Home Loan’s ‘Simple Interest’ Isn’t
Q. I am buying a home and my loan carries an interest rate of 8.5%. However, my loan papers say the annual percentage rate is 8.625%. What is the “annual percentage rate,” and how is it different from the interest rate? -- C.C.K .
*
A. The 8.5% interest rate your loan carries is what is sometimes known as the “simple interest rate,” the rate at which interest is assessed on the original principal amount of your loan. Annual percentage rate is the effective interest rate being charged on the amount of money you actually receive.
What’s the difference? It is the points and loan fees that are typically deducted from the amount of money you are borrowing before you ever receive the funds. Although these points and fees are paid from your loan proceeds, you are still responsible for paying the full amount of the loan. The annual percentage rate, APR for short, takes this disparity into account and expresses your actual cost of credit on the funds you actually receive. In your case, the amount of points and fees you are paying must be relatively small given the rather small difference between the simple interest rate and the APR.
Where to Find Quotes on Mexican ADR Prices
Q. My wife and I recently invested in the ADRs of Cemex, the Mexican cement company. Our problem is that we cannot find this company listed anywhere. Even the brokers we have contacted do not know where to find it or how much it is trading for. What can we do? -- W.M.K.
*
A. The domestic shares of Cemex--issued in a form called American depository receipts, or ADRs--are traded in the over-the-counter market, but the trading prices are usually not listed in general circulation newspapers.
Nevertheless, your stock broker should be able to help you. Any full-service brokerage, such as Paine Webber, which I contacted, has access to a whole range of trading information. Sheila M. Eger, a first vice president of the Indian Wells Paine Webber branch office, recommends that you ask your broker to check with his or her foreign desk for the most current price range. Eger says that because of the volatility of the Mexican peso, brokerages are not quoting exact prices of Mexican ADRs but are giving out prices only as “indications” of the trading fluctuations of the securities.
Tax Deductions for Bad Non-Business Loans OK
Q. The company I started failed, and I filed for bankruptcy. I was able to repay in full all the secured investors in my business, but the unsecured creditors received nothing. My accountant said these investors--most of them are relatives and family friends--could write off their losses on their taxes. Now one of the investors’ accountants says that’s incorrect. What’s right? -- R.F.
*
A. Based on what you’ve told us, we’re assuming that your investors made what is termed a “non-business loan.” Under current rules, taxpayers may deduct a non-business bad debt from any capital gains income generated during the tax year and up to $3,000 of ordinary income. Any excess losses may be carried forward to subsequent tax years and deducted in the same manner. Taxpayers may not deduct partially worthless non-business bad debts; they must be completely worthless, as we assume those made to your now-defunct company were.
Non-business loans are generally defined as investments or loans which are not connected with the lender’s or investor’s primary business or occupation.
401(k) Enrollees May Be Able to Switch Brokers
Q. I have $50,000 in the 401(k) plan at my job. I am age 60 and intend to work here for at least another five years. The company recently switched its 401(k) plan operations to a new brokerage, and I do not like the investment options it is offering. I would like to move the money I have collected so far into other investments and continue participating in the 401(k) plan. Is this possible? -- B.M.
*
A. The answer depends on the rules governing your company’s 401(k) plan, so you will have to check with your plan administrator. The critical issue is the regular or normal retirement age established in your plan--an age that typically ranges from 55 years to 65 years depending on what your company has decided. (Most plans also have minimum employment requirement, often five years, requiring that you have worked for the company a certain number of years before being able to take a 401(k) disbursement at normal retirement age.)
If you are past that age, you are generally allowed to take a distribution from your plan while still remaining a participant in the 401(k) for the future. If you have not yet reached that age, you cannot take a distribution from the plan without quitting your job or suffering a serious medical emergency. If you meet the distribution rules, be sure to ask for a “trustee to trustee” transfer of your 401(k) funds to an individual retirement account of your choice. Your new account will be a rollover IRA.
