No one wants to pay all of the interest we are forced to pay on loans, credit cards or mortgages, yet we make the monthly installment payments each month religiously to pay off our debts and protect our credit records.  Have you ever looked at just how much interest you pay? Over the life of a 25 year mortgage you can and will literally pay thousands and thousands of dollars. Aside from winning the lottery, what is a guy supposed to do? Well there are a number of possible alternatives that can help you pay less interest and even pay off your loan, mortgage etc even more quickly than one would think.

Of course each person will need to evaluate their personal situation in terms of the amount of money owed , whether it is a loan, a credit card or a mortgage and just how much money you can afford to pay in addition to what you are paying already. Even a little bit extra can make a big difference to the overall total amount of interest you pay and how long it will take you to fully repay your debt. Essentially it means changing your installment payment frequency and there are a number of ways to accomplish this.

Make an Extra Installment Payment

Most loans and mortgages, certainly credit cards allow you to make an extra payment in addition to your regular installment payments. Any extra payment goes directly to reducing your principal. In turn the amount of interest that is calculated immediately becomes less, meaning that on your next installment payment, which remains the same total amount,  more money is going towards reducing your principle.  The net result is that you can pay off a loan or mortgage more quickly since you have reduced the principal more quickly than originally planned.

Change from Monthly to Bi-weekly

Most people will make an installment payment once per month on their mortgage, car loan or any other type of loan. If you were to change from once per month to once every two weeks, you are making in effect an extra monthly payment. So if you were paying $ 500 / month for a total of $6000 per year and then switch to $250 bi-weekly, your total annual payment jumps to $65oo or an extra months payment. This has an immediate impact of interest reduction and more going towards principal reduction. Over a 25 year mortgage, you can reduce the number of years you pay for your mortgage dramatically all by just changing the installment payment frequency.

20 + 20 Peograms

Some financial institutions will allow their customers to increase their monthly installment payments by 20% each year. In addition once per year these same customers can pay 20% of the original mortgage once per year. Combined you can make a significant contribution to your mortgage and knock years as well as thousands of dollars in interest off your mortgage.

Pay 10% Extra Each Year

Some people receive a bonus at the end of each year from their companies or they have some extra money left over from their budget. If you were to take this money and put it towards your loan or mortgage, again you can take years off your mortgage and months off a 5 year loan. Some companies have a provision in their mortgage documents which limits this sort of payment to 10% of the original balance. Some will go as high as even 20%, although most people would have a difficult time coming up with this much money. Sometimes an inheritance can be used in this manner to have dramatic effects in terms of paying the mortgage off and reducing the interest you pay.

Pay 10% Extra Each Time the Interest is Recalculated

Most mortgages have a 25 year term, however the interest rate will be fixed for a specified period from one to five years depending on what you chose the last time you renewed the interest rate.  Each time you renew the interest rate, customers have an opportunity to repay all or a portion of the loan or mortgage depending on the agreement you have with your financial institution. This is an excellent time to pay a portion of your mortgage down and eliminate or reduce the amount of interest that you pay.  Keep the monthly installment payments at the same level even if the interest rate drops. More money will go towards reducing the principal and paying off the loan or mortgage more quickly.

Take Advantage of an Open Floating Rate Mortgage

Open mortgages or variable rate mortgage interest rates float with the prevailing bank rate and commercial interest rates. These are published on a regular basis by the banks. During times of volatile economic climate, the interest rate can go up and down a lot, making a variable rate interest rate mortgage tough to handle sometimes. During quiet economic times the rate stays much the same from one year to the next making it easy for people to meet their obligations.

The big advantage of an open floating rate mortgage  is that you can pay any amount any time towards the principal. Your installment payment frequency is pretty flexible.  You must of course pay the accrued interest each month as a minimum. If your cash flow is such that one month you have a large income, you can pay it towards the open mortgage, while other months when times are tight you might only pay the accrued interest. While variable mortgages have their advantages, consumers need to be reminded that this takes some discipline to manage and not spend your extra funds on other non interest savings areas. Before you know it the money is gone and you are still paying the same monthly installment payments.

Just by changing your installment payment frequency in some manner similar to those ideas we have mentioned above, you can significantly affect the amount of interest you pay and reduce the number of years it takes to pay off your mortgage or loan. Even a little bit each year can make a big difference!

There are many different types of loans offered by financial institutions and there are many uses for the funds that are borrowed. One area that many consumers use loans for is to pay for investments they are making. These are called investment loans and trigger installment payments on these loans in much the same manner as all other types of loans. There are secured loans and non secured loans for investment purposes as well as tax consequences associated with your investments.

Non Secured Loan

A non secured loan really means that this is an open loan that the financial institution has loaned to you without any security for the loan other than your personal commitment that you will repay the loan. These types of loans are usually reserved for the best customers of the banks with the highest credit ratings. The interest rate will be higher in most cases than interest rates on secured loans. The total interest is also deductible against the income you make on your investment, but we will get into that a little later in this post.  Since the interest rate might be a bit higher , your monthly installment payment on these loans  for the loan is going to also be higher as well.

Secured Loan

When you are planning to use the loan to purchase something that is tangible, the banks may be willing to take the item you are purchasing as security for the loan.  For example if you purchase a car, they will place a lien on the car and offer you a secured loan at a more competitive interest rate than they would have for a non secured loan. Typically the interest rate is lower and you can still deduct the interest if the loan is used for investment purposes. In the example of using the loan to purchase a car, you cannot sell the car without first paying the loan off first. The installment payment on these loans will often be lower due to the lower interest rate.

Secured loans can be used for investment purposes as well. For example if you are purchasing a building, the building may be used as security for the loan to allow you to receive a better interest rate.

Secured loans are also often used to purchase stocks and mutual funds. Due to the increase risk of the stock market the banks will not allow you to use the full amount of the value of the stocks as security for the loan. You may have to put something else up as security if you wish to have the full loan secured and obtain a more competitive interest rate in this situation. Again if you are using the loan to purchase an investment that will earn you revenue or income , you can deduct the interest paid against the income you make to reduce your income tax payments.

Impact on Your Income Taxes

Before you read on , we first of all must encourage readers to check with their accountants to confirm that the investment they are going to make and the corresponding investment loan they may be taking is deductible against the income.

Generally any time you borrow money to make an investment, the cost of the loan can be deducted against the income that the investment makes. If you make a $1000 investment income and your loan cost you $900, then your net income for tax purposes is $100. This is a really simple example, however it demonstrates how investment loans can be used to offset the revenue you may gain from an income tax perspective.

Note that it is only the interest that can be deducted. Your monthly installment payment on your loan is made up of principal repayment and the interest that is calculated each month. Your financial institution can provide you with a statement of the total amount of interest you pay each year on your investment loan. You can use this number for the purposes of calculating your income taxes each year.

Risk Associated with Investment Loans

When ever you are investing in something, it is never without risk. Whether it is a rental home, a business, stocks on the stock market or some other type of investment there is always risk associated with the investment. Many investors will limit their risk while others take a lot of risk rationalizing that they stand to make a lot of money if the investment realizes the gains they expect.

Regardless of what your investment loan funds are use for, the installment payments on these loans are always required to be paid each month. If the financial institution becomes nervous about your investment or your ability to pay the monthly installment payments they may ask for the loan to be repaid early.

If your investment has gone south or just is not generating the income you expected, this may be a problem for many investors.  Managing cash flow is extremely important in these circumstances and your ability to maintain your investments depends on this. If you are over extended and your monthly installment payments are getting the better of you, your entire investment strategy could come falling down and you would be forced to claim bankruptcy.

This is obviously a catastrophic event, however it underscores the importance of managing cash flow and your monthly installment payments on investment loans, personal loans and mortgage payments. Credit card payments also can factor into managing your cash flow.

In Summary

Obtaining a secured loan generally provides a more competitive interest rate and lowers the overall cost of your investment loan. The interest charged can be used to reduce the total amount of income taxes you pay each year. Investors must pay close attention to the amount of risk they are taking to avoid significant losses as well as monthly cash flow issues. Cash flow is one of the most important elements to pay attention to when it comes to investing as well as  meeting your monthly obligations and avoiding bankruptcy.

The big stores offer great sales at various times of the year with little cash down and long term installment payment offers. They can offer what first appears to be some really great deals with huge discounts and low interest financing. Some will even offer no pay events were you do not need to make an installment payment for three months or sometimes even longer. I have often wondered how they can do this and how do they make money? How can they offer an item at 20% reduced pricing with zero down and no installment payments for 3 months and still make a profit? As with all things the details are what you need to look at to understand who has the really best deal.

Start with the Price

In order to really understand whether these offers are a good deal or not, consumers must start with the price of the item and comparison shop. For example if the exact same TV set is being sold at two different stores owned by different companies, compare prices and any other services that might be thrown in. If the price at  store A, that is offering zero interest and no installment payments is lower than the other store (B) who wants cash up front, then you are getting a better deal, at least on price . Make sure you are getting the exact same product so that you know you are doing an exact comparison.

Next Look at the Financing

With Store B, you know that you have to pay up front, so the cash needs to be there for you to pay for that TV. If you plan to place the cost of the TV on your credit card and pay installment payments on your credit card, then you will need to add the cost of interest that you will pay to the cost of the TV to get the total cost of the TV.

If you are taking money that was earning you some interest, calculate how much interest you will lose because you have spent this money on your TV at store B. Add this loss of interest to the cost of your TV to get the total cost of your new TV.

Now with the free credit and no payments scenario at store A, it gets a bit tougher. First of all you need to make sure that there are no extra fees for taking out this loan, because that is what it is , a loan with installment payments. If there are fee’s then you will want to add these fee’s to the cost of the TV purchased from store A. Next you need to calculate the cost of interest that you will be charged once you do begin making payments on your new TV. This is the catch that everyone needs to be aware of!

Store Credit Interest Rates

Most stores offer credit to customers as a convenience to help them sell more product. What they often do not tell you is that the interest rates they charge on overdue balances is usually the highest you can get without talking to a loan shark. Rates of 25% to 30% are not unusual. If you will be making installment payments on your TV loan after the grace period is up, you should add the cost of interest to the overall cost of the TV purchased from Store A.

Before you know it these numbers can be quite high and add a lot to the price of the TV. This is really were the profit is for the furniture / appliance stores is. Charging interest rates on unpaid balances of 25% to 30% is a very profitable business.

Before you know it that discount TV, free credit, with no installment payments for some period of time is costing you a great deal. Often, the cost is higher than if you had just paid for it in the first place. Of course we are assuming you had a choice and had the money to pay for it in the first place.

Purchase on Credit or Do With Out

Although these zero down, no payment  deals sound pretty attractive if you are going to end up making installment payments that are based on 25%+ interest rates, then the cost of whatever you purchase is going to be much higher than you anticipated and the deal you thought you were getting is not really that good.

There is no question that financially everyone is better off to wait until they have the cash to buy something. Buying on credit at higher interest rates just increases the overall cost and gives you less to spend on other things. More and more families are doing with out today instead of going into debt with easy credit, especially after the financial crisis that erupted during 2008 and 2009.

Many people cannot even get credit now, while others are just saying it is too scary to be in debt, so I do not want to go there. What happens if I lose my job etc.

Impact of Tight Credit

Obviously this line of thinking has a negative impact on sales at furniture stores and many other industries. Unfortunately this is now a reality and many consumers are taking a really hard look at their purchases and the real cost of their purchases at furniture stores and other locations. No credit means no new debt means no new sales, means fewer jobs for everyone.

Still when Store A offers that discount deal, with zero down and no installment payments for three months or more, it is hard to resist. Just take a few minutes and assess the real cost before you sign on the dotted line. A good question to ask, is, what the price will be if you pay cash. Most furniture stores will be reluctant to make any kind of offer since it removes a potential revenue flow from the bottom line for them. Financing for furniture stores is a big business today and has a big impact on the monthly installment payments for customers.

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.

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. Read more »

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 »