What QE3 Means for Mortgage Rates

As widely expected, the Federal Reserve announced “QE3” last week, a move taken to bolster the flagging economy by putting downward pressure on long-term interest rates.

More specifically, the Fed pledged to purchase even more agency mortgage-backed securities (MBS) in an effort to push mortgage rates lower than already are, via a method known as quantitative easing.

Their plan is to buy roughly $40 billion in MBS per month, with no set time period. In other words, it’s open-ended, which may have been unexpected.

And it will only come to an end when the economy and labor force have improved noticeably, and probably extend even further beyond that.

The Fed will also maintain an existing policy of reinvesting principal payments from its current agency debt and agency MBS in additional agency MBS.

Altogether, these latest actions will increase the Fed’s holdings of longer-term securities by about $85 billion each month through the end of 2012.

Just Tell Me How Much Rates Will Drop!

  • As the Fed makes the pledge to buy more mortgage-backed securities
  • Demand should rise, pushing MBS prices higher
  • Which means lenders will be able to make more and offer lower rates to consumers
  • Rates could drop .125% to .25% or more

Okay, okay, so what on earth does all that mean in layman terms? Well, with the Fed buying so many MBS, demand for them rises, prices rise, and the yield drops, and thus mortgage rates drop.

So the interest rate on your 30-year fixed mortgage goes down, though how much it will go down is the big unknown.

After QE3 was announced on Thursday, mortgage rates quickly sank back to record lows seen a month or so ago.

Unfortunately, mortgage rates have already fallen so much that the movement doesn’t mean a whole lot.

We could be talking anywhere from an eighth to a quarter point in rate, so instead of a rate of 3.625% on your mortgage, it might be 3.375%.

On a $200,000 loan amount, the difference in monthly payment is roughly $28. In other words, you can go to the movies or out to a modestly-priced dinner each month.

So before you get too excited, you may want to come to terms with the fact that it’s not going to change your life.

Granted, if you hold the mortgage for the full term, you’ll save about $10,000 in interest.

Rates Are Already Rock Bottom

  • The problem is that rates are already super low
  • And the lower they go, the harder it is to push them lower
  • So while perhaps a well-intentioned move by the Fed
  • It might not have the desired effect, especially if lenders are too busy to bother lowering rates

I’ve said this time and time again. Mortgage rates are already so stinking low that there’s not much room to move any lower.

Yes, it’s possible that the 30-year fixed could dip into the 2% range if the economy takes another wrong turn. Or if Europe implodes. Or if something else unthinkable happens. Let’s not tempt fate.

But the lower mortgage rates are, the less upside there is of them getting any better. When rates are high, it’s easy for them to slip lower and lower.

However, once rates drop considerably, as they already have, it’s probably safe to expect only modest improvements, if that.

That’s pretty much what we’ve seen over the past year and change, modest improvements after much more sizable declines.

So perhaps it’s best to look at the Fed announcement more as a preemptive move to avoid a rise in rates.

In effect, QE3 might mean low mortgage rates for a longer period of time, despite improvements in the broader economy that normally dictate their direction.

After all, mortgage rates had risen a bit over the past month, and the new G-fee has also made mortgages more expensive.

This effectively puts rates back to their most recent lows. Anything beyond that is still a big question mark.

And even if they did drop any lower, I don’t know if it would have much of an effect.

Mortgage lenders are already swamped with refinance applications, and those looking to purchase a home certainly are not holding back because mortgage rates are too high!

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.

Source: thetruthaboutmortgage.com

Stock Market Today: Stocks (and the Fed) Stay the Course

The market flipped between minor gains and losses throughout a fairly mundane Wednesday that the Federal Reserve failed to spice up.

This afternoon, the Fed released its minutes from the Federal Open Market Committee meeting in March, and officials expressed patience in keeping its easy monetary policy in place, believing it will be “some time” until its economic and price-stability goals are met.

“Without doubt, the March FOMC meeting minutes point to a desire to maintain a highly accommodative stance of monetary policy for the foreseeable future,” says Bob Miller, BlackRock’s head of Americas Fundamental Fixed Income. But he adds that “the March meeting also saw seven of 18 participants who did not think keeping the target policy range unchanged for three more years was appropriate.

“That’s now becoming too many voices to squelch. … We think this debate will unfold further as the economy (and inflation) strengthen in the coming months.”

There were individual pockets of motion across today’s market – larger tech-related stocks such as Twitter (TWTR, +3.0%) and Nvidia (NVDA, +2.0%) headed higher, as did recovery plays such as retailer L Brands (LB, +3.6%) and cruise line operator Carnival (CCL, +1.4%).

Sign up for Kiplinger’s FREE Investing Weekly e-letter for stock, ETF and mutual fund recommendations, and other investing advice.

But the broader indexes hardly moved. The Dow improved marginally to 33,446.26. The S&P 500 gained just 0.2% to 4,079, but that was enough to mark a new all-time high.

Other action in the stock market today:

  • The Nasdaq Composite was off marginally to 13,688.
  • The small-cap Russell 2000 had a much rougher go at things, dropping 1.6% to 2,223.
  • U.S. crude oil futures headed higher again, up a modest 0.4% to $59.55 per barrel.
  • Gold futures slipped a mere 0.1% to $1,741.60 per ounce.
  • Bitcoin prices took a tumble, falling 3.6% to $56,136. (Bitcoin trades 24 hours a day; prices reported here are as of 4 p.m. each trading day.)
stock chart for 040721stock chart for 040721

Which Stocks Should You Watch? Here’s What a Machine Had to Say.

Over the past few years, we’ve frequently touted the potential of artificial intelligence (AI). This technology’s ability to revolutionize everything, from industrial logistics to toasting your bread, has made the companies who enable artificial intelligence, or best utilize it, into many of the market’s top returners.

Several AI-focused funds have come to life as a result, and some of today’s most innovative companies have AI flowing through their business.

But artificial intelligence can do more than power profitable stocks – apparently, it can pick ’em, too.

Near the start of 2021, we explored an AI-powered analytics platform and some of its selections, and, since then, those stocks have clobbered the market. Naturally, we’re curious whether this “robo-picker” can continue to outperform, so we’ve taken a fresh (and expanded) look at this system’s top stocks to watch right now. You should, too.

Kyle Woodley was long NVDA as of this writing.

Source: kiplinger.com

5 Charity-Focused Credit Cards That Help You Donate

If you’re still cutting checks to your favorite causes, you might be missing out. Some credit cards focus on charitable giving, helping you earn rewards or fundraise for your favorite nonprofit organization as you spend.

Here are five charity-focused credit cards that can help support a great cause.

1. Charity Charge Mastercard

Rewards: 1% cash back on every purchase for your organization of choice.
Sign-Up Bonus:

Annual Fee: $0
Annual Percentage Rate (APR):
1.99% APR for six months on purchases and balance transfers, then the prime rate (a variable amount determined by the Federal Reserve) plus 6.99% to the prime rate plus 16.99% APR.

Why We Picked It: Cardholders can donate tax-deductible cash rewards to multiple nonprofits.
For Your Charitable Donations: Every purchase earns 1% cash back, which is donated on a quarterly basis to as many as three nonprofits of your choosing. Recipients won’t have to pay credit card processing fees, which means all your rewards go directly to the organization(s) of your choice.

Drawbacks: Many competing cards earn stronger cash back rates.

2. U.S. Bank FlexPerks Travel Rewards Visa Signature Card

Rewards: Three points per dollar donated to charity through 2017 (two points thereafter); two points per dollar spent at airlines, gas stations, grocery stores, and select cellular providers; one point per dollar spent on other eligible purchases.
Sign-Up Bonus:
20,000 bonus points if you spend $2,000 in net purchases in the first four months.

Annual Fee: $0 the first year, then $49.
Variable 14.99% to 24.99% APR on purchases and balance transfers.

Why We Picked It: This card awards points specifically for charitable donations.
For Your Charitable Donations:
Through the end of this year, charitable donations earn triple points on the dollar (beyond 2017, donations will earn two points per dollar). Points can be redeemed for travel, merchandise, gift cards, and more.

Drawbacks: There isn’t much time left to take advantage of triple points for charitable donations. 

3. World Wildlife Fund Credit Card

Rewards: 3% cash back on gas and 2% cash back at grocery stores and wholesale clubs on up to $2,500 in combined purchases each quarter; 1% cash back on other purchases.
Sign-Up Bonus:
$150 online cash rewards bonus if you spend $500 in the first 90 days.

Annual Fee: $0
0% APR for 12 months on purchases and balance transfers, then variable 13.99% to 23.99% APR.

Why We Picked It: If you value nature and wildlife conservation, this card helps you earn cash back as you support the World Wildlife Fund (WWF).
For Your Charitable Donations:
All purchases earn cash back, with special rates reserved for gas, grocery store, and wholesale club purchases. You can donate your redeemed cash back if you wish, but the WWF will benefit either way. The WWF will receive a minimum $3 donation when you open the card and an additional $3 annually. Plus, the WWF receives .08% of all retail purchases made on the card.

Drawbacks: This card is locked into the WWF, so keep looking if you prefer another charity.

4. HaloCard Visa

Rewards: 1% of purchases for your nonprofit of choice.
Sign-Up Bonus:

Annual Fee: $0
9.9% APR for six months on purchases, then variable 13.9% APR; 7.9% APR for 12 months on balance transfers, then variable 13.9% APR.

Why We Picked It: This card makes automatic donations to your favorite nonprofit.
For Your Charitable Donations:
All purchases earn 1% back, which is donated to the nonprofit of your choosing. You can change which nonprofit to donate to at any time, and all donations are tax deductible. The nonprofit will not incur any processing fees.

Drawbacks: The 1% earning rate isn’t very impressive compared to other cards.

5. Pink Ribbon BankAmericard Cash Rewards Credit Card

Rewards: 3% cash back on gas and 2% cash back at grocery stores and wholesale clubs on up to $2,500 in combined purchases each quarter; 1% cash back on other purchases.
Sign-Up Bonus:
$150 online cash rewards bonus if you spend $500 in the first 90 days.

Annual Fee: $0
0% APR for 12 months on purchases and balance transfers, then variable 13.99% to 23.99% APR.

Why We Picked It: You can help Susan G. Komen fight breast cancer with this card.
For Your Charitable Donations:
Bank of America customers get an extra 10% bonus cash when they redeem their cash back as an electronic deposit into their Bank of America account. Susan G. Komen gets $3 when you open the card and an additional $3 every year you renew. Plus, Susan G. Komen receives .08% of all retail purchases made on the card.

Drawbacks: The best cash back value is reserved for Bank of America customers.

How to Choose a Card for Charitable Donations

If you have one favorite nonprofit that gets the lion’s share of your donations, it’s worth checking if they offer a branded credit card. That way, you can easily support your favorite cause as you use your card.

If you plan to donate your cash back earnings to charity, be sure to compare charity-focused cards with their traditional competitors. With traditional cards, you can simply redeem your cash back or rewards and donate them directly to your charity of choice. It’s extra work, but it might be worth it for a more lucrative rewards program.

Make sure to check redemption and donation options for rewards. Some credit cards let you redeem your rewards for charitable donations, with no extra steps necessary. Certain rewards programs even let you donate miles or points to charity.

What Credit Is Required for a Card for Charitable Giving?  

Rewards cards, charity-focused or otherwise, usually require good to excellent credit. Before you apply, ensure you have a good shot at approval, as a hard credit inquiry can lower your score. You can check your credit report absolutely free at Credit.com.

Image: Jacob Ammentorp Lund

Note: It’s important to remember that interest rates, fees, and terms for credit cards, loans, and other financial products frequently change. As a result, rates, fees, and terms for credit cards, loans, and other financial products cited in these articles may have changed since the date of publication. Please be sure to verify current rates, fees, and terms with credit card issuers, banks, or other financial institutions directly.

Source: credit.com

The Fed Minutes and Mortgage Rates

Just a few short hours ago, the Federal Reserve released the hotly anticipated FOMC “minutes” from its two-day meeting that took place back on April 30th and May 1st, 2013.

The contents weren’t all that exciting, though they seemed to be enough to result in a 200+ point stock market swing.

The markets opened considerably higher this morning, only to take a beating after the minutes were released, with the Dow falling roughly 80 points.

What Was Said at the Meeting?

  • The Fed basically said inflation was stable
  • Which meant they didn’t need to raise key interest rates
  • Because the economy is still questionable
  • But if and when the economy heats up they’ll change their tune

In a nutshell, the Fed said economic growth expanded moderately in the first quarter, unemployment edged lower (but employment growth slowed), and consumer price inflation remained low, with expectations for future inflation stable.

Put simply, there wasn’t all that much drama in the economy during the first quarter, and things appear to be on track, albeit not a fast track to anywhere good or bad.

The Fed didn’t even seem to express any excitement about recent developments in the housing market, highlighting the decline in existing home sales in March alongside rising prices.

For the record, those sales were revised upward today by the National Association of Realtors, and April existing home sales were the highest since November 2009, when the homebuyer tax credit gave the market a temporary boost.

Anyway, the takeaway is that the Fed isn’t yet convinced that the economy is good to go. It will take months of solid and convincing improvement for the Fed to taper its accommodative monetary policy.

That said, the Fed voted to continue its purchases of mortgage-backed securities (MBS) at a pace of $40 billion per month, and longer-term Treasury securities at a pace of $45 billion per month.

[What QE3 means for mortgage rates.]

Isn’t This Good News?

  • Mortgage rates are lower than usual
  • Thanks to the Fed’s MBS buying program, but it’s not going to be around forever
  • And once they stop buying mortgages we could see mortgage rates jump
  • Thanks to increased supply and an overall indication that the economy is strong enough to end the program

If the Fed continues to buy Treasuries and MBS, mortgage rates should stay low, right? After all, if demand for mortgages is strong, prices will rise, and yields (and rates) will fall.

Well sure, that logic is sound, but the Fed’s MBS purchase program is nothing new, and the fear of losing it after everyone got so accustomed to it is unnerving to say the least.

And guess what – the minutes revealed that some of the participants (unclear how many) “expressed willingness” to lower the rate of purchases as early as the Fed’s June meeting.

Meanwhile, one participant recommended deceasing the rate of purchases immediately, while another suggested shifting purchases away from MBS and over to Treasuries in light of the recent housing recovery.

In other words, there is increasing pressure on the Fed to slow (or end) its purchases of MBS, which will inevitably lead to higher mortgage rates.

And that day seems to be getting closer and closer as more and more positive economic reports are released.

Sadly, mortgage rates are already at or near 2013 highs, so if the Fed really decides to pump the brakes and slow their MBS purchases, 30-year fixed mortgage rates could say goodbye to the 3% range and settle in above 4%.

Of course, we might be fearing the worst for no apparent reason other than fear itself.

In prepared remarks before Congress this morning, Fed chairman Ben Bernanke didn’t seem to indicate any decisive action on the Fed’s behalf.

Rather, he noted that prematurely withdrawing policy accommodation before there is a clear sign of a recovery could do a lot more harm than good.

And let’s face it; there will be plenty of bumps in the road to recovery. Just look at the latest weekly numbers from the Mortgage Bankers Association, which revealed that mortgage applications declined 10% week-over-week.

Additionally, the refinance index has declined nearly 20% over the past two weeks to its lowest level since March.

Clearly the Fed won’t want to do anything drastic enough to derail the housing market, which after more than five terrible years has finally displayed a few months of solid gains.

Still, the Fed can only do so much to control mortgage rates, and as the economy continues to improve, rates will have nowhere to go but up.

Read more: Mortgages vs. inflation

(photo: Lyra Jaye)

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.

Source: thetruthaboutmortgage.com

Blogger Claims Bernanke Made His Mortgage $53,000 More Expensive

Posted on June 18th, 2013

A Yahoo! Finance blogger named Rick Newman claims Ben Bernanke cost him $53,000 on his recently acquired mortgage.

The issue revolves around the latest testimony from the Federal Reserve boss, who revealed the Fed could taper purchases of mortgage-backed securities (MBS) in the not-so-distant future.

If the Fed tapers its purchases, supply of MBS will essentially rise above demand, and home loan interest rates will increase.

The funny thing is Bernanke didn’t actually take any action, he just said it was possible the Fed could taper MBS purchases at some point this year. Still, it was enough to rattle investors and send mortgage rates flying.

In just weeks, 30-year fixed rates climbed from around 3.5% to just over 4%.

Blogger Missed Out on a 3.5% Mortgage Rate

Newman said he found a home to purchase in late April, and in early May was able to lock in a mortgage rate of 3.5%, which was pretty much the floor for the 30-year fixed.

He instead decided to float his rate, with the hope rates would fall even more between the time his loan was processed and closed.

Unfortunately, he got caught up in Bernanke’s drama, and had difficulty sleeping at night as he began to play the market. In fact, he even considered walking away from the house because of the rise in rates.

Finally, Newman decided to just give up hope on a rate below 4% and take a rate of 4.125%, knowing that time was of the essence and any more gambling could really land him in a tough spot.

As a result of his decision to float, as opposed to lock, Newman wound up with a monthly mortgage payment that is $148.11 higher than what it could have been.

While that may not sound too bad, if he holds his mortgage for the full term, he’ll be looking at an additional $53,319.60 in interest paid.

He will also build home equity slower because of the higher interest rate, which could be an issue if selling or refinancing early.

Still, 4.125% is nothing to scoff at, seeing that rates have been significantly higher historically.

But the lesson here is that mortgage rates are unpredictable, and can rise or fall for any number of reasons.

Newman could have just locked his rate and slept soundly, knowing he was good to go at 3.5%. But he wanted more. The sad thing is there wasn’t really much upside to a slightly lower rate.

How low did he think rates would fall? He couldn’t possibly have envisioned a rate below 3%, so perhaps 3.25%?

If he did manage to snag 3.25%, he would have only saved about $58 a month and just over $20,000 if he held the mortgage to term.

Tip: As mortgage rates move lower, the payment and interest savings decrease and are thus less attractive.

What Can He Do About It?

Anyway, he knows he messed up, and he admitted it. And it’s admirable that he told the world about it. Respect.

But enough about what he did wrong – how could he make up for it? Well, what he could do to minimize the impact of the higher rate is prepay his mortgage faster.

If he makes mortgage payments that are $200 higher than necessary every month, he can reduce his total interest expense to below that of the original 3.5% rate.

His total interest paid would drop to just above $254,000, compared to the $257,000 or so dollars he would have paid if he secured the 3.5% rate and made standard payments. He’d also shave nearly five years off his mortgage.

Assuming he just pays his 4.125% mortgage as scheduled, he’ll wind up spending more than $310,000 on interest.

So it’s not too late to make things right, though Newman may not want to make larger mortgage payments.

It’s not a fix-all, but if he has no better plan for the money, he could reduce interest costs and feel a little bit better about missing the boat.

Read more: Pay off the mortgage or invest?

(photo: Medill DC)

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.

Source: thetruthaboutmortgage.com

What Happens If You Just Stop Paying Your Student Loans

If your student loan payments seem overwhelming, you should know that you’re not alone. Americans are shouldering a growing student debt burden; In fact, US borrowers owe a combined $1.7 trillion in student loan debt, according to the Federal Reserve .

For federal student loans, if a borrower fails to make payments on a loan for more than 270 days, the loan will go into default. Having trouble paying off student debt is not uncommon. According to the latest figures as of the publication date of this article, 9.7% of the borrowers who started repaying federal student loans in 2017 defaulted within the next three years.

Public Service Loan Forgiveness Program . Unlike other forms of debt, such as home and auto loans, student loans generally cannot be discharged during bankruptcy. Borrowers are still required to repay student loans even if they don’t graduate or are struggling to find a job in your field.

Ignoring your student loans will likely result in an increasing balance. In addition to interest that accrues over time, failing to repay a student loan on time can result in additional fees if your debt gets moved into collections. Because on-time payments account for a portion of a borrower’s credit score, failing to make payments can negatively impact a person’s credit score. Having a credit score on the low end of the spectrum can impact your ability to get a mortgage, car loan, credit card, or apartment lease.

If you default on federal student loans, the government can take your tax refund or up to 15% of your wages. You can also be sued, though this is more common with private loans.

Is there a student loan statute of limitations?

There is no statute of limitations for federal student loans. That means you can be sued at any point for not paying your loans, as long as you’re alive.

There is a statute of limitations for private student loans, which is set by individual states and generally ranges from three to 10 years. But even this limit just means the lender can’t sue you anymore—it doesn’t mean the loan goes away or they stop trying to collect what is owed.

Is Getting out Paying Student Loans Possible?

Are there ways to get out of paying student loans? There are some temporary solutions that allow borrowers to temporarily stop making payments on their student loans.

Relief for Federal Student Loans

For federal student loans, you can temporarily pause payments by requesting a deferment or forbearance. You might qualify if you’re still in school at least part-time, unable to find a full-time job, facing high medical expenses, or dealing with another financial hardship. The type of loan held by the borrower will determine whether they can apply for a deferment or forbearance.

Federal student loans can only be deferred for up to three years. There are two types of forbearance; general and mandatory. Borrowers facing financial difficulties can request a general forbearance, and their loan servicer determines whether or not they qualify. General forbearance is awarded in 12 month increments, and can be extended for a total of three years.

Loan servicers are required to award qualifying borrowers a mandatory forbearance. Qualifications include participating in AmeriCorps, National Guard duty, or medical or dental residency. The Federal Student Aid website has a full list of criteria for mandatory forbearance. Mandatory forbearances are also granted in 12 month increments, but can be extended so long as the borrower still meets the criteria to qualify for mandatory forbearance.

cancelled or discharged , if your school closes while you’re enrolled or you are permanently disabled. For obvious reasons, these aren’t options to count on, so you can assume your loans will be sticking with you.

Temporary Relief for Private Student Loans

Private lenders sometimes offer relief like forbearance when you’re dealing with financial hardship, but they aren’t required to. If you have a private student loan, check with your lender directly to see what temporary relief programs or policies they may have.

The Takeaway

Because student loans don’t disappear, it’s important to make them manageable. Borrowers with federal student loans may be able to qualify for deferment, forbearance, or income-based repayment options which can provide some temporary relief or help make monthly payments more manageable. Options available for borrowers facing financial hardships with private student loans vary by lender.

For some borrowers, student loan refinancing can be a one way to lower interest rates, reduce monthly payments, and combine all your loans into a single monthly payment. Reducing monthly payments by extending the life of the loan may result in more interest over the life of the loan.

It’s also possible to refinance both federal or private loans, or a combination of the two. Note that refinancing federal loans eliminates them from federal protections, including relief options like deferment and forbearance, so this won’t be a suitable option for everyone.

Looking to make your student loan debt more manageable? Refinancing with SoFi can lower your monthly payments so you can get back in control of your finances.

SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
SoFi Student Loan Refinance
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.


Source: sofi.com

Credit Card, Auto Loan Rates Won’t Rise Soon Despite Fed

Shopping for the best auto loans? Whether you are looking for the best car loan rates for a new or used vehicle, or you want to refinance an auto loan, we can help. Today’s auto loan rates are displayed in our helpful car loan calculator. Get the lowest rate when you compare rates from multiple lenders, even if your credit isn’t perfect.

With a lower interest rate, you’ll save money and pay off your car loan faster. It pays to shop for the best car loan rate! *

The single most important thing you can do to save money on an auto loan is to shop for the best auto loan rate before you set foot in a dealership. By knowing what kind of rate you qualify for before you try to buy a vehicle, you accomplish three things:

  1. You’ll know what kind of car payment you can qualify for
  2. You can focus your negotiations with the dealer on the vehicle price rather than on the financing
  3. You won’t end up getting stuck in a higher cost loan than you can qualify for

As you shop around for financing on a new or used vehicle, keep in mind the following factors that will affect your payment:

Length of loan:

Many buyers are opting for car loans that are five years or longer. Experian notes that in the last quarter of 2012, the average car loan length was 65 months. That’s almost five and a half years! The advantage of a longer car loan is that your payments will be lower. The disadvantage is that you may be “upside down,” – you owe more than the vehicle is worth – for a longer period of time.


A larger down payment will reduce the amount you borrow and may make it easier to qualify for a better car loan rate. If you haven’t saved much for a down payment, you may be able to sell your current vehicle and use that money toward the down payment, or trade in your current vehicle to reduce the price of the car or truck you are buying. But if you are short on cash, don’t panic. Not all lenders will require a down payment.

Credit score:

Your credit score will be used to help determine the interest rate you’ll pay. But just because you have less than perfect credit, that doesn’t mean you can’t get a decent rate. The credit score that an auto lender uses may be somewhat different than the score you see if you get your own credit so don’t get too hung on up the number.

Refinance Auto Loans

Is your current auto loan rate higher than the rates you see in the loan rate comparison table above? If so, you may want to refinance your car loan. If you can get a lower rate, you’ll save money and you may be able to pay off your loan faster, too. Another option is to extend your loan term to make your payments more affordable. It’s easy. Just choose refinance from the options above and apply to see if you qualify for an auto loan refinance.

Bad Credit Auto Loans

If you have credit problems and need to buy a car or truck, you may be tempted to just use a Buy Here Pay Here (BHPH) car dealer that advertises it makes bad credit car loans. With one of these arrangements, the dealership arranges the financing and usually you make your payments to the dealer rather than a third-party lender like a bank or credit union.

Before you go this route, make sure you try to get preapproved for a car loan online or with a local financial institution. If you can get financing elsewhere then you’ll have more freedom to shop for the best deal on your car from a variety of sources, rather than limiting yourself to the cars available at that dealership. And when you do find a car or truck you like, you’ll be able to try to get the price down, rather than taking whatever they offer you.

Keep in mind that even if you are offered a high-rate auto loan online or through your bank or credit union, you can always ask the dealer to beat that rate – after you have negotiated the price for the vehicle you want.

Protect Your Credit When Auto Loan Shopping

Every time a lender checks your credit or requests your credit score, that fact will be noted on one or more of your credit reports as an “inquiry.” Your credit score can drop as a result. The good news is that most credit scoring models will ignore recent auto-related inquiries, and will count multiple inquiries from auto loan applications in a short period of time as one. To protect your credit, it’s best to shop for an auto loan in a focused period of time: two weeks or less is best to be safe.

You can check your credit score for free using Credit.com’s free Credit Report Card. Requesting your own credit score through this service will not affect your credit score.

Car Title Loans

If you are desperate to borrow money but you have bad credit, you may be tempted to get a car title loan. These loans require you to pledge your vehicle as collateral for the loan. They are not legal in all states, but where they are, they usually lend up to 25% of the value of the car or truck you own free and clear.

Watch out! Interest rates on auto title loans are very high; often 25% per month – or about 300% per year – according to the Center for Responsible Lending. According to the CRL report, the average car-title borrower renews a loan eight times, paying $2,142 in interest for $951 of credit. If possible, you should try instead to get a personal loan or, if you can’t, see whether a non-profit credit counseling agency can help you find another solution to your financial difficulties.

-APR = Annual Percentage Rate. Rates based on credit worthiness and are subject to change without notice. Your actual rate and monthly payment may vary. Must be 18 years of age or older to apply. Loans subject to credit approval and could be subject to credit union membership.

* IMPORTANT NOTE FROM CREDIT.COM: Credit.com is not a lender. The above offers are provided by third-parties from whom Credit.com receives compensation. Credit.com will not call you about any loan application resulting from the above offers, and will not ask you over the phone, via email or otherwise for financial information or other sensitive personal data.

REMEMBER never to share any financial information or other sensitive personal data over the phone or via email without independently confirming the identity of the company calling first!

† Advertiser Disclosure: The offers that appear on this site are from third party advertisers from whom Credit.com receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). It is this compensation that enables Credit.com to provide you with services like free access to your credit scores at no charge. Credit.com strives to provide a wide array of offers for our members, but our offers do not represent all financial services companies or products.

Source: credit.com

Taking a 401(k) Loan to Fill Income Gaps? Tips Before You Dip!

One of my first positions was in a 401(k) call center, where one of the most common questions people asked was about taking a plan loan to pay off their credit card debt.

When I went to my manager for guidance, I was told in no uncertain terms that we were never ever to broach this topic, as it bordered on financial advice. Throughout my career I have seen that employers refuse to discuss 401(k) plan loans as a source of debt financing. To the extent plan materials provide any advice regarding loans, the message is usually centered on the dangers of borrowing from your retirement nest egg.

The reluctance to communicate the prudent use of 401(k) plan loans can be seen in the number of people holding different types of debt.

While numbers vary, 22% of 401(k) plan participants have a 401(k) loan outstanding, according to T. Rowe Price’s Reference Point 2020. Compare this to 45% of families holding credit card debt and 37% having vehicle loans (source: U.S. Federal Reserve Board Summary of Consumer Finances). Yet the interest rate charged on 401(k) plan loans is typically far lower than other available options. The annual interest rate of plan loans is typically set at Prime Rate +1%. As of March 2021, prime +1 is 4.25%. The average annual percentage rate (APR) on credit cards as of March 2021 is 16.5%. And depending on your state, payday or car title loans have an APR varying from 36% to over 600%!

The basics of how it works

Participants in an employer-sponsored defined contribution program, such as a 401(k), 457(b) or 403(b) plan, can typically borrow up to 50% of their plan account balance, up to $50,000.

Loans other than for purchase of a personal residence must be repaid within five years. Repayments are credited to your own account as a way to replenish the amount borrowed, and there are no tax consequences so long as the loan is repaid.

What’s at stake

I still think about my call center experience and wonder why we couldn’t have been more helpful. I would never recommend tapping your retirement savings to pay for current expenditures, but the need for short-term borrowing is an unfortunate reality for many people.

If you have to borrow, why not at least examine the advantages of tapping your plan over other short-term financing options? Besides lower interest rates here are some potential advantages of 401(k) loans: 

  • A 401(K) loan is not reported to credit bureaus such as Equifax, TransUnion and Experian, and therefore not considered in the calculation of your credit score.
  • Your credit score will not suffer in the event that you “default” on a 401(k) loan by not repaying any outstanding balance if you leave your job.
  • In the event that you miss a payment (for example, by going out on an unpaid leave of absence), you are not charged any late fees. (However, the loan may be reamortized so repayments are completed within the original term.)
  • The interest rate on your plan loan is fixed through the term of the loan and can’t be raised.

Of course, there are disadvantages as well, including:

  • Beyond the interest payments, there is the cost of the investment gains you’re giving up on the outstanding loan balance, ultimately reducing your retirement assets.
  • Most plans charge fees of $25 to $75 to initiate a loan, as well as annual charges of $25 to $50 if the loan extends beyond one year. If you are borrowing small amounts, this may eliminate most if not all of the cost advantage over credit debt.
  • Since you make repayments using after-tax dollars, you are being double-taxed when you eventually receive a distribution from the Plan.
  • Unlike other consumer debt, you can’t discharge the debt in the event of bankruptcy.
  • If you leave your job during the repayment period, you may be required to make a balloon payment to repay the loan in full — either to the original plan or a Rollover IRA. Otherwise, the outstanding balance is then reported as taxable income, and you can also be assessed an additional 10% early withdrawal fee on the outstanding balance. (Although some plans do permit terminated participants to continue repaying their loans from their personal assets rather than through payroll deduction, but this is not the norm.)

Good news 

Final regulations have been issued by the IRS on a provision (Section 13613) of the Tax Cuts and Jobs Act of 2017 (TCJA) extending the time that terminated employees can roll over their outstanding 401(k) loan balance without penalty. Previously, you had 60 days to roll over a plan loan offset amount to another eligible retirement plan (usually an IRA). The new rules stipulate that effective with loan offset amounts occurring on or after Aug. 20, 2020, you have until the due date (with extensions) for filing your federal income tax return, to roll over your plan loan balances.

By way of example, if you leave your job in 2021 with an outstanding 401(k) plan loan, you have until April 2022 (without extensions) to roll over the loan balance.

Make the right choice – but tread carefully

After all other cash flow options have been exhausted — including such possibilities as reducing voluntary (unmatched) 401(k) contributions or reviewing the necessity of any subscription services which are automatically charged to your credit card – ,) — participants should compare plan loans to other short-term financing options. Some of the points to specifically consider include:

  1. Do you expect to remain in your job during the loan repayment?  As noted above, if you leave your job you may be required to make a balloon payment of the outstanding balance or face taxes and penalties on the outstanding balance. 
  2. If you are uncertain about remaining in your job, do you have the ability to pay off the outstanding balance if required?  The research behind plan loans shows there is real damage to your long-term retirement income adequacy from defaults, considering the accompanying taxes and penalties.
  3. If you take a plan loan, can you still afford to contribute to your retirement plan? In particular, you should strive to contribute enough to receive the maximum matching contribution provided by your employer. 
  4. If you are still considering a loan after answering these gating questions, you should compare the total cost of different debt options.  Vanguard has a tool available on its website that lets you compare plan loans to other debt options and includes the forgone investment experience during the term of the loan. (You should also include any loan fees in the cost comparison.)

Again, no one advocates this type of borrowing except if it’s more advantageous than your other alternatives. So, if your employer  isn’t walking you through the pros and cons of a taking a loan against your 401(k), investigate them for yourself.

Principal, Buck

Alan Vorchheimer is a Certified Employee Benefits Specialist (CEBS) and principal in the Wealth Practice at Buck, an integrated HR and benefits consulting, technology and administration services firm.  Alan works with leading corporate, public sector and multi-employer clients to support the management of defined contribution and defined benefit plans.

Source: kiplinger.com

Financial Crisis: First Foreclosure, Now Credit Cards?

The next big crisis?

The past year has been a tough one for our economy.  We have seen the companies suffer as the mortgage industry undergoes a huge crisis.  Thousands of foreclosures have happened to people who got into mortgages they couldn’t afford.  Adjustable rate mortgage and interest only loan rates started going up, and people found they couldn’t afford their mortgages anymore.  (One could argue that they never could afford them in the first pace, but that’s an argument for another post)

Yes, that's an axe

Yes, that's an axe
credit: danesparza

Now, according to ABC News there may be another crisis ready to explode. The credit card crisis:

With banks limiting home equity lines, gas and food bills on the rise, and homeowners struggling to make their mortgage payments, some Americans are turning to credit cards to make ends meet. Many, however, are finding their cards more expensive to use as credit card companies increasingly raise interest rates, lower credit limits and cancel inactive accounts.

It’s all happening, some industry watchers say, for a good reason: The companies are trying to avert a crisis.

In the first three months of the year, commercial banks in the U.S. took losses on 4.7 percent of their credit card loans, up from 3.9 percent the year before, according to the Federal Reserve.

In the last two weeks, major credit card players like American Express, Capital One, Citigroup and Bank of America have all reported larger losses from unpaid card bills. American Express saw second-quarter profits from its U.S. credit card business fall a stunning 96 percent from $580 million in the spring of 2007 to $21 million this year. (Overall, the company reported $655 million in second-quarter profits.)

So people are getting behind, they’re having a hard time paying their mortgages, their home equity lines and paying for everyday essentials.  It’s no surprise that they’re using their credit cards more, making balance transfers and then in turn getting behind on those payments as well.

Who is to blame for the looming credit card crisis?

The article argues that the credit card companies are to blame for much of the problem themselves because when the mortgage sector started tanking, they looked to their credit card divisions to bolster their meager earnings.  They upped the credit limits and offered more cards to higher risk buyers.  It only stands to reason that when they offer credit to people with a history of not paying (thus high risk), that they’ll show a higher number of people defaulting on their debts.

Credit card lending became “a bit too aggressive,” said John Ulzheimer, the president of consumer education for Credit.com, a credit card information site. “People were getting credit vehicles maybe they should not have been getting. Those bad issuances of cards are, in many cases, coming home to roost right now.”

Can companies survive this credit crunch?

Now the question is this, will this looming credit crunch be enough to do in some of these struggling credit card and other financial companies?

Analysts agree that credit card troubles alone likely won’t be enough to topple any one bank in the same spectacular fashion that subprime mortgage losses led to the collapse of Bear Stearns.

But Ron Ianieri, the chief market strategist for the investor education company Options University, said that for banks already suffering from other financial woes, more trouble on the credit card front “could be enough to be the straw that breaks the camel’s bank.”

“I don’t think a credit card crisis would be strong enough to collapse a bank under normal conditions, but these aren’t normal conditions,” he said. “These banks are teetering right now as it is. One more push — it doesn’t have to be a big push — and it could knock them off the top.”

So it’s really up in the air. This credit crisis, along with the foreclosure problems that we’ve seen in the past months could be enough to do in some of these companies. It’s hard to feel sorry for really anybody involved in this fiasco.

Banks started lending and giving credit cards to people who had no business getting one. People taking advantage of these offers  really had no business getting into home loans they couldn’t afford, or using credit they couldn’t pay back.  Irresponsibility abounds and plenty of blame is assignable to all parties involved.

In the short term, the credit card companies will probably survive by bumping interest rates up, and lowering credit limits.  That means customers will be paying more in fees, and be even less likely in some cases to make their payments.

If you’re having problems with your debt, I suggest getting into a good financial program, much like Dave Ramsey’s Financial Peace University where you can set up a plan to repay your debts, get rid of your credit cards for good, and find freedom in living without debt.


Credit Cards: The Next Financial Crisis?

Source: biblemoneymatters.com