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Refinancing & Installment Payments

Thursday, March 4, 2010

When you find that all of your installment payments added together are larger than what you can handle with your current salary, it may be time to refinance, rather than miss an installment payment and risk a hit on your credit rating.

It may seem like a downward spiral when you miss installment payments. The debt collectors are after you, your credit rating is lower and now other lenders are coming after you because your credit rating dropped.

Taking the initiative prior to falling into this trap is one way of avoiding this downward spiral. Refinancing all of your debt in such a manner that your monthly installment payments actually drop can be a solution for some people. Not everyone can take advantage of this approach, but it is worth checking to see if you qualify. If you do , chances are that your installment payments can be dropped significantly. Consumers should also remember how they got into this situation and avoid the pitfalls that got them there once they refinance.

Can You Refinance to Lower your Installment Payments

Many people have a few credit cards and it is often these credit cards that get them into trouble with their installment payments. The combination of high interest rates ( some as high as 28% ) and short term payment requirements drive the monthly installment payment skyward. In addition, when you do make your monthly payment, very little actually goes to reducing the principle so you do not see much relief in terms in total monthly installment payments.

Car loans and furniture loans are also culprits in the discussion about installment loans. Typically these will be five year loans with more competitive interest rates. Still your monthly installment payments may be more than you can manage when you add your mortgage, car loans and credit card payments together.

To answer the question about whether you can refinance, you will need to assess what additional value you have in your home that is above the value of your mortgage. Many companies are being very cautious today when it comes to mortgages due to the crisis that occurred in the United States during 2009. However, as a general rule you can take out a mortgage on your home for up to 75% of the value of your home. Some companies may go higher if you have great credit ratings and solid jobs, but credit remains very tight at time of writing.

If you own a home take 75% of your homes value and subtract the value of your current mortgage against your home including any second mortgages if you have one of these. The difference, if it is positive is the amount that you can look to the banks for refinancing and lowering your monthly installment payments.

Here is an example. If your home is worth $400k, then 75% if your home is $300k. This is the amount of mortgage financing you may be able to obtain on your home. Remember that all banks are being very cautious these days so you may have to shop around to get even this amount.

If your current mortgage is $100k for example, then $300 less $100 leaves you with $200 k in refinancing that you might be able to use towards reducing other loans and credit card balances. Each time you pay down a credit card payment, your monthly installment payment will drop. Remember that you now have a larger monthly installment payment on your mortgage, however it will be not as large as the loans you are paying off due the fact that you have a very competitive interest rate and a much longer term.

Refinancing is not For Everyone

Many consumers may not have the unused equity in their home as per the above example, or they may just not want to add to their existing mortgage preferring to go without while they are paying installment payments on credit cards and other loans.

There is absolutely nothing wrong with this approach. It is really a question of what you can deal with. Paying off loans is by far the best approach. Once the loan is reduced to zero, you immediately get some relief because that is one installment payment you no longer need to make.  In addition, you have shown that you can make monthly installment payments and be counted on to repay a loan. Immediately your credit rating  gets a plus mark on it and this is a good thing when you go to borrow money in the future.

If you cannot meet the monthly installment payments each month and there is no other recourse, you may want to talk to a refinancing specialist to get some help on refinancing and reducing your installment payments every month. Consumers in this situation, should remember that the worst thing they can do is to ignore their commitments. Left long enough, your loan will be referred to a debt collector and they are not nice people  to deal with.

Far better to face your finances up front and negotiate directly with the lenders. Once your debt is handed off to a debt collector the lender is only going to get cents on the dollar of what is owed to them. If you can negotiate with them to pay them something less than what you are paying now, but more than what the lenders will get from a debt collector, you are both winners.

This situation only works for consumers in dire financial circumstances. The lenders are not likely going to cooperate in refinancing your installment payments if they think you have a lot of equity that could be used to pay your loan. Often the best approach is to talk to a financial expert who can assist you in this area. There will be a fee of course for their services, however this may be money well spent if you are able to extricate yourself from a difficult financial situation and reduce your installment payments at the same time.

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Credit Card Installment Payments

Thursday, February 18, 2010

Most of us have several credit cards, a main credit card and another one that we use as a backup in case we max out or the credit card is stolen etc. In addition many consumers also have store credit cards that offer 10% off the purchase price when we use them. These are great deals, since many of us will purchase an item on sale and then get another 10% of the sale price. A good deal right! Not necessarily. Once you begin making installment payments on these credit cards, you may be surprised at the amount of interest you are paying vs. the amount of principle that you are actually paying off each month.

Store credit cards typically charge interest on the balance on the credit card somewhere in the range of 18% to 28% depending on the store.  When you compare to 5 year term loans or mortgage interest rates, these store credit card rates are extremely high. The installment payments are also very high and most consumers will find it difficult to make their monthly installment payments with these high rates.

Solutions to High Credit Card Installment Payments

There are solutions to this problem, however it depends on your financial situation as well as whether you have the discipline to manage your credit cards once you have paid them down. Many people, once their credit card balances are transferred to a loan or mortgage with a lower interest rate and a much lower installment payment, just load up on the credit card all over again. They end up with a problem that is now much worse. They have installment payments again on the credit card and a large installment payment on their loan or mortgage. My suggestion: Cut up the store credit card if you are worried that you will not have the discipline to manage your credit card balances.

Arrange a Personal Loan at your Local Bank

Many people are finding it difficult to borrow money right now in 2010 due to the recent financial crisis, however for those of you that have the income and the credit rating, this may be an option. Paying an installment payment on a loan based on an interest rate in the range of 5% to 8% is so much better than making installment payments when the interest rate is 28%.

Increase your Mortgage Principle

Again, this option may not be available to everyone due to the recent financial crisis during 2009. Many homeowners found that the value of their homes actually declined, in some cases to less than the value of the existing mortgage. However if you have a small mortgage relative to the value of your home, you may be able to persuade the bank to increase the amount of your mortgage so that you can pay down your credit cards and eliminate the corresponding installment payment. Not only will the interest rate be a lot lower, the term of the mortgage is longer than 5 years ( in some cases it can be 25 or 35 years) which has the effect of making the installment payment increment quite low.  This option will give you the lowest installment payments overall, however we emphasize that cutting up your credit cards should be given serious consideration.

Transfer Credit Card Balance to a Competitive Credit Card

We have all received these offers in the mail. Apply for a new credit card, transfer your existing credit card balances to the new credit card and they will guarantee you a low introductory rate for some period of time. On the surface these credit card offers sound pretty good, however there are a few pitfalls to them which we would like to point out, which can effect your monthly installment payment significantly.

Often the introductory is quite attractive and will significantly decrease your installment payments. There are three issues that consumers need to be aware of. First the introductory rate only lasts for a defined amount of time. Once that time limit is up, the interest rate returns to the usual high credit card rate with the corresponding impact on your monthly installment payment. If you can, pay off the principle before you reach the end of this time limit.

Secondly, the next catch is that if you miss a payment, even by one day, the credit card company has the right to increase the interest rate to the normal rate that they charge. How many times have we scheduled an electronic payment, only to have keyed in the wrong date, or the wrong amount. That is all it takes so make sure this amount is correct.

Third, if you should exceed the credit limit they have offered to you, which includes the transferred balance as well as any new charges, they have the right to increase the interest rate.  Easy to do and with significant consequences.

The writer recently received an offer just like this one. If you missed a payment or exceeded the credit limit, the interest rate went from 1.99% for the first 10 billing cycles to 19.99%! A significant increase to your monthly installment payments!

Installment Payments

Installment payments are based on the term which is usually 5 years for credit cards, the interest rate and the balance. As we indicated earlier the interest rate can vary from 18% to 28% depending on the card and the institution you are dealing with. Your balance is a bit trickier.

If you pay the balance on your credit card each month prior to the due date, then no interest is calculated and you do not have installment payments. If you not pay the balance off or just pay a portion of the balance prior to the due date, then interest will be charged on the remaining balance from the end of the grace period to the billing date. If you take cash advances on your credit card, interest is charge immediately and is calculated as part of your installment payment. Consumers can easily find a large interest charge on their invoices due to cash advances and unpaid balances!

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Bad Credit & Installment Payments

Thursday, February 4, 2010

How many times have you seen the advertisements for loans for consumers with bad credit? Seems as if they are every were these days. Over the past two years many consumers have seen their credit ratings fall due to job losses or because they have over extended themselves. Now it is much more difficult to find an installment loan even if you have the best credit rating simply because the economy has had such a rough time in 2009.

A bad credit rating can have a dramatic impact on your installment loan. For example you may not even be able to find a lender who is willing to lend a loan to you or if you can, they will offer such high rates of interest and tight terms it may not be worth your while to take on the additional debt. So how does bad credit impact your installment payments?

Every installment loan you take out whether it is a car loan, a furniture loan, a debt reduction loan or even a mortgage consists of the same factors.

They all have :

Principle: This is the actual amount of money that you are going to borrow. It will consist of the money you need plus any fees or broker expenses necessary to process the loan. Always examine what fees are being added on to the principle amount to see the true cost of the loan in addition to interest charges. In some cases you may only be eligible for a specific amount for your loan, so these fees are then deducted from the amount you will receive. You might receive less than you asked for simply because of your bad credit rating and your perceived ability to repay the loan.

Interest Rate: The interest rate is the rate at which interest will be calculated. Obviously the lower this number is, the less it will cost for your loan over the life of the loan.  A bad credit rating will also tend to cause lenders to increase the interest  rate, making it more expensive for you to borrow any money. Consumers must also pay attention to how often the interest is calculated. Many loans regardless of the type of installment  loan, are  calculated every 6 months. This means that they calculate the interest you will pay using the remaining principle amount at 6 month intervals.

Some credit cards do this on a monthly basis and payday installment loans might do this calculation on a weekly basis. The net result is the more often interest is calculated, the more it is going to cost you. Always push for 6 months and avoid any installment loans that use shorter intervals to calculate interest. Pay off your credit cards as quickly as possible, since they have the highest net interest rate and are very expensive installment loans.

Term: The term is the length of time you will take to pay your installment loan down to zero. Mortgages come in all terms with some as long as 25 to 35 years, while car loans may be one year to a maximum of five years. Some loans that are intended for emergency funding may only have a term of 30 days.

Regardless of what the term is that you choose, always review whether you will be able to complete all of the payments including interest and fees within this time frame. Failure to do so will require at the minimum a renegotiation of the loan usually at some cost to you the consumer. If you cannot renegotiate or just cannot repay the loan, then your credit rating will suffer even more and make it more difficult in the future to take out an installment loan.

Lastly the term of you installment loan will have a big impact on the monthly payment value. A shorter term means a large monthly installment payment, while a longer term reduces the monthly installment payment. Of course installment loans with longer terms will actually cost more since it takes longer to repay them, hence the interest charges are larger. i.e.. the total cost of the loan will be higher.

Monthly Installment payment: The above three factors, the principle, the interest rate and the term all combine in a mathematical formula to arrive at your monthly installment loan payment.  This is the amount you must pay each month. If your principle or interest rate increases, your monthly payment will increase. On the other hand if the term increases, your monthly payments will actually decrease since you are taking longer to repay your installment loan. The amount of interest you pay over the life of the loan will increase as a result.

Once you understand what each of these items mean and their relationship, consumers can quickly understand why they have bad credit and why they make it so hard to get an installment loan. If you have a bad credit rating, then they the banks, are really saying that you are a high risk customer and may not repay the loan. They will either deny the loan to you or they will increase the interest rate and shorten the term to reduce the risk of possible defaulting on the installment loan.

Higher interest rates and shorter terms make the monthly installment payment a lot higher and perhaps out of reach for many consumers based on their budget or income levels.

As a rule of thumb your total monthly payments should not be any higher than 30% of your total monthly income after taxes. If you have a combination of mortgage payments, installment loan payments and possibly credit card payments that are larger than 30% of your after tax income, you definitely need to take some action to fix this situation.

Anytime you get over this amount, consumers will find it very tough to meet daily living expenses and will have to cut corners until they can retire loans and eliminate payments of this type. If you want to avoid a negative impact on your credit rating always repay your installment loans on time every time.

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Auto Installment Loans

Thursday, January 21, 2010

As soon as we turn 16, we want to buy our first car, regardless of the price, the cost of insurance and operating costs. We just want a car to drive and look cool in, maybe attract the girls and probably most of all have some freedom. No more asking our parents for the family car, which looks like  a family car of course and definitely not cool. (Continued)

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Personal Installment Loan Basics

Thursday, January 7, 2010

With the meltdown of the economy in 2008 and 2009, driven by the financial markets, bad home mortgages and who knows what other kinds of loans there were, I thought it would be useful to discuss some of the basics relative to loans, principle, collateral, interest rates and installment payments. (Continued)

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What is Credit Scoring

Tuesday, December 8, 2009

creditscoringCredit scoring is one of the most important factors when it comes to an individual’s credit rating. More now than ever it is critical to have a clean credit history. If you are one of the unlucky people who has a poor credit score this might be of interest to you.

A Definition of Credit Scoring

Credit scoring objective methodology widely used by credit grantors to make credit decisions. Scoring models are widely used to evaluate loans to consumers, including credit cards, home mortgages, and home equity lines of credit. Scoring methodologies also are used for the approval of small and large business loans and small and large business credit cards. (Continued)

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Installment 3 – History of USA Free Banking 1800s

Saturday, February 14, 2009

The other and more important new development was free banking. By action of the state legislatures of bank was held to be not a corporation, which then and for many years required a special charter from the state, but a voluntary association of individuals and thus, like blacksmithing or rope making, open to anyone. (Continued)

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History of United States Currency (1800s) Installment 1

Saturday, February 14, 2009

More on the history of United States banking and currency here. This is a many part series on the history of United States currency, markets, banks, and industrialization. (Continued)

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Installment 2 – History of USA Money 1800s

Friday, February 13, 2009

It was an arrangement which reputable bankers and merchants in the East viewed with extreme distaste. Yet for them it was not intolerable. They had good money in which to do business with each other and with foreigners. (Continued)

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How To Raise Quick Cash With a Garage Sale

Thursday, February 12, 2009

In keeping with the theme of our web site we will be exploring different ways to raise cash quickly, and the first post I would like to make is regarding garage sales. (Continued)

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