In Canada, the Canadian government encourages their citizens to save for their retirement.  The financial vehicle that many people take advantage of is called the RRSP, or Registered Retirement Savings Plan. This plan allows Canadians to set aside funds for their retirement, tax free as long as they follow a set of rules that have been defined for the RRSP’s. Canadians can make RRSP installment payments or contributions and they can also make lump sum payments to their plans as well.

The most significant advantage of the Canadian RRSP program is that up to specific limits, Canadians can make deposits to their RRSP and deduct the amount from their income in the year they make the deposit. This has the advantage of reducing the amount of taxes that will be paid in the year the taxes are filed and the year of the contribution. All income earned while these funds are in the RRSP are also tax free. Taxes will be applied once they funds are withdrawn from the RRSP which can be at anytime up to the year the RRSP owner is 71 years of age. At that time they must convert their plan to an income plan which pays them a specific installment amount each month.

Many Canadians will use RRSP installment payments as a means of making their contributions to their RRSP’s. These installment payments can be completed manually, or they can be auto deducted from their bank accounts or even from their pay checks. The RRSP installment payments are deposited into their RRSP plan and invested according to the instructions of the RRSP owner. Most RRSP plans have a large number of investment vehicles they can choose from including mutual funds of all types and also common shares of registered corporations.

An RRSP installment payment approach is an excellent approach to investing and saving for retirement. At first when the installments are made there may be some angst since you have less money to spend on monthly bills and entertainment. However once you get used to regular RRSP installment payments coming out of your bank account etc, after a while you do not even miss the money. Many people will adjust to doing less with less money so that they can save for retirement and also lower their income taxes.

RRSP Installment Payments – How Much?

How much should you contribute to your RRSP? There are two answers to this question and they depend on your income and the maximum limits the government will allow you to make each year.

Each year one of the calculations that is made during your income tax assessment is the amount that you will be allow to contribute to your RRSP during the following year. If you are not sure what this amount is, check your tax assessment from the previous year to find out how much you are allowed to contribute. You can make these contributions in either a lump sum contribution or use RRSP installment payments during the year as long as you do not exceed the maximum as stated in your tax assessment.

The other limitation of course is how much can you afford to contribute each year. Everyone should  contribute each year, but some years with expenses etc, you might not be able to make the full contribution. This is one of the reasons that RRSP installment payments each month or even every two weeks is a great way to go, because it distributes the contribution over the full year rather than coming up with a large amount one time during the year.

If you miss a year or do not make the full contribution in one year, the unused amount is carried over to the following year. So you never lose the contribution room and can increase your installment payments over the following year.

When Should You Start Making Installment Payments to Your RRSP?

Obviously the earlier you start with contributions to your RRSP with RRSP installment payments the more investments you will have for your retirement. However if you do not have any income or low income you will also not have much in the way of RRSP contribution room. As your income grows your RRSP contribution room will grow and your savings will grow as you make these regular installment payments to your RRSP.

We believe that you should start as soon as possible to invest in your RRSP and make monthly RRSP installment payments up to the level of your allowed contribution.  With this approach you will maximize your savings for retirement and minimize the income tax you pay over your life time.

A small example will help illustrate just how important it is to make monthly RRSP installment payments towards your retirement. Lets assume that you contribute $100 per month beginning at age 20 until age 55. If you assume that you can make an average of 7% per year on your investments you will have $165 thousand saved without taking into account the taxes that you will also not have to pay on your income tax.  If you continued until age 65, just 10 more years your savings would leap to $342 thousand for your retirement!

But I Have a Pension With My Company

If the last 10 years have taught us anything, it is that nothing remains constant. Many companies who we would have thought to be untouchable have gone bankrupt. Enron, Nortel, GM to name 3 large companies went bankrupt in the past 10 years along with the life savings of the employees. A WORD OF CAUTION. Do not depend on your company for your retirement.  If you retire and there is a retirement pension, then you lucked out. What we are saying is always have a plan B, which means that you have your own retirement plan that you can rely on should the pension plan your are depending on goes up in smoke.

If you end up with both your pension and your retirement savings, you can celebrate and you will be well off. If you just end up with your retirement savings, at least you have that. One last thing, never put all of your retirement dollars in one place. Always diversify!

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.

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.

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. Read more »