Stock Market Today: Stocks Finish Lower as Traders Mull Recession Odds

The potential for the U.S. to slip into recession was the topic du jour Monday as stocks kicked off the week with a wobbly, uneven session.

Over the weekend, former Goldman Sachs chief Lloyd Blankfein told CBS’ Face the Nation that recession was “a very, very high risk factor.” That opinion was met by a number of other calls Monday morning.

Wells Fargo Investment Institute, for instance, says “our conviction is that the chances of an outright recession in 2022 remain low” but believes odds are growing that 2023 could see an economic contraction. UBS strategists say the chances are different depending on where you look – their global economists say “hard data” points to a sub-1% chance of recession over the next 12 months, but the yield curve implies 32% odds.

“There’s no crystal ball to predict what’s next, but historical trends can come into play here. With the [S&P 500] closing 15% below its weekly record, there’s only been two times in the past 60-plus years that the market didn’t fall into bear territory after a similar drop,” adds Chris Larkin, Managing Director of Trading at E*Trade. “This doesn’t mean it’s bound to happen, but there is room for potential downside.”

Larkin says to keep an eye on major retail earnings this week – which will kick off in earnest with Walmart’s Tuesday report – to get a pulse check on the American consumer.

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Monday itself was a fairly quiet affair. Exxon Mobil (XOM, +2.4%) and Chevron (CVX, +3.1%) were among a number of plays from the energy sector (+2.7%) that popped after U.S. crude oil futures jumped another 3.4% to $114.20 per barrel.

Twitter (TWTR, -8.2%) shares dropped after Tesla (TSLA, -5.9%) CEO Elon Musk spent the weekend questioning how much of Twitter’s traffic comes from bots. Wedbush analyst Daniel Ives said the move feels more like a “‘dog ate the homework’ excuse to bail on the Twitter deal or talk down a lower price.” TWTR stock has now given up all its gains since Musk announced his stake in the social platform.

The major indexes finished an up-and-down session with mostly weak results. The Dow Jones Industrial Average managed to eke out a marginal gain to 32,223, but the S&P 500 declined 0.4% to 4,008, while the Nasdaq Composite retreated 1.2% to 11,662.

Also worth noting: Warren Buffett’s Berkshire Hathaway will file its quarterly Form 13F soon. Check back here tonight as we examine what Buffett has been buying and selling. 

stock chart for 051622stock chart for 051622

Other news in the stock market today:

  • The small-cap Russell 2000 closed out the session with a 0.5% dip to 1,783.
  • Gold futures gained 0.3% to settle at $1,814 an ounce.
  • Bitcoin was off 1.6% to $29,551.92 (Bitcoin trades 24 hours a day; prices reported here are as of 4 p.m.)
  • JetBlue Airways (JBLU, -6.1%) ramped up its hostile takeover attempt of Spirit Airlines (SAVE, +13.5%) on Monday, urging SAVE shareholders to vote against a buyout offer from fellow low-cost air carrier Frontier Group Holdings (ULCC, +5.9%). JBLU last month offered to buy Spirit Airlines for $33 per share – a premium to the $21.50 per share ULCC offered in February – but SAVE’s board of directors rejected the bid citing concerns over regulatory approval. JBLU followed up in early May with an “enhanced superior proposal,” including paying a $200 million, or $1.80 per SAVE share, reverse break-up fee should regulators block the deal.
  • Warby Parker (WRBY) fell 5.3% after the eyeglass maker reported a loss of 30 cents per share in its first quarter. This was much wider than the per-share loss of 3 cents the company reported in the year-ago period and missed the consensus estimate for breakeven on a per-share basis. Revenue of $153.2 million also fell short of analysts’ expectations. WRBY did maintain its full-year revenue guidance of $650 million to $660 million. “We remain cautiously optimistic on shares as WRBY continues to show ability to grow the top line, open new stores, and is recession resistant as a lower cost option for non-discretionary spend,” says CFRA Research analyst Zachary Warring (Buy). “We see the company leveraging SG&A to become profitable in the second half of 2022.”

Check Out Europe’s Dividend Royalty

If you’re seeking out more stable opportunities amid an uncertain U.S. market … well, the rest of the world is admittedly looking pretty shaky, too. But that doesn’t mean there aren’t a few morsels worth a nibble. 

BCA Research notes that while there’s negative news around the globe, “European benchmarks already discount a significant portion of the negative news.” And looking ahead, inflation there is expected to peak over the summer “as the commodity impulse is decelerating” – that should help stagflation fears recede and help European shares.

Graham Secker, Morgan Stanley’s chief European and U.K. equity strategist, chimes in that his firm remains “overweight [European] stocks offering a high and secure dividend yield.”

We’ve previously highlighted our favorite European dividend stocks, which on the whole tend to produce higher yields than their U.S. counterparts.

But we’d also like to shine the spotlight on Europe’s twist on an American income club: the Dividend Aristocrats. The S&P Europe 350 Dividend Aristocrats have somewhat different qualifications than their U.S. brethren, but in general, they’ve proven their ability to provide stable and growing dividends over time.

Read on as we look at the European Dividend Aristocrats.

Source: kiplinger.com

Should You Consider a Roth Conversion While the Market is Down?

While a down market may not be a fun time for investors, there are some bright spots and opportunities to be had. Stock market drops like we’ve seen recently might make a Roth IRA conversion more appealing as a strategy for investors.

Should you consider converting a traditional IRA to a Roth during a down market? There are a few things to consider before pulling the trigger.

What is a Roth Conversion?

Before you embark on a Roth conversion, you need to fully understand what it is. When you have a traditional IRA, those are pre-tax dollars that you’re investing. While the money grows tax-free, when you later go to take a withdrawal, every dollar you pull will be taxed.

With a Roth IRA you are investing post-tax dollars, and when you convert a traditional IRA to a Roth, you pay the full tax during the year that you convert, at ordinary income rates. Then, the dollars that you’ve converted will grow tax-free for the remainder of the time that they sit within the investment. When you later take money out of a Roth, it’s all tax-free, as long as you are 59½ or older and follow a few other rules.

What You Need to Know About a Roth Conversion in a Down Market

When you trigger a Roth conversion, you’ll be responsible for paying the tax due on any pre-tax contributions or earnings within the traditional IRA. The benefit here is that if the market has dropped, it’s likely that your IRA value has dropped along with it – so your full value has gone down, and you’ll be paying taxes on the current value (which is lower, due to the market being down than it was months ago). So, in theory, you can convert a larger portion of your IRA in a down market and pay less in taxes than you could in years when the market is up.

Here’s an example: If you had a traditional IRA with $100,000 at the start of the year, and due to the market, it is now down to $85,000, you could choose to convert that entire IRA to a Roth and only pay tax on the $85,000 instead of the $100,000 that it was months ago. Assuming that these dollars will rebound in the market in the future, you’ve picked a good opportunity to convert.

It’s important to work with both a financial adviser and your tax professional to determine not only the amount of tax you’ll owe during the year that you perform the Roth conversion, but also how long it would potentially take you to break even.

What are the Pros of a Roth Conversion?

Converting from a traditional IRA to a Roth has many potential benefits for investors. Because a Roth IRA allows for dollars to grow tax-free, all the growth is also tax-free. There are also no RMDs, or required minimum distributions, on a Roth IRA once you turn 72. With a traditional IRA or 401(k), you have a set minimum you must withdraw each year once you hit RMD age, but Roth IRAs do not adhere to this rule.

Tax rates are still relatively low, historically, which means now is as good of a time as any for a Roth conversion, from a tax perspective. Tax parity is another benefit of Roth IRAs because you have different “buckets” of income to pull from at retirement in an effort to keep your taxes low during retirement. Roth IRAs also benefit your spouse and heirs at inheritance time, as the tax-free benefits pass along to them in various ways, depending on the time limit and amount, and their relationship with you, the deceased.

A Few Cautions on Conversions

Roth IRA conversions aren’t all benefits though, there are a few things to be aware of. There’s the five-year rule, where you must wait five years after a conversion before making a withdrawal or else you could incur a 10% penalty. Keep in mind that this five-year rule only applies to those who are younger than 59½. After you reach that age, the five-year rule and its penalties no longer apply.

Triggering a Roth conversion may also increase your adjusted gross income (AGI), which could compound other issues, such as Medicare premiums. This may also increase your tax rate.

The best way to determine if a Roth conversion is the right move for you during the down market is to work with a financial adviser and a tax professional so you can get feedback on your specific financial situation.

Diversified, LLC does not provide tax advice and should not be relied upon for purposes of filing taxes, estimating tax liabilities or avoiding any tax or penalty imposed by law. The information provided by Diversified, LLC should not be a substitute for consulting a qualified tax adviser, accountant, or other professional concerning the application of tax law or an individual tax situation.
Nothing provided on this site constitutes tax advice. Individuals should seek the advice of their own tax adviser for specific information regarding tax consequences of investments. Investments in securities entail risk and are not suitable for all investors. This site is not a recommendation nor an offer to sell (or solicitation of an offer to buy) securities in the United States or in any other jurisdiction.

President, Partner and Financial Adviser, Diversified, LLC

In March 2010, Andrew Rosen joined Diversified, bringing with him nine years of financial industry experience.  As a financial planner, Andrew forges lifelong relationships with clients, coaching them through all stages of life. He has obtained his Series 6, 7 and 63, along with property/casualty and health/life insurance licenses. 

Source: kiplinger.com

How to Become a 911 Operator

Ever consider what it’s like to be a 911 emergency operator?

Well now’s the time to think about it. The job is in high demand these days and it doesn’t require a college degree, saves lives and is never boring. The average starting salary is $38,000 and the national average pay is about $48,000, which isn’t super high but the job usually has good medical benefits.

In most states it takes about four to six weeks to get certified and then several months of on-the-job training. New hires are paid while they are trained.

Yes, there is certainly stress involved, but agencies have services to help employees deal with that. And not every call is a life-or-death situation; there are plenty of non-emergency situations such as stolen cars or lost dogs.

St. Johns County in Florida is just one of hundreds of agencies across the country looking to hire so-called “heroes in headsets.” It’s offering a starting salary of $41,000, which is boosted with overtime. There’s also a bonus of $2,000 for completing the certification.

“There has been a need for 911 professionals for as long as I can remember,” said April Heinze, Operations Director for 911 and Public Safety Answering Point at NENA, the National Emergency Number Association. That need has become much greater with COVID-19, which discouraged many from working in office settings or high-contact jobs like public safety. Thus the pool of potential employees has gotten smaller. “You’re starting to see more and more municipalities offering signing bonuses to encourage people to apply.”

For the right person, a job in emergency communications can become a rewarding career. As with healthcare, working in public safety is a chance to help people in need.

“When you go home at the end of your day you think about all of the people you helped. You may have saved lives that day. You are able to do a large amount of good on a daily basis,” Heinze said. Her organization represents tens of thousands of 911 first responders.

Here’s a link to 911-operator openings in each state. This isn’t comprehensive, however, so check the municipalities near you about openings, which are sometimes described as emergency dispatcher or 911 dispatcher.

How to Become a 911 Operator

First, be 18 and have a high school diploma or GED. The hiring process involves pre-employment testing and interviews. Most states have training requirements of four to six weeks in person or online. After that, employees train on the job for six to 12 months. Expect a drug screening.

Pros of Being a 911 Operator

The pros of being a 911 operator include good medical benefits, paid vacation time, job satisfaction especially if you like to help people and a lively workplace. It’s a job that’s rarely boring.

Good Benefits

The most common employers are police departments, public safety departments, fire stations, and emergency management call centers. Aside from a few nonprofit organizations, most of these agencies are operated by municipalities.

“In many cases there are many really good benefits. Some localities still have great retirement benefits. You typically get decent sick time and vacation time and can earn other types of time off as well,” Heinze said. “There’s opportunity for overtime and holiday pay. You get paid holidays off and may end up getting double time if you work on a holiday.”

Job Satisfaction

There’s no going home wondering if you made a difference in the world. “You have a great sense of self worth. You are able to do some fantastic things in your day,” Heinze said. “You make a difference in many people’s lives in one day’s time on a weekly and monthly and annual basis.”

Exciting Work

Along with the above tasks, emergency dispatchers must analyze situations and consider what more could be happening. Heinze pointed to a scenario in which a caller complains that her neighbor’s dog is barking incessantly. The 911 dispatcher has to figure out whether the dog’s owner could have had a medical emergency or there could be a break-in taking place.

Major Multitasking

This can be a pro or a con depending on the person. For some, emergency communications work might seem overwhelming. But for people who have a passion for operating on all cylinders, a 911 call taker offers a wide variety of work.

Once you are fully trained in emergency communications, you’ll take calls, dispatch emergency responders and check data and background records all at one time, said Heinze.

Cons of Being a 911 Operator

The cons are stressful work and long hiring process then after that on-the-job training and shadowing an experienced dispatcher. As you can imagine, the hiring personnel want to make sure that 911 operators can handle the pressure of hearing and helping people in distress.

Stress

Clearly, this isn’t an easy job. It’s very hard to take numerous calls that include trauma and crimes in process. Heinze said many municipalities have peer support groups, mentors and outside counseling to help dispatchers cope with the stress.

Long Hiring Process

This is not a job you can apply for and expect to start two weeks later. Heinze estimates it can take up to three months to be hired.

The pre-employment testing process includes several interviews, aptitude tests, a psychological evaluation and lengthy background checks. Some agencies go a step further, asking applicants who make it to the final stage of hiring to shadow someone on the job to make sure it’s something they want to do.

What Makes a Good Emergency Dispatcher?

The most important characteristic for an emergency dispatcher is the ability to be calm in stressful situations. A good emergency dispatcher has good communication skills and is personable. Typing is a required skill, as is empathy.

Here are more details on the skills employers will look for:

  • Customer service. If you’re good at customer service, you will likely make a good emergency call-taker.
  • Typing abilities. Most 911 dispatchers need to type between 30 to 45 words per minute without error.
  • Communication skills. Not only are you communicating with people in distress, you must be able to calmly talk with a wide variety of people. “You have to handle calls from every different generation, from a child caller to the elderly, someone with a mental disorder, intoxicated people, deaf or hard of hearing people,” Heinze said.
  • Empathy. It’s good to have a calming voice and provide an empathetic ear that’s ready to help.

These skills will give you a good foundation for your training, where you will learn about:

  • Telecommunications
  • Critical incident stress
  • Suicide intervention
  • Emergency medical dispatch
  • Advanced First Aid/CPR/AED
  • Hazardous materials
  • Domestic violence
  • Terrorism

Frequently Asked Questions (FAQs) About the 911 Operator Profession

We’ve rounded up answers to some of the most common questions about being a 911 dispatcher.

How Do I Become a 911 Operator?

Applicants must be 18 and have a high school diploma, GED or college degree to apply for 911 operator positions, and then go through a series of tests and interviews. Once you are hired, most states have training requirements of four to six weeks in a classroom or online setting. After that, employees will train on the job for six to 12 months.

What Are the Pros and Cons of Being a 911 Operator?

Pros include job satisfaction, good work benefits and an exciting, meaningful job. Cons are high stress, up to a three-month hiring process and major multitasking.

How Stressful Is It to Be a 911 Operator?

Yes, it can be stressful taking calls from people in life threatening situations. Agencies provide counseling, peer support groups and mentor support to help emergency dispatchers deal with stress.

Is a 911 Operator a Good Job?

It is a good job if it you are the kind of person who can remain calm in an emergency and you like to help people. Average starting pay is $38,000 for a meaningful career. In addition to the salary, most 911 operators work for a government agency with retirement benefits, sick time and paid vacation. There is also potential for overtime pay and the chance to advance to a higher salary.

Katherine Snow Smith is a freelance editor and reporter in North Carolina and Florida. She is author of Rules for the Southern Rulebreaker: Missteps & Lessons Learned.

Source: thepennyhoarder.com

Thinking about Rolling Your 401(k) into an IRA? 7 Deciding Factors to Consider

The Department of Labor has outlined new rules for advisers to follow when rolling over retirement plans. Whether it is a 401(k) to an IRA or an IRA from one custodian to another, there are several considerations that need to be evaluated before making a change. If you are initiating a rollover on your own, it may be beneficial for you to evaluate these items as well.

You should be able to get all the information you need on your plan from your statements, Annual Participant Fee Disclosure and Summary Plan Description. If you do not have access to these documents, you can usually request them from your human resource department.

All-In Fees and Expenses

Before deciding whether to do a rollover, you will want to compare the fees within your 401(k) plan vs. the fees for the IRA. Fees in the 401(k) could include any mutual fund loads, plan expenses and any underlying fees. Sometimes the fees may be higher in your 401(k), but there may be additional benefits to keeping your funds in the 401(k) wrapper.

It would be up to you to decide whether any benefits are worth the fees. For example, if you are opening an IRA and moving over to an investment adviser there will be additional management fees paid to your adviser, but you may also receive financial advice, retirement planning or wealth management services.

Available Services

Some retirement plans, such as 401(k)s, provide added creditor protection, the ability to take out a loan or take hardship withdrawals, which are not available with IRAs. In certain circumstances you may be able to keep some asset protection if 401(k) funds are rolled into a separate IRA and not commingled with other IRA funds. Some 401(k) providers provide investment education to participants that may be valuable if you are a younger investor.  You will also want to look at your vesting schedule and company match to determine whether they may be affected. In addition, some retirement plans offer Roth 401(k) contributions, which may not be available to you otherwise.

Available Investments and/or Products

Several 401(k)s offer participants limited investment options. On one hand, that could be viewed as a positive, because when there are too many choices it can confuse participants and make it harder to manage the plan. However, some plans’ limited options may be  more expensive, such as actively managed funds, and they might not offer any low-cost index options.

If you roll over funds into an IRA you then have access to a much wider universe of investments. That said, this should not be your only decision criteria. Some company retirement plans offer a “BrokerageLink” option, which allows you to move funds from the “core” 401(k) account to a brokerage account –  another way to access more investment options. Some plans have restrictions on what can be invested in a BrokerageLink so you would want to consult the plan document before deciding.

Guaranteed Income/or Interest Rates

Are you invested in anything earning a guaranteed interest rate that you will lose by moving from a 401(k) to an IRA or other plan? For example, TIAA CREF’s 401(k) offering has TIAA Traditional, which could be earning 3%-4% –  a great return in this environment. You may not want to roll out funds into an IRA and lose access to this option.

Tax Considerations

If you are required distribution age but still working past retirement (providing you are not an over 5% owner in the company), you can defer taking money out of your 401(k). Unfortunately, if you have an IRA on the side, that IRA is subject to required distributions at age 72, even if you continue to work. If you leave the funds in the 401(k) you can still contribute and don’t have to take money out.

One caveat related to the Roth part of a 401(k): If you are age 72 and a greater than 5% owner or retired you have to take a distribution from the Roth side. A way to get around this is to roll the Roth 401(k) balance into a Roth IRA prior to age 72.

Also, if you happen to be in a zero-income year and all you have is retirement funds and need cash, it may make sense to take a taxable distribution rather than do a rollover.

Distribution Considerations

If your 401(k) retirement account is invested in an insurance product or annuity you will want to evaluate whether there are any surrender charges. Usually annuities cannot be moved to IRAs in kind. Some annuity products may have certain benefits that will be lost if liquidated, so you will want to make sure you understand how your product works before making a decision.

Some plans may offer annuity options rather than a lump sum, which would be lost if you roll your 401(k) over to an IRA. You will want to look at the financial implications of the lump sum vs. the annuity options to see which option is better for your situation, especially if you have a spouse who can receive survivor benefits.

You will also want to check if there are any in-service distributions options or guaranteed payment options.

Beneficiary Considerations

If you are married, your 401(k) must list your spouse as beneficiary unless your spouse signs a waiver. You can list anyone on an IRA as a beneficiary, so you may want to review your estate planning and beneficiaries if you make any changes.

Senior Financial Adviser, Evensky & Katz/Foldes Financial Wealth Management

Roxanne Alexander is a senior financial adviser with Evensky & Katz/Foldes Financial handling client analysis on investments, insurance, annuities, college planning and developing investment policies. Prior to this, she was a senior vice president at Evensky & Katz working with both individual and institutional clients. She has a bachelor’s in accounting and business management from the University of the West Indies, she received an MBA at the University of Miami in finance and investments.

Source: kiplinger.com

Dear Penny: Is Using Retirement Money So My Daughter Can Graduate a Mistake?

Dear Penny,
A big advantage of Parent PLUS loans is that you can qualify for something called income-contingent repayment. Basically, your payment is capped at 20% of your disposable income. You’re planning to retire soon, so I’m assuming your income will drop soon as well. That means you could qualify for an extremely low payment once your daughter graduates.
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She is a good kid with some special problems that she overcomes daily. I want her to have this degree and a chance in life. She worked very hard to overcome all of the physical and mental challenges in her life, BUT expenses are starting to affect my retirement. Any advice?
Sometimes I get antsy when parents talk about spending retirement money on their child’s education. But we’re talking about one year of college, not four. I think you’d deeply regret not giving your daughter the financial support she needs to make it through this final year.

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. Send your tricky money questions to [email protected].
Contact the financial aid office for your daughter’s school if you haven’t already done so. The Free Application for Federal Student Aid, or FAFSA, bases financial aid on income from two years earlier. For example, aid for the 2022-23 school year will be based on 2020 income. But some schools offer a process called professional judgment where administrators can adjust FAFSA information based on major life changes, like a parent’s retirement, on a case-by-case basis.
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Your daughter has no doubt overcome her challenges thanks to her own grit, but also because of your love and support as a parent. You’re making a sacrifice to pay for her last year of school because you believe in her. Once she graduates, paying off any debt you’ve incurred will be another challenge you’ll need to conquer together.
-J.
Keep in mind, a Parent PLUS loan is only an option if your daughter is considered a dependent student. For example, if she’s 24 or older or she has dependent children of her own, unfortunately, you wouldn’t be eligible.
Ready to stop worrying about money?
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Dear J.,
With private student loans — whether you take them out in your name or co-sign for your daughter — you’re at the mercy of your lender if you’re struggling with payments. So I’d vote in favor of a Parent PLUS loan, even if you find a private loan with a lower interest rate.
If you can’t get a Parent PLUS loan, I’d suggest splitting taking half from your retirement funds and a private loan for the other half. Neither is an ideal option, but sometimes life forces us to choose between less-than-perfect options.
What makes me nervous about using retirement money is that virtually everyone’s investments have taken a hit in recent months. You want to limit your withdrawals as much as possible right now so that your money can recover. But at least since you’re 67, you won’t pay an early withdrawal penalty.
Now let’s address your daughter’s role. I don’t know if she currently has a job. If she is able to work some to help defray costs without jeopardizing her studies, that should be on the table.
My daughter is in her last year of college. I don’t have any more money to pay for it. So for her last year, should I take from retirement monies or get a loan? 
If financial aid can’t make up the shortfall, a Parent PLUS loan is a good solution. A Parent PLUS loan is a federal student loan that you, as the parent, are responsible for repaying.
Source: thepennyhoarder.com

But I want her to focus on her studies so that she can actually complete her final year of coursework in a year. Stretching out the timeline further could pose a greater risk to your retirement. So I wouldn’t ask your daughter to get a job if she’s not already working or work more hours if she has a job.

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By taking half from your retirement and half as a loan, you can minimize the damage to your nest egg while taking less debt into retirement. If you’re able to work just a bit longer to pay some of these expenses in cash, even better.

Can I Pay off a Personal Loan Early?

Perhaps you’ve gotten a raise or a bonus, and you want to pay off the remaining balance on a personal loan. Is that possible? The short answer is “yes” and, in many cases, it can be a wise decision.

But if there’s a prepayment penalty, then this loan payoff may be more costly than you’d expect. Learning how a prepayment penalty might affect your payoff amount can be helpful in making the decision whether or not to pay off a personal loan early. And if you’re gathering information about a personal loan early payoff without incurring a prepayment penalty, you do have some options.

Is It Possible to Pay Off a Personal Loan Early?

It’s unlikely that a lender would refuse an early loan payoff, so yes, you can pay off a personal loan early. What you have to calculate, though, is whether it’s financially advantageous to do so. If a personal loan early payoff triggers a prepayment penalty, it might not make financial sense to do so.

Overview of Prepayment Penalties

It may sound strange that a lender would include this kind of penalty in a loan agreement in the first place.

Some lenders may, though, to ensure you’ll pay a certain amount of interest before the loan is paid off. It is an extra fee that, when charged, helps lenders recoup more money from borrowers.

You can find out if you’d be charged with a prepayment penalty by looking at the loan agreement you signed with the lender.

If you have one, the penalty could be in effect for the entire loan term or for a portion of it, depending upon how it’s defined in the loan agreement.

Does Paying off a Personal Loan Early Affect Your Credit Score?

Personal loans are a type of installment debt. In the calculation of your credit score, your payment history on installment debt is taken into account. If you’ve made regular, on-time payments, your credit score will likely be positively affected while you’re making payments during the loan’s term.

However, once an installment loan is paid off, it’s marked as closed on your credit report — “in good standing” if you made the payments on time — and will eventually be removed from your credit report after about 10 years. Paying off the personal loan early might cause it to drop off of your credit report a few earlier than it would have and no longer help your credit score.

If I Pay Off a Personal Loan Early, Does My Interest Rate Decrease?

Since a personal loan is an installment loan with a fixed end date, if you pay off a personal loan early, you won’t pay less interest. You won’t owe any interest anymore because the loan will be paid in full.

Recommended: What are the average personal loan rates?

Advantages of Paying off a Personal Loan Early

There are definitely some advantages to personal loan early payoff. One obvious benefit is that you could save on interest over the life of the loan. A $10,000 loan at 8% for 5 years (60 monthly payments) would accrue $2,166.50 in total interest. If you could pay an extra $50 each month, you could pay the loan off 14 months early and save $518.42 in interest.

Not owing that debt anymore can be a psychological comfort, potentially lowering bill-paying stress. If you’re able to make that money available for something else each month — maybe creating an emergency fund or adding to your retirement account — it might even turn into a financial gain.

If you no longer owe the personal loan debt, you’ll essentially be lowering your debt-to-income ratio, which could positively affect your credit score.

Disadvantages of Paying off a Personal Loan Early

If your personal loan agreement includes a prepayment penalty, paying off your personal loan early might not be financially advantageous. Some prepayment penalty clauses are for specific time frames in the loan’s term, e.g., during the first year. If you pay off the loan during the penalty time frame, it could cost you just as much money as it might if you had just paid regular principal and interest payments over the life of the loan.

You might be thinking of a personal loan early payoff so you can put your money to work somewhere else. But if the interest rate on the personal loan is relatively low, it might make financial sense to put your extra money toward higher-interest debt, or to contribute enough to an employer-sponsored retirement plan so you can get the employer match, if one is offered. If you don’t have an emergency fund yet, you might also consider starting one with a bit of extra money each month until it’s at a comfortable level.

Another thing to consider is whether paying off your personal loan early will hurt your credit. As mentioned above, making regular, on-time payments to an installment loan like a personal loan can have a positive effect on your credit score. But when the loan is paid off, and marked as such on your credit report, it’s not as much help.

Advantages of early personal loan payoff Disadvantages of early personal loan payoff
Interest savings over the life of the loan Possible prepayment penalty
Could alleviate debt-related stress Extra money could be better used in another financial tool
Lowering your debt-to-income ratio Removing a positive payment history on the loan early could negatively affect your credit
More cushion in your monthly budget Taking money from another budget category might leave an unintentional financial gap

Things To Ask Yourself Before Paying off a Personal Loan Early

Everyone’s financial situation is different. Priorities that are important to you might be less so to someone else. Considering how a personal loan early payoff might affect you can be a good way to start making the decision.

Will Paying off a Personal Loan Early Put Me at Risk?

There can be some drawbacks to paying off a personal loan early — some that might be considered risks.

If you’re thinking of putting extra money toward a personal loan balance, but you don’t have any money set aside in an emergency fund, that’s a financial risk. If you encounter an expensive, necessary financial need without the means to pay for it, you might be tempted to use high-interest debt like a credit card.

If you consider it risky to pay more than you need to for something, then paying a prepayment penalty could be considered a financial risk. If paying a loan early will cost you extra money, you might think about where that money could be better spent.

Will Paying off a Personal Loan Early Improve My Debt-To-Income Ratio?

Lowering your debt-to-income ratio can have a positive effect on your credit score, and paying off a loan will accomplish this. But you might weigh that positive against any potential negative effect that might come with paying off your personal loan early, such as not having a positive payment history included on your credit score after your loan is closed.

Does Paying off a Personal Loan Early Have Clear Benefits?

There are absolutely clear benefits to paying off a personal loan early. Saving money in interest charges over the life of the loan is at the top of the list, as long as any savings is not offset by a prepayment penalty.

Having more money in your monthly budget — since you wouldn’t have that loan payment due each month — might lower your financial stress.

Types of Prepayment Penalties

If and how a prepayment penalty is charged on a personal loan will be stipulated in the loan agreement. Reviewing this document carefully is a good way to find out if the penalty could be charged and how your lender would calculate it.

If you can’t find the information in the loan agreement, asking your lender for the specifics of a prepayment penalty and for them to point out where it is in the loan agreement is another way to be certain you have the right information to make a decision.

There are a few different ways a lender might calculate a prepayment penalty fee.

Interest costs

In this case, the lender would base the fee on the interest you would have paid if you had made regular payments over the total term. So, if you paid your loan off one year early, the penalty might be 12 months’ worth of interest.

Percentage of your remaining balance

This is a common way for prepayment penalties to work on mortgages, for example, and you’d be charged a percentage of what you still owe on your loan.

Flat fee

Under this scenario, you’d have to pay a predetermined flat fee for your penalty. So, whether you still owed $9,000 on your personal loan or $900, you’d have to pay the same penalty.

Avoiding Prepayment Penalties

Finding out whether a prospective lender charges a prepayment penalty — and not using that lender if it does — is at the top of the list of ways to avoid a prepayment penalty.

If you’ve already taken out a loan that includes a prepayment penalty, there are some options.

First, you could simply decide not to pay the loan off early. This means you’ll need to continue to make regular payments on the loan rather than paying off the balance sooner, but this will allow you to avoid the prepayment penalty fee.

You could also talk to the lender and ask if the prepayment penalty could be waived, but there is no guarantee that this strategy will succeed.

If your prepayment penalty is not applicable throughout the entire term of the loan, you could wait until it expires before paying off your remaining balance.

Another strategy is calculating the amount of remaining interest owed on your personal loan and comparing that to the prepayment penalty. You may find that paying the loan off early, even if you do have to pay the prepayment penalty, would save money over continuing to make regular payments.

Types of Personal Loans

In general, there are two types of personal loans — secured and unsecured. Secured loans are backed by collateral, which is an asset of value owned by the loan applicant, such as a vehicle, real estate, or an investment account. Unsecured personal loans, on the other hand, are backed only by the borrower’s creditworthiness, with no asset attached to the loan.

You might hear unsecured personal loans referred to as signature loans, good faith loans, or character loans. Typically, these are installment loans the borrower repays at a certain interest rate over a predetermined period of time.

Personal Loan Uses

Acceptable uses of personal loan funds cover a wide range, including, but not limited to:

•   Consolidation of high-interest debt.

•   Medical expenses not covered by health insurance.

•   Home renovation or repair projects.

•   Wedding expenses.

While there are benefits to borrowing a personal loan, it might not always be the right financial move for everyone. Personal loans offer a lot of flexibility, but they are still a form of debt, so it’s a good idea to weigh the pros and cons before signing a personal loan agreement.

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Personal Loans at SoFi

If you’re looking for an unsecured personal loan with no prepayment penalties, a personal loan from SoFi might fit your financial need. There are no application fees, no origination fees, and no hidden fees attached to unsecured personal loans with SoFi.

A SoFi Personal Loan can be used to consolidate credit card debt, make home improvements, pay for relocation costs, repair your vehicle, make a major personal purchase and more.

The Takeaway

If you’re in a secure enough financial position to be able to pay off your personal loan early, that’s terrific. But before you do, it’s a good idea to calculate whether it’s a good financial decision or not. A prepayment penalty could take a bite out of any savings you might see on interest costs.

Comparing interest rates for a personal loan, along with lenders’ fees and other charges, including prepayment penalties, is a good way to find the lender that meets your financial needs.

Ready to explore SoFi personal loans? Check your rate in just one minute.

FAQ

Is it good to repay a personal loan early?

Paying off a personal loan early can be a good financial decision, as long as any prepayment penalty charge doesn’t cost more than you might pay in interest.

If I pay off a personal loan early do I pay less interest?

Paying off a personal loan early doesn’t affect the interest rate you’ve been paying up until that point. It would mean, however, that the total amount of interest you’d pay over the life of the loan would be less than anticipated.

Does paying off a personal loan early hurt your credit?

Because making regular, on-time payments on an installment loan such as a personal loan is a positive record on your credit report, removing that history early can have a slight negative affect on your credit.


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Source: sofi.com