Thursday, October 25, 2012

Installment Loans Revistied

Have you been considering buying a car?  How do you plan to pay your tuition? Do you have many credit cards with a balance and you are looking for a way to consolidate your credit card bills into one payment? If any of these, among a myriad of other options that entice you to borrow money, are true, you are likely considering an installment loan for the money you owe. Installment loans can be an “upside down” liability or they can be a rational way to help you manage obligations where credit is your choice.  Credit is not always bad.


A common example of credit being good is credit cards.  Credit cards can be a convenient way to pay for purchases and they can provide you with many consumer protections.  They can also be expensive.  If you have positive balances on multiple credit cards and you are sincere in wanting to move to a life of less debt, one might consolidate these loans into an installment loan.  As credit cards generally carry a relatively high interest rate, a consolidation loan at a lower rate of interest might be optimal.  An installment loan can consolidate multiple loans into lower, manageable payments with a lower interest rate.  If you make the same (or greater) payment as the sum of your prior monthly payments, you will amortize the loan faster with less of a finance charge.  


These loans can also be used to pay for the expenses related to education, or sudden expenses for which you have inadequate emergency funds. Loans can, after all, be a helpful tool for anyone in a financial bind. Banks are in the business of providing qualified loans to their customers – loans that are lent to bank customer for legitimate reasons, pending credit approval by a loan officer. People borrow money to pay for school, new appliances, car maintenance, to help cash flow a new business, among many other reasons. While, in general, it is foolish to borrow money for any purpose other than an investment, the risk they entail is often difficult to avoid.  Moreover, if you have something you can pledge as collateral to repay the bank, should you default on the loan, you can reduce this risk and, often, the interest charged on the loan.


It is quite common for installment loans to be used to buy vehicles, a depreciating asset. This function is very common, regardless of the fact that new cars lose value as soon as they are driven off the lot. This causes the value of the loan to be greater than the value of the car, or a loan-to-value ratio exceeding 100% of the car’s value, making the loan “upside down”.  Moreover, borrowing to purchase a depreciating asset can be a choice that helps move you further from your financial success.  Consider the following.


Assume you want to purchase an $18,000 car and borrow the price at an interest rate of 8% for 48 months.  Your monthly payment would be $439.43 and, after 48 months, you will have paid a total of $21,093 and have a depreciated car worth, if you are lucky, $11,000.  On the other hand, if you drive your existing car for four years and wait to purchase the car, that $18,000 car will cost $20,260 at a 3% rate of inflation.  If you save $413.87 per month in an account that only pays 1% per year, you will be able to purchase your new car.  That car will be worth $20,260 – not $11,000.  As such, your “automobile” assets are $9,260 greater and you have established yourself as a saver.


For an appreciating asset, like your education, borrowing money may have a substantial payoff.  We know that, on average, a family with a head who has graduated from college, in 2007, had a family income of $105,219.  On the other hand, the average family with a high school educated head had an average family income of only $51,369.  Borrowing money for a higher income can be a good use of money.


So, what should you do when you are thinking about taking out a loan?

1)      Save for the purchase, if you can. Avoid taking out a loan if at all possible but, if you must, make sure it is for an asset that will pay you back.

2)      If you must take out a loan, make a large down payment, in order to reduce financing costs.  

3)      Check your credit score yearly to make sure it is accurate.  Manage it to maintain its quality.

4)      Shop around! Banks and lenders compete for your business, so the more you shop around, the best loan conditions and rate of interest are more likely to be yours.

Financial success is yours to choose.  Choosing to overuse credit or using credit for items, which depreciate in value or which may altogether lose their value (like the prom dress for the date that turns out to be a dud) is foolish.  Foolish lives next door to her cousin, Failure.  Success is on a different street.


-          Ryan Buttrey, PFP Student, with Robert Weagley, Chair


Thursday, October 18, 2012

Prepaid Cards: Know Your Fees

Prepaid debit cards are the latest fee-generating vehicles for financial institutions looking to replace revenue lost when credit card fee regulation started in 2010. Prepaid cards have no fee restrictions and can charge for everything from using an ATM to calling customer service.  The Consumer Financial Protection Bureau predicts that consumers will load $167 billion onto prepaid cards by 2014. That's a lot of dollars loaded onto a wide variety of cards. With so much choice, smart consumers will look for a card that offers the benefits they need without excessive fees.

If you shop around for the card, you can find one that fits your situation the best, depending on your spending habits, how frequently you buy things and what you want to do with the card. Out-of-pocket expenses can add up quickly when you consider the long list of potential fees for prepaid cards:

·         Purchase fee – what you pay to buy the card itself

·         Activation fee – another fee to activate the card so that you can access the funds that are loaded onto it

·         Monthly “maintenance” fee – a common fee that may be tied to the balance you keep on the card or other conditions

·         Reloading fee – a fee paid to put more money on the card; you may also incur a fee with a third party who converts your money to electronic form for loading purposes

·         Funds transfer fee – a fee that you must pay when funds get transferred from one card to another or from a specific account

·         Purchase transaction fee – a charge for using the card to buy something; these fees vary and may be waived on a limited number of purchases

·         Denied transaction fee – a fee that may be added if you try to make a purchase without sufficient funds

·         Overdraft (or shortage) fee – a few cards will cover a transaction if you have insufficient funds and they cover the purchase anyway

·         ATM withdrawal fee – some cards will permit a few free ATM withdrawals in network but out-of-network or additional withdrawals may involve added fees

·         Balance inquiry fee – a fee that you must pay just to check the balance on the card

·         Foreign currency conversion fee – a fee you incur just for using your card outside the U.S.

·         Inactivity fee – a fee that gets added if you don’t use your card within a specific period of time (e.g., 60-90 days)

·         Card replacement/reissue fee – a fee you must pay if your card is lost, destroyed or stolen

·         Paper statement fee – charged for requesting a paper statement rather than viewing it online

·         Customer service fee – a fee that gets charged if you call customer service and ask to talk to a person rather than using an automated system; even some automated systems charge a small fee

·         Closure fee – a fee you must pay just to stop using the card

Fees and benefits can vary widely from card to card. For example, many prepaid cards don’t have protection for unauthorized charges or lost or stolen cards.  Some cards do have those protections, so you need to do some comparison shopping. Don’t just run to a discount store and buy the first prepaid card you see. If you do, it’s pretty likely you won’t get the best deal you could.  Prepaid cards can be an option for someone who can’t open a checking account, or as a means for providing funds for a teen, college student or an elderly parent.  Just make sure that the card doesn’t have future fees that they’ll incur because they don’t understand what happens when they use the card.

Prepaid cards might be a way to teach money skills to a teen or college student.  If they run out of money the third week of the month, they’ll learn that you can’t have everything you want, and there are limits to what you can spend.  It’s a lesson they can learn without going over a credit limit or running up a balance that they can’t realistically pay.

Prepaid cards can be beneficial, but as with so many other financial instruments, it depends – on what you use your card for, how often you use your card, where you use your card and many other factors.  Do your homework, think about how you will use a card, and fully investigate the terms and conditions of several cards so you can make the decision that is best for you and your situation.


By Brenda Procter, M.S., Extension Associate Professor, MU Personal Financial Planning Department and Debbie Johnson, Audio Producer/Director, MU Cooperative Media Group

Source:  Howard, Alegra.  Consumer Action News, Prepaid Card Survey: Convenience at a cost, April 2012




Thursday, October 11, 2012

Something for Nothing

An article was forwarded to me by a colleague about a company going bankrupt.  The company, Rich Global LLC, was the publisher of the book Rich Dad, Poor Dad a popular book written by Robert Kiyosaki.   In the book Kiyosaki shared, in the words of Fortune magazine, the

“secret money-making strategies of the wealthy with his wage slave readers. The tips ran the gamut from ridiculous to illegal and downright hurtful and included advocating for insider trading, arguing for the purchase of multiple real estate properties with little or no money down and telling followers they could purchase stocks on margin via unfunded brokerage accounts.”


The Tip for this week is that many people bought into the hype and questionable practices included in the book.  Most importantly, the book almost idolizes “passive income” – income you receive for owning things and doing nothing productive to increase the wealth of the nation.  Well, please excuse my old fashioned values where I believe that the greatest asset we own is our human capital.  Moreover, our human capital is the only capital that we can control. By making investments in our human capital, we can earn greater incomes.  That income does allow us to save and invest but it is the wise man who continues to work, to make a positive contribution to society, and to increase the national product of our country.  When we all do this, we are all better off.


This episode in my life reminds me of a song entitled Something for Nothing by Rush.  The words of the song are below and you may read more about the bankruptcy of a modern day seller of blue sky here: .

Something for Nothing

by Rush


Waiting for the winds of change
To sweep the clouds away
Waiting for the rainbow's end
To cast its gold your way
Countless ways
You pass the days

Waiting for someone to call
And turn your world around
Looking for an answer
To the question you have found
Looking for
An open door

You don't get something for nothing
You can't have freedom for free
You won't get wise
With the sleep still in your eyes
No matter what your dreams might be

What you own is your own kingdom
What you do is your own glory
What you love is your own power
What you live is your own story
In your head is the answer
Let it guide you along
Let your heart be the anchor
And the beat of your own song

You don't get something for nothing
You can't have freedom for free
You won't get wise
With the sleep still in your eyes
No matter what your dreams might be