Month: April 2018

How to Pay Off Your Student Loans Faster

paying off student loans

The student loan burden in the U.S. is currently $1.3 trillion, dispersed among 44 million borrowers. While the amount of outstanding student loan debt varies widely among those loan recipients, the average 2016 college grad will leave school with a student loan bill totaling $37,172. That is a lot of debt, and if you are among those with student loan debt, it can feel like you will never be able to pay it off.

Student loan debt can certainly be a huge burden on new graduates, and it can continue to plague you for many years to come. For many recent — and not-so-recent — graduates, student loans can hinder hopes of home ownership, and can even linger on unpaid until they begin to negatively impact your credit score.

By paying your student loan off more quickly, you will save yourself money on interest, lower your debt-to-income ratio, and improve your credit to help you to reach your other financial goals faster.

Here are some tips to pay off your student loan faster:

Do not wait until graduation. Many college students are unaware that they can — and should — start making payments on their student loans prior to graduation. Doing this can be a huge benefit when it comes to cutting down the time it will take to repay your loans. Consider this: If you obtain a $10,000 student loan with an interest rate of 7 percent as a freshman in college, making monthly payments of $75 immediately will save you about $694 in interest by the time you graduate. One note of caution: Some private loan companies assess penalties for early payments, so make sure to check with your lender before making early payments.

Apply any early payments to principal only. If you are in a position to begin making payments on your loan immediately, make sure to specify that those payments be applied to principal, not interest. Lenders will typically apply payments to interest first, but by beginning payments before they are due, you have the option of applying those payments directly to the principal loan balance. Make sure to contact your lender to specify this so you can begin making some real progress that will save you money in interest down the road.

Make more than the minimum payment. Adding more to your monthly payment is one of the easiest and most effective ways to chip away at your student loan debt. Anything extra you add to your regular monthly payment will be applied to your principal. If you have set up auto payments, change those to include the extra amount you would like to pay. By adding this to your auto pay it will make it easier to stick with it. Even as little as $20 extra each month can add up to make a big difference.

Live with mom and dad a bit longer. You graduated college and you want to spread your wings and fly. Rest assured, there will be plenty of time to be an adult. If you can, take advantage of free room and board and apply some — or all — of the funds you would have used for rent or a mortgage to your student loan balances. A little bit of pain can yield a lot of gain and you will be surprised how much of a dent you can make in your student loan debt by living at home for just an extra year.

Refinance/consolidate your loans. If the interest rates on one or more of your existing student loans are on the high end, look into refinancing. If you have multiple loans, you may be able to consolidate them into a single new loan with a lower interest rate and monthly payment. Just be sure that if you are rolling a federal loan into a refinanced private loan, that you are not giving up some of the perks of those loans, such as deferment options. Of course, if your goal is to get rid of your student loan debt faster, deferment may be an easy sacrifice to make for a lower interest rate and payment.

If student loan debt is having a negative impact on your credit, you could benefit from credit repair services. At Lexington Law, we offer a free credit report summary and consultation. Contact us today at 1-844-259-3482.

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What is Acceptable Collateral for a Loan?

loan collateral

If you are considering applying for a personal or business loan from a bank, the bank may require some sort of collateral as part of the approval process. Collateral is something of value that you own or control that you agree to hand over to the bank if you default on the loan.

If this sounds foreign to you, it is because this type of credit arrangement is not nearly as common as it was many years ago. Since ancient times, if you wanted to borrow money or something else of value, you were expected to leave the lender with something else of value (such as an animal or a costly garment) in expectation of taking the item back when you repay your loan. These days, however, it is far more common for loans to be secured directly by the asset being financed (like a house or vehicle), or by revolving, unsecured credit (like a credit card).

However, collateral is still very much a part of the lending world for those circumstances when the loan you are seeking cannot be directly secured by what you are purchasing. Repayment depends on what happens in the future. A sizeable personal loan for the purpose of debt consolidation, or a business loan to fund expansion are examples of this arrangement.

Understanding how collateral works and what sorts of assets qualify to serve as collateral can help you better decide whether a loan secured in this way is the right choice for you.

How is the value of collateral calculated?

Because collateral serves as risk reduction for the lender, it follows that no lender is going to allow you to borrow every penny that the collateral could possibly be worth. Most lenders will not even consider collateral that is not worth significantly more than the loan principal.

The calculation banks use to determine how much collateral they require is called the loan-to-value (LTV) ratio. In most cases, lenders prefer to lend an amount no more than 70 or 80 percent of the collateral value. For instance, if you have a collection of vintage Star Wars merchandise valued at $100,000, you may be able to use it as collateral to borrow as much as $80,000 in cash. (Note: if your bank’s loan officer is not a Star Wars fan, this option may not work.)

In that respect, this type of collateral works exactly the same as other secured loans, like an auto loan or a mortgage. In that case, the bank is only going to approve a mortgage up to a certain percentage of the value of the property being purchased. They are careful to do so because if you stop paying your mortgage payments and desert the house, the bank wants to ensure they can recover the full value of their loan by selling the house you have left them with.

What assets can be considered as collateral to secure a loan?

The following items are most commonly accepted as collateral for loans that require something beyond the asset being financed. It is important to note, however, that every bank (and every banker) is a little different, and they will all have their own requirements and/or preferences when it comes to what they will accept as collateral.

  • Real Property: Land, buildings, vehicles, and land rights that you already own (not that you owe money on) is one of the most effective forms of collateral because it is relatively easy to sell and rarely depreciates significantly in value.
  • Valuables: For similar reasons, valuable personal belongings (like art, antiques, gold, or jewelry) can serve as collateral as well. These items can generally be appraised by experts to determine their current and likely future worth with a fair amount of confidence.
  • Cash: Perhaps the most popular form of collateral is cash itself, usually in the form of an existing savings account or easily liquidated investment account. While it may seem strange to borrow money if you have adequate cash on hand to serve as collateral, in the case of large investments, the dividends and interest income you lose by withdrawing that much cash can end up costing more than the interest on the loan.
  • Future Income: Now we are moving into the realm of potential income, so lenders will view this sort of collateral as far more risky than the items above. However, if you are seeking a business loan and you have a high-quality business plan mapping out exactly what you intend to use the money for (and what the return on investment will be), you can convince a bank to lend you the money based on that alone. Or, they may accept future earnings as a portion of the collateral and require less in the way of real property or cash.
  • Inventory and Equipment: For businesses that stock inventory (primarily retailers) and that own specialized equipment (such as manufacturers), these business assets can serve as legitimate collateral for a business loan. They may not be quite as fast to liquidate if the bank needs to seize them, but they are of value and of immediate use to your competition (if no one else).
  • Invoices and Accounts Receivable: If your business has a strong history of collecting payment from customers and/or the customers who currently owe you for services rendered have a solid payment history, a lender may accept proof of the money you are owed as collateral. This form of collateral is usually used by businesses to get through a brief, temporary cash crunch so they can cover payroll and operating expenses while waiting for all their money to come in.
  • Stocks, Bonds, and Other Investments: Most investments are treated similar to cash as long as the market is strong. Lenders accepting investment portfolios as collateral may even offer as much as 100 percent LTV if they are very confident in the market’s stability. In less certain economic times, however, those same lenders may remove this option from the table completely because of the risk. It is important to note that some investments, including personal retirement accounts and 401k plans, cannot legally be pledged as collateral to secure a loan.
  • A Blanket Lien: As the name implies, a blanket lien covers basically all assets under your control, personal or business. Lenders are more likely to jump at this opportunity because it means that if you default on your loan they can go after anything and everything you have to get their money back. Doing so is very dangerous for the consumer. It should only be considered if all other options fail and securing your desired loan is crucial.

For more interesting and valuable financial insight, check out some of these past articles on financial success.

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How to Overcome Credit Card Anxiety

credit card anxiety

Guest post by Alayna Pehrson – Content Management Specialist at BestCompany.com

You can use credit cards as tools to build your credit, right? Unfortunately, many people fail to see credit cards in that way. Credit cards can have a poor reputation that some people simply can’t overlook. Although credit cards will only cause damage when used irresponsibly, many people still get anxious when they think of using a credit card. Here are a few tips to help you overcome your credit card anxiety:

Do Your Research

One of the best things you can do to lessen your credit card anxiety is independent research. Reading blogs, books, and seeking out other resources can help you understand how to use credit cards wisely. Countless, easy-to-access articles and websites focus specifically on credit cards and how you should use them to your advantage. It’s important to keep your personal spending and financial habits in mind as you do your research. For example, if you know that you often spend over your budget and you are prone to making irrational purchases, then research credit card articles and blogs that relate to your situation. Millions of people use credit cards daily, so there is bound to be at least one person out there who has faced similar situations and who can provide helpful advice about credit cards.

Learn From Others

Another thing you should do is learn from others’ mistakes. Almost everyone has made a credit card mistake at least once since they started using a credit card. If you observe their credit card usage as well as their mistakes, you will be able to understand the best and worst ways to use a credit card. You can learn from parents, relatives, friends, bloggers, etc. Learning from other people’s credit card mistakes can help you avoid making those mistakes in the future. After all, why should you suffer the same fate when you know how to avoid it? Observing both those who have good credit and those who have poor credit will teach you to recognize the difference between good and bad credit habits.

Check Your Credit Report

Not only can you learn from others, but you can also learn from yourself. Regularly checking your credit report can show you what areas you need to improve on when it comes to your credit. Staying in tune with your credit report is also one of the best habits you can develop. Those who check their credit reports on a regular basis are also more likely to catch identity theft before any real damage happens. For example, people who regularly check their report will have a better chance at noticing when any type of fraudulent activity (like unwarranted purchases and accumulated debt) is present. Overall, your credit report can show you how well you are handling credit.

Conduct a Self-Audit

In addition to regularly checking your credit report, conducting a financial self-audit could also help you with your credit card anxiety. Sitting down once a month and going over your credit history, your credit habits, and your debts can confirm that you are in control of your finances or highlight areas for improvement. You may think that a credit card will overrun your life and automatically condemn you to a lifetime of debt, but hopefully, your self-audit will show you otherwise. This self-audit should also be a learning process. You may not have great results after one audit, but that can be seen as an opportunity for personal financial growth. Again, you need to be willing to learn from both your mistakes and successes.

Have Confidence

Handling credit cards and finances with confidence can be a challenge. After all, if it were easy, everyone would have good credit and zero debt. Fortunately, there are ways to become confident with your credit card usage. If you develop and maintain good credit habits, do your research, and learn from both yourself and others, you will see your anxiety and fears disappear over time. You should remember that you are in charge of your financial future. Obviously, life can be difficult and throw challenges your way, but in the end, you are the one who uses the credit card; it doesn’t use you. Although having bad credit can be scary, you should keep in mind that it can be fixed. Fixing your bad credit does take time and money, but will definitely prove worthwhile.

If you’re concerned about your credit, learn about your options. Contact us today to learn more.

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The Difference Between a Bank and Credit Union

The first US bank was established in 1791 and was, rightly enough, called the First Bank of the United States. Although the First Bank closed its doors just 20 years later, it paved the way for dozens of major banks, hundreds of small community banks, and hundreds more local credit unions in America.

But while both banks and credit unions ostensibly perform the same services — namely providing checking and savings accounts, credit cards, and loans — the quality, variety, and cost of those services can vary greatly depending on the type of institution with which you bank.

Differences in Fundamental Structure

Overall, the main differences come down to the fundamental structure of each financial institution. Banks and credit unions are vastly different types of organizations, with different objectives and methods of reaching them.

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For the most part, banks tend to reflect the American corporate cliché of a business operated by a board of directors with shareholders to whom they must answer — and show a profit. Banks are generally obligated to pay its shareholders and investors, and it’s with those few that the bulk of the bank’s profit typically winds up. The goal of a bank is to make money.

Credit unions, in contrast, are cooperative institutions, meaning each credit union is owned (and controlled) by its members. Profits from credit unions are thus funneled back into the organization — and its members — rather than the pockets of investors. This doesn’t mean members receive a check each year, but rather, profits are returned to them through lower rates and fees. The credit union’s goal is to provide affordable banking services to its constituents.

Each Has Pros and Cons

Lower rates and fees are just one of the pros of banking with a credit union. Because credit unions don’t have to answer to shareholders and consultants with their eyes fast to the bottom line, they also tend to have more flexible credit requirements for their products than larger institutions. This can mean you’re more likely to get approved for auto loans or credit cards from your neighborhood credit union than the Big Bank down the road.

At the same time, since the credit union’s main goal is meeting the needs of its local community, that’s where it’s focus will tend to be. Members often need to meet certain eligibility requirements, such as residency in the community. Additionally, credit unions don’t typically establish branches or ATMs outside of its local area.

The diminutive nature of a local credit union also limits the number of financial products they can offer, particularly for those with larger portfolios to invest. For example, your average credit union may only offer one or two credit cards and may not have high-net-worth wealth management experts on staff.

Banks, on the other hand, have an eye to profit, so they often work toward reaching as a broad an audience as possible. This means your average Big Bank has an abundance of branches and ATM locations to ensure convenient access, some offering services worldwide. Banks are also more likely to participate in online lending networks, like those found on BadCredit.org, which are used by those looking for multiple loan quotes at once.

Additionally, banks tend to provide the widest range of financial products (Chase alone has over a dozen credit card options) and can have a wealth of options for those with, well, a lot of wealth.

Of course, there’s another side to that thirst for profit than just a lot of ATMs. It also means you won’t get the same low rates and fees with a bank as with a credit union. Nor will you typically find that credit-union flexibility in a bank’s credit requirements for its financial products (unless it is specifically a subprime-focused bank).

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Demystifying 11 Complex Credit Terms

demystifying credit terms

Credit can be complex and confusing. When you’re applying for a loan or credit card, the process can be intimidating — especially when unfamiliar terms start getting thrown around. While some terms are self-explanatory, others can be a bit more ambiguous.

Getting familiar with some of the terms you will encounter in the loan or credit card application process can be beneficial in getting the best loan terms and ensuring you are entering into credit agreements that are favorable for you. Depending on your credit score, of course, you will be eligible for more favorable loan terms and lower interest rates.

Let’s take a look at 11 common credit terms you’re likely to encounter in the process of a credit application scenario.

  1. Interest rate

    An interest rate is a percentage of the principal balance your lending institution charges you for borrowing the money. Many factors go into determining a borrower’s interest rate, including credit score, the risk of default and inflation, as well as the length of the loan.

  2. Annual Percentage Rate (APR)

    APR is an annual rate that accounts for the interest and other fees paid on a loan or credit card balance. This percentage varies based on the bank or lending institution.

  3. Billing cycle 

    A billing cycle is essentially the number of days between statements on a credit card or loan account. The length of this cycle is typically between 20 and 45 days and is at the discretion of the credit or loan provider. The credit card company or loan institution provides the borrower with a statement once the billing cycle ends. Some lenders will allow the consumer to request a different billing cycle than what is offered.

  4. Minimum amount/payment due 

    Minimum amount due is the monthly payment a borrower must pay to keep their account current and in good standing, avoiding late fees. The amount of this payment can be fixed or variable based on the outstanding balance on the account. The former is more common on installment loans, and the latter is more common on revolving credit accounts. It’s important to remember, especially with credit cards, that making only the minimum payment won’t yield fast results in paying off a balance, and the longer you carry any balance on a card, the more interest you’ll be paying.

  5. Payoff amount

    A payoff amount is the total dollar amount that has to be paid to satisfy a debt. Payoff amounts are often more than the principal balance because they include any unpaid interest, late charges or fees. If you are ready to pay off a loan, it’s important to contact the lender to get the correct payoff amount, because interest compounds daily, so that figure is always changing.

  6. Mortgage insurance

    Mortgage insurance is completely separate from the insurance borrowers are required to carry on a home in order to secure a loan against it. Mortgage insurance is designed specifically to protect the lender in the event that a borrower defaults on the loan. Mortgage insurance is required in all states for borrowers who have less than a 20-percent equity stake in their home.

  7. Down payment

    Down payments are an initial one-time cash payment that is put towards a loan at the beginning of the application process. For mortgages and auto loans, a down payment is typically a percentage of the full loan amount. While auto loans don’t always require a down payment, mortgages nearly always do. The smallest down payment options are attached to FHA and VA loans, which require between 3 percent and 5 percent down, with special programs available to make down payments as low as 1 percent available to qualified buyers. Conventional loans require 20 percent down in order to avoid mortgage insurance.

  8. Principal balance

    The principal balance is the unpaid portion of a loan or credit account excluding interest and fees. Your loan agreement should clearly define the amount of your monthly payment that goes toward principal and what goes toward interest and other fees.

  9. Refinance

    Refinancing allows you to move debt to a new loan and/or change the terms of an existing loan. For example, many consumers refinance their mortgage loans, using their equity to pay off other loans such as credit cards, and/or to secure a lower interest rate or shorten the term of the new loan. It’s important to calculate the associated fees to ensure that the overall benefit warrants refinancing. In addition to mortgages, consumers can often yield benefits from refinancing student loans and car loans. This is often especially beneficial after credit repair efforts have raised a previously low credit score.

  10. Cosigner

    A cosigner is someone other than the primary borrower who assumes risk for a loan along with the primary borrower. Adding a cosigner to a loan is a way to increase the odds of approval, particularly if the primary borrower doesn’t have substantial income or a high enough credit score to qualify on his or her own. Cosigners are equally responsible for repaying the debt on which they’ve signed and are therefore putting their own credit score at risk if the primary borrower makes late payments or defaults on the loan.

  11. Collateral

    Collateral is the asset or property used to secure loan repayment. Collateral value must be equal to or greater than the loan amount. The asset or property is then at risk of seizure (or repossession in the case of a mortgage or auto loan) by the lender in the event that the borrower defaults on payments.

Understanding these credit terms can remove some of the anxiety associated with the credit application process and help you manage your credit more effectively. If you’re struggling to qualify for any type of loan and wondering how to fix your credit you may benefit from working with a credit repair professional. Lexington Law offers a free credit report summary and consultation. Contact us today to get started.

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