. This could be the thing that saves you from getting trapped in a predatory cycle of debt.

Amortizing loans don’t charge interest as a single flat fee; they accumulate interest over time, which means that a) your loan will accrue less money in interest as you pay down the principal, and b) that paying your loan off early will save you money overall.

(That second benefit assumes that your loan doesn’t charge prepayment penalties. So make sure you find that out as well before borrowing.)

But here’s the most important thing about amortization: It ensures that every payment you make goes towards both the principal and the interest. So each time you make a payment towards your loan, you get one step closer towards being out of debt.

That seems … pretty obvious, right? Well, unfortunately, it’s not always the case. Short-term bad credit loans often charge interest as a flat fee, and they come with the option of rolling over your loan in order to extend your due date. Rolling over a loan often consists of paying only the interest owed in exchange for receiving a new loan term, complete with additional interest.

For people who struggle to afford their loans, loan rollover can leave them trapped in a dangerous cycle. Every couple weeks or every month they make payments towards the interest owed without ever paying off any of principal loan amount. No matter how many payments they make, they never get any closer towards actually getting out of debt.

This is why amortization is so important. If you’re taking out a bad credit loan, choose a loan that has an amortizing payment structure—otherwise, you could find yourself in a cycle of high-interest debt.

3. Can I afford the payments?

Earlier in this piece, we mentioned that the annual rate for short-term loans can be far more relevant than you might think, which mostly comes down to people not being able to afford their payments. The more that people have to roll over their loan or reborrow another loan in order to make ends meet, the more they end up paying in interest.

This is especially relevant when it comes to short-term bad credit loans like payday and title loans. Think about it: If you borrowed $400 at a 15 percent interest rate and then had two weeks to pay back $460, would you be able to swing it? Many can’t, at least not without having to take out another loan in order to pay the rest of their bills and living expenses.

In fact, a study from the Pew Charitable Trusts found that only 14 percent of payday loan borrowers had enough money in their budget to make their payments. And data from the Consumer Financial Protection Bureau (CFPB) has stated that the average payday loan borrower takes out 10 loans per year, spending an average of 200 days in debt.

The higher interest rates for bad credit loans are always going to mean some belt-tightening in order to make your payments. But there’s a big, big difference between tightening your belt and having to cinch it so small that you practically cut yourself in half.

Bad credit installment loans often mean paying more money towards interest overall when compared to payday and title loans, at least on paper. But that longer loan repayment term also means smaller individual payments. Having payments that fit within your budget and let you get out of debt on-schedule can definitely be worth the extra money.

4. Do they check my ability to repay?

Bad credit loans are also sometimes referred to as “no credit check loans” because the lenders in question don’t do a hard credit check when processing a customer’s application. This makes sense since people applying for these loans already have poor credit scores.

But there’s a big difference between not running a hard credit check and not checking whether a customer can afford their loan altogether. One of them speaks to the realities of bad credit borrowing, but the other can be a sign of something far more sinister.

Lenders that don’t do any work to verify a customer’s ability to repay their loan could very well be actively hoping that their customers don’t repay on time. That way, they roll over or reborrow their loan, which means increased profits for the lender.

On the flip side, lenders who want to check a customer’s ability to repay can run what’s called a “soft” credit check, either from one of the three major credit bureaus (Experian, TransUnion, Equifax) or from an alternative consumer reporting agency.

These checks return less information than a hard credit check, but they also won’t affect your credit score. There are also other methods beyond a soft credit check—like verifying your income—that lenders can use to determine your ability to repay a loan.

Nobody who has bad credit wants a hard credit check when they’re applying for a loan. All it’s going to do is ding their credit; that’s the last thing they need! But they should still choose a lender who cares about their ability repay. That’s a sign that this loan will help forge a path to a bright financial future instead of digging their finances into an even deeper hole.

5. How do other customers feel?

When you’re looking for a place to eat or a new place get your hair cut, do you check the customer reviews? Well, why wouldn’t you do the same thing when deciding to borrow money? The experiences of other customers can tell you loads about what a place is really like.

So check out a lender’s customer reviews on Google, and Facebook before applying for a loan. You should check with lending platforms like LendingTree or CreditKarma, as they often have reams of customer feedback and reviews.

And go beyond that! Search out the company’s BBB page to see if they’ve had complaints registered against them and how those complaints have been resolved. Even a thorough Google search for the company might turn up information that will sway your decision.

There are any host of factors to consider when applying for a bad credit loan, and there are many questions you should be asking beyond the five we’ve listed here. But possibly the most important question is: What’s the best loan for you? Once you have that figured out, your decision should be an easy one.

In the long-term, the best way to avoid predatory bad credit lenders is to … fix your credit score! To learn more about improving your score, check out these related posts from OppLoans:

What other questions do you have about borrowing with bad credit? We want to hear from you! You can find us on Facebook and Twitter.

Visit OppLoans on YouTube | Facebook | Twitter | LinkedIN

How You Can DIY Your Way to Cheaper Home Maintenance

You’d be surprised how some very easy tasks can end up saving you tons of money in home repair costs over the long run.

Our house, in the middle of the street. Our house, we should have built it somewhere else.

Cars won’t stop hitting our house. It’s what happens, when that house is in the street.

That’s right, folks. Whether your house is in the middle of the street or in one of the thousands of better locations to have a house, it’s going to need regular maintenance and repairs. And that can get very expensive—like “taking out an installment loan” expensive.

But what if … you could do that maintenance on your own? You’d be able to save a lot of money! So is it time to grab your tools and start hitting various parts of your home with a hammer?

Not so fast! Certain tasks should be left up to a professional. We spoke to the experts to find out what tasks you can handle on your own—plus how to pull off the job—and which should be left to the pros.


Making a list, checking it (probably more than) twice.

Before you decide which tasks you can handle on your own and which you’ll need to bring a professional in for, you should make a list of all of the tasks that need to be done.

“I rehab houses and spend a lot of my time making expensive repairs for items that could have been avoided by homeowners with simple scheduled maintenance,” advised home flipper Robert Taylor.

“Every homeowner needs a schedule to remind them of when to do their maintenance items and then to make sure that they actually do them. Putting maintenance tasks on a calendar or scheduling them for specific times during the year can help to make sure they don’t get forgotten.”

John Bodrozic, co-founder of HomeZada (@HomeZada), echoed the need to make a list and schedule:

“The first thing to know about performing your own maintenance is itemizing all the preventative maintenance tasks your home requires in a recurring schedule, as many items are seasonal or have a recommended frequency for how many times to perform the tasks over the course of the year.

“This is important because what is required for your home oftentimes depend on where your home is located, the seasonal weather where you live, and the age of your home and its equipment and building materials.

“Once you have this schedule, then you can determine whether you are able to do these yourself. Most consumers can perform a majority of the preventative maintenance tasks their home requires themselves, even with perhaps searching for a quick video on how to do something.”

So what are some of those tasks you can perform on your own?

Join the winterization nation.

When it comes to the seasonal maintenance to get your home ready for winter, there are quite a few tasks you can do on your own. And that’s good because if you live in a place with winter, winterizing has to be done every year.

Here are some tasks you can do on your own before the fall ends, from Zach Hendrix, co-founder of GreenPal (@YourGreenPal):

“Aerate and overseed turf to make sure you’ll have a great looking lawn next year. Clear those gutters on the roof to avoid all kinds of problems like wood rotting along the roof line. Winterize your irrigation system and pool if you have one. Failing to get this done before your first frost could cost you thousands. Remove any dead annuals from your landscape beds.”

“Performing these home maintenance tips in the winter time will save you thousands of dollars in preventative maintenance repair costs.” You can read more about home winterization in our blog post, Winterizing Your Home: How To Prep for Winter on the Cheap.

Prevent an HVAC attack.

Managing your heating, ventilation, and air conditioning is probably not the first home maintenance task you think about, but it is a vital one. And it’s one you probably don’t need a professional to manage!

“Changing your HVAC filter is not only a very important task, but most homeowners can outsource it to their child, it’s that easy,” Jonathan Faccone, founder of Halo Homebuyers L.L.C., told us, “It’s a must if you want to keep your furnace operating efficiently and preserve its overall life-span. Many people tend to forget or overlook this important maintenance item which can actually invalidate your system’s warranty if not kept up.”

But that’s not all. Faccone gave us two other suggestions of home maintenance tasks you can do on your own:

“Painting is a task that I believe most homeowners are comfortable doing. If you screw up with a wrong color or a shaky hand, the consequences are certainly not disastrous. There is certainly an art to successfully completing a professional looking paint job. However, after watching a few good Youtube videos on technique and a little practice, you’ll get the hang of it.

“Another overlooked maintenance item is making sure all the hinges and metal on metal contact points of your garage doors are well lubricated. This item is recommended every 6 months to keep your garage door operating efficiently and prevent any serious repairs in the future. Home Depot carries garage door-specific lubrication products which you can choose from, and it takes only about five minutes to complete.”

Know when to call in the pros.

Even if you see yourself as a DIY Dragon, some tasks should really be left to the professionals. What are some of those tasks? Oh, you know we asked the experts about that!

“Most basements in homes over 50 years old have some form of asbestos, whether it’s insulation on air-ducts or asbestos tiles on the floor,” warned Jeff Miller, real estate agent and owner of AE Home Group (@aehomegroup) in Maryland.

“While it is legal in many states for homeowners to personally conduct abatement in their own homes, it is something that is best left to the professionals. These professionals have expensive equipment like negative pressure air units to ensure that every asbestos particle is removed from the home. By conducting a DIY abatement, you open yourself up to potential health risks in the future.”

But asbestos isn’t the only thing you shouldn’t be inhaling.

“Mold is a common issue that should be left to the professionals,” recommended Evan Roberts, real estate agent and renovation expert with Dependable Homebuyers in Baltimore, MD. “While a DIY homeowner can address the symptoms of mold by scrubbing with bleach, replacing drywall, and setting up a dehumidifier, these solutions are only temporary and do not get to the root of the problem.

“Professional mold remediation experts understand the extensive ways that moisture can enter a home and apply their professional experience to determine a permanent solution.”

“We were renovating a house with mold and couldn’t figure out how water was entering the house. We extended downspouts and sealed the basement walls but water was still finding its way into the basement.

“We called out an expert who went out front and pointed at a tree stump in the yard. Over time the roots had decayed and rabbits had extended these voids to create tunnels to the home. Rainwater would store up and have a direct path into the basement. After removing the stump and compacting the ground we no longer had any water or mold issues.”

Finally, here are some more tasks that Faccone advises against handling on your own:

“Home items that the homeowner should leave to the professionals are ones that pose a safety risk or can cause major damage to the house if not done the proper way. These items include plumbing, carpentry, and electrical related tasks. If you are not comfortable using certain tools and have never had any experience with these items, it’s best to leave it to those who do.”

Go forth and make those repairs.

Now you should have a sense of what you can and can’t tackle on your own. Grab your hammer and go! Just make sure you don’t bite off more than you can chew (Also don’t, um, chew your house.)

Getting stuck in costly repairs is how people end up running through their savings and being forced take out short-term bad credit loans and no credit check loans—like cash advances, title loans, and payday loans—during times of financial emergency.

Saving money through DIY home repairs is great, so long as you know your limits. In the meantime, want to find out some other ways you can save money? Check out these related posts from OppLoans:

What are your best tips for DIY home maintenance? We want to hear from you! You can find us on Facebook and Twitter.

Visit OppLoans on YouTube | Facebook | Twitter | LinkedIN


Contributors

John Bodrozic is a co-founder of HomeZada (@HomeZada), an online and mobile home management solution. HomeZada strives to educate and provide resources for homeowners in all areas of home management, including home inventory, home maintenance, home finances, and home improvement projects.
Jonathan Faccone is the managing member and founder of Halo Homebuyers L.L.C., a New Jersey and Eastern PA real estate development and investment company with a team of experts with collectively over 30 years of experience. He is also a referral agent through Keller Williams Realty.
Zach Hendrix is a Ruby on Rails developer and UX professional. He is Co-Founder of GreenPal (@YourGreenPal), an online marketplace connecting homeowners with local landscape maintenance professionals.
Jeff Miller is a real estate agent and owner of AE Home Group (@aehomegroup) in Maryland.
Evan Roberts grew up in Towson and now lives in Upper Fells with his girlfriend Michelle and their lovable dog, Mia. He has a proven track record as a homebuyer and loves helping educate homeowners on the current real estate climate. If you’re looking for a trustworthy professional who can answer all your toughest questions, then Evan is your man!
Robert Taylor rehabs and flips homes in the greater Sacramento area.  During the past 12 years, he has bought, remodeled and flipped scores of houses with code enforcement issues, houses needing repair, unwanted inherited houses, and difficult rental properties.

Your Guide to Escaping a Debt Trap

Being deep in debt can feel like you’re sinking in quicksand. But hope is not lost! Here are some tips to help you plan your debt trap escape.

Life comes at you fast. It seems like only yesterday you received that great new credit card in the mail, and yet here you now sit, suffering the embarrassment of that very same card being declined because you maxed it out. How did this happen?

Well, it’s no coincidence that people talk about debt like it’s a trap. When you’re in debt up to your eyeballs, you might as well be sinking into quicksand in the middle of the jungle.

Still, that doesn’t mean that you should give up. Just like there’s always a way out of quicksand (probably like a sturdy vine? Or something?) there’s also a way to escape from your debt, no matter how firmly it has you in its grasp.

So grab your safari hats, keep your comically oversized butterfly nets at the ready, and check out these ten steps for escaping a dastardly debt trap.


Ask for help.

This is a good lesson for any situation, not just getting out of debt. Don’t convince yourself that you have to do this all on your own. Seek help from a local nonprofit or a credit counselor. Talk to your friends and family members who are good with money.

Heck, you can even to talk to them about helping you directly, either by lending you money or by cosigning for a low-interest loan or credit card.

Granted, you should only do this if you are confident you can hold up your end of the bargain. The last thing you want to do is end up with even more debt plus a ruined relationship.

Still, the first thing you should do when escaping a debt trap is to ask for help. Trust us.

Stop spending money you don’t have.

Asking for help might be step one, but it only beats out this step by a razor-thin margin. Before you can start getting out of debt, you first need to stop digging yourself even deeper.

Take a look at where you’ve spent money over the past couple months and figure out why you are spending beyond your means.

For some, this step will be easy, as the debt they’re carrying will have been from a one-time financial or medical emergency.

For others, this will mean making serious adjustments to their lifestyle. If you need to change your spending habits, then go ahead make them, pronto.

The sooner you do this, the earlier you’ll get out of debt.

Build (and stick to) a budget.

Good news, the actions you took in step two have already gotten you started on step three.

With a budget, you are going to stop letting your spending rule your life. Instead, you’ll make a plan for where your money is going to go.

Take your last three months of expenses and put it into an Excel document—or use one of these handy budgeting apps.

Separate your needs from your wants, or things like rent and car payments that you must pay versus things like movie tickets and late-night rideshares that you can cut out.

Prioritizing your needs over your wants is the key to a good budget, especially when you need to pay down excess debt. The more you can put towards savings and debt repayment, the better off you’ll be.

Make a debt repayment plan.

If you try and pay down your debt without a plan, you are dooming yourself to failure. So don’t do that.

Instead, make a plan that is both reasonable and that leaves you some wiggle room in case an unexpected bill emerges. (For more on that, see the next entry.)

No matter what kind of plan you make, it can’t rely on you paying only the minimum payments. Your budget needs to carve out room for extra funds.

The two best debt repayment plans out there are the Debt Snowball and the Debt Avalanche methods. With both of them, you put all your extra debt repayment funds towards one debt at a time.

People will swear by the Debt Avalanche method because it means paying off your highest interest debts first, but that can take a while.

The Debt Snowball, on the other hand, focuses on paying off your smallest debt first, which will give you early victories. For many folks, that’s encouragement they’ll sorely need.

Build an emergency fund.

Throwing all of your money towards debt repayment is all well and good, but it does come with a big downside: If you don’t have any money in savings, you’ll have to take on more debt any time a surprise expense comes your way.

The way to avoid that is to simultaneously build an emergency fund. While this might slow down your debt repayments somewhat, the financial security it’ll provide is well worth it.

When you make a budget, set aside money from each paycheck that goes right into a savings account. Heck, you can even get money in cash and put it in an envelope under your mattress.

These funds are for emergency expenses, so they need be easy to access, but you’ll also have to avoid using them for unnecessary purchases and splurges.

Your initial goal with an emergency fund should be $1,000. But really, the ideal size for an emergency fund is six months worth of living expenses.

Pay yourself first.

This is a simple but powerful financial lesson. Paying yourself first means putting your long-term financial needs before everything else.

In this case, you should figure out how much you want to put into savings and towards debt repayment every month. Once you have those numbers in mind, only then do you turn your attention towards building the rest of your budget.

It might sound a little silly, but you’d be surprised what can happen when you change up your financial priorities.

You might call this the financial equivalent of the baseball diamond from Field of Dreams: build these savings into your budget, and the money will come.

Be careful with debt consolidation.

One way to pay down your debt is to consolidate all your different debts into one single loan or credit card with a lower interest rate—or maybe with no interest at all.

But debt consolidation comes with dangers all its own, especially with credit cards. Using a zero percent APR offer on a credit card to consolidate your debt can make your debt payments go farther, but what about all those old cards?

Closing those cards could actually hurt your credit score, but leaving them open invites a lot of temptation. If you’re not careful, you could end up racking up even more debt. That’s the last thing you need!

You need to be very, very careful, and keep those old credit cards in a place where you can’t access them very easily.

Increase your income.

The faster you can get out of debt, the more money you’ll save in interest and the sooner you’ll be able to put that extra money towards stuff that’s way more fun or productive or both.

But unless you want to start hunting local pigeons for food, there’s only so much room that you can carve out of your budget.

The only other option, then, is to increase your income! You can do this by taking on a second job or a fruitful side hustle.

The one thing you’ll want to watch out for is overwork and burnout, as that can lead you to make emotional splurge purchases.

If you aren’t able to swing a side gig, you can look for a better, higher-paying job, or ask your boss for a promotion!

Avoid predatory loans.

For folks with bad credit, tight budgets and meager savings, emergency expenses often mean taking out a bad credit loan or no credit check loan to make ends meet.

This is something you do your best to avoid in general, but especially if you’re trying to pay down your debt.

Predatory lenders offering short-term payday loans, cash advances, and title loans with ridiculously high annual interest rates will likely drive you even deeper into the hole.

Beyond a simple debt trap, they could leave stuck in a vicious cycle of debt, where you keep making payments without ever getting closer to paying your loan off!

If you must take out a bad credit loan, look into a long-term installment loan, as their amortizing interest and more reasonable payments can help keep you on track.

Fix your credit score.

If you’ve spent years trapped in debt, the odds are good that your credit score is in the tank. (For reference: A credit score under 630 is considered “bad credit,” but even scores below 670 can seem too dodgy for traditional lenders.)

The amount of debt you owe makes up 30 percent of your FICO score, so getting out of debt should help your score immensely. But don’t get overconfident!

A better score will help you borrow money with better terms and at lower rates, so order a free copy of your credit report and see where exactly your score can be improved.

Here’s a tip: If your years in debt caused any late or missed payments, make sure you make all your payments on time moving forward. The only credit score component more vital than your amounts owed is your payment history.

You can also follow these tips to AVOID debt traps altogether.

Guess what? It turns out that spending beneath your means, maintaining a budget, and building your savings are all great ways to stay out of debt in the first place! Just follow the advice we’ve laid out in this article, and your financial future should be debt-trap free!

If you want to read more about managing your finances responsibly, check out these related posts from OppLoans:

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