Beating Broke

Personal Finance from the Broke Perspective

Are Personal Loans Ever Right For You?

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Is a personal loan ever the right choice for you?  I’m not talking about payday loans, or those fun (or not) personal loans that happen in the back alley of a pawn shop, but honest to goodness personal loans from a bank.  Maybe you’ve heard them referred to as an unsecured loan.

A personal loan is usually called an unsecured loan because it has no property securing its repayment.  Unlike a car loan, mortgage, or other secured loan, there is nothing for the bank to come and repossess if you should default on the loan.  It’s a loan based on your credit alone, and your personal ability to repay it.  Because of the unsecured nature of the loan, the interest rate is usually a bit higher than a secured loan.

And, because of that higher interest rate, personal loans are generally frowned upon.  The only way to get a “loan” at a higher rate is to use a credit card.  Credit cards, actually, are a form of personal loan.  Think of them as a personal line of credit.

Are there good reasons to get a personal loan?

The answer, much like most other things related to personal finance, is that it depends.  Some people will tell you that they are an absolute no-no.  Don’t do it, under any circumstances.  I tend to lean a little bit more towards the middle.  I don’t think you should use them every single time you need a little bit of money.  That can get a bit cumbersome, and can lead to bad credit practices.  But, I also think that there are times when a personal loan can be beneficial.

Personal LoansWhen I used a personal loan.

I’ve borrowed money from a bank in the form of a personal loan.  Once.  It was the only time I really needed to do it.  It was near the beginning of our journey towards getting out of debt.  A journey we are still on, mind you.  After several years of very slowly building credit, we were on the right track.  And then stuff happened.  We needed some money to help pay for some bills.  Without anything to secure a loan, I was able to get a small loan from my local credit union.  It helped bridge the gap between what we needed to keep our bills current, and save our credit, and getting behind on stuff.  It wasn’t a huge loan, and it wasn’t any more than we needed.

Our usage is one way that I think that a personal loan can be a good thing.  There are other ways that I think they can be helpful.  Using them smartly, and only taking what you need is always the rule, though.  Using them to help bridge gaps in funding for capital investments in your company, paying off a higher interest rate credit card, and even for a little bit more to help pay for home improvements.  Obviously, using them for things that can be considered an investment.  Either an investment in the traditional sense in that it returns some amount to you, or investment in that it saves you an amount.

What about you?  Have you ever borrowed on a personal loan?  Do you think people should?

img credit: StockMonkeys.com on Flickr

 

3 Ways Young Homeowners Can Save $3745 (at least) Each Year

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If you recently bought your first home let me congratulate you. This is possibly the very best time to buy real estate that you’ll ever see in your lifetime. You made a smart move. And because you are a smart real estate investor, I know you’ll be interested in taking advantage of the following 3 ways young homeowners can save even more “moolah”.

1. Home Warranty

I owned a home warranty program for years and it was a waste of money. Of course it felt great not to have to worry about running into major unexpected expenses, but the cost just didn’t justify it. First of all, you are stuck with any repair person the home protection company sends out. Next, the deductible you have to pay is often pretty close to the amount you’d have to pay to a contractor of your own choosing. Last, when you do have a major repair, you are stuck (again) with whoever the company sends out unless you are willing to go through a great deal of red tape.

You’re always responsible for upgrades, code changes and any problems associated with misuse or poor maintenance. I cancelled my home protection plan several years ago and it turned out to be a fantastic decision. If you follow my lead on this, you’ll save at least $600 a year.

2. Life Insurance

If you are a young homeowner you might have a young family or plan on having one. As a result, you definitely need life insurance. But when it comes to term life vs. whole life – play it smart. Term life is your best friend. It’s cheap and it does the job. It’s true that at some point (20 or 30 years down the road) your term insurance will expire. But by that time, you may not need life insurance anyway. Term life is so much cheaper than whole life that you can take that savings and invest it. This way probably you’ll have much more than the whole life promises.

One of the biggest problems with whole life (and I feel it’s criminal) is that agents sell you the whole life you can afford because it pays them a whole lot more commission. (Maybe that’s why they call it “whole” life.) And because it buys a great deal less insurance than term, people end up dangerously under-insured. You could save several thousands of dollars each year and have better coverage just by having term instead of whole life insurance. Look into this ASAP.

3. Good Credit Score

Because you are a young homeowner, you’ll be using your credit for a very long time. And you might have to lean on that plastic a lot right now to pay for all that new furniture and appliances. If you able to get even a slightly better credit score, you might end up savings a bundle every month. That’s because a higher credit score will help you get lower interest rates on credit cards and mortgages.

Find out what your score is and make sure there are no errors. If there are mistakes, fix them. You can easily do most of this without paying a cent. You can even get your credit score for free and sign up for services that provide updates whenever there is a change to your rating. This has helped me a great deal.

As a young homeowner you might be facing some pretty hefty expenses and that can be daunting. Take these 3 steps. Dump the home protection plan. Get rid of your whole life insurance and buy term instead. Finally make sure your credit score is as high as possible.

Will you save $3745? I don’t know. You could save a lot more. You’ll never know until you start taking action.

What are the biggest expenses you face as a young homeowner? What have you done to reduce those costs?

This was a guest post written by Neal Frankle. He is a Certified Financial Planner ® and owns Wealth Pilgrim – a great personal finance blog. He writes extensively about ways to help people make smart financial decisions. One of his most in-depth posts was his review of CIT Bank.

Saving on Home Loans

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One of the biggest purchases you will make over your lifetime is the purchase of a house.  Some will argue that purchasing a house is an investment.  But, if it’s your primary house that you intend to live in, it’s not an investment.  Sorry, it just isn’t.  If you intend to rent the house out, that’s another story, but your primary residence is just a purchase.  Even so, it’s a very large purchase.  It makes sense, then, that we will want to find as many ways as we can to save money on the purchase of our home.

Saving before a home purchase

I’ll discuss how to save on your home once you’ve already purchased it a bit further down, but you’ll find yourself a good bit ahead of the game if you start thinking about how you can save money on your home purchase before you make the purchase.

  1. Improve your credit, improve your rate – The rate at which you borrow the money to buy your home is a big deal.  A half a point on the rate can translate to thousands of dollars more in interest over the life of the loan.  The best way to guarantee that you get the best rate available is to have excellent credit.  Depending on how far you improve your credit, you could shave as much as two or three points off the interest rate of the loan.  Not only will that reduce the payment you’ll make, but it will reduce the amortized amount of the loan by tens of thousands.  Want to know what makes an impact on your credit score?  Read the Beating Broke Guide to Your Credit.
  2. Compare home loans – I mentioned how this will likely be one of the biggest purchases of your life, right?  Well, why on Earth wouldn’t you compare the loans available to make sure you were getting the best deal?  You’ve got to compare those loans!  Different lenders will have different policies, rates, and even lengths of loans.  Not only will failing to compare the home loans available cost you money, but it could cause you a lot of stress over the life of the loan.
  3. 20% down or more – If you’ve got the savings for it, put at least 20% down on the home.  Why?  Well, it reduces the amount of the loan, for one.  The less you have to borrow the better, right?  More importantly, 80% is the normal cutoff for when a lender will require you to add Private Mortgage Insurance to the loan.  It can add a hefty bit to the monthly payment, and it doesn’t go anywhere but into the insurer’s pocket.

Saving after a home purchase

  1. Refinance – This may not be for all of you looking to save, but with the current rates, it bears looking into for some of you.  Refinancing a higher interest rate mortgage into a lower interest rate loan can save you thousands over the life of the loan.  Refinancing into a shorter term mortgage can also save you thousands, but beware that the mortgage payment is likely to be higher due to the shorter amortization period.
  2. Make extra payments – If refinancing isn’t in the cards for you, make sure that your lender will accept extra payments to principle and then start making them.  Reducing the principle will reduce the interest, and by simply making an extra payment a year, you can shave years off of your mortgage.

Whether you’re looking at buying a home, or already have, saving money on the biggest purchase of your life is always worth looking into.  A few minutes on the phone with your lender can sometimes save you more than you would cutting lattes every day.  With the higher number of defaulting mortgages recently, many banks are much more willing to help you save money on your payments and pay the loan off early.  They like getting their money back too!

What other ways have you used to save money on your mortgage?  What’s the most extreme example that you’ve heard of?