The Answer to Spending Problem Is Counseling, Not Another Loan
Question: Recently I decided to apply for a $20,000 consolidation loan to lower my interest rate on some debts--mostly for tuition and computers for my kids. My financial history includes a bankruptcy in 1996, so I don’t qualify for most loans or credit cards. I answered an ad in our local newspaper and was approved. But to receive the money, I have to wire the lender $990. They say it’s to pay for some kind of insurance policy in case I default. I want to believe that this loan program is for real, but common sense tells me that it is a huge scam. Is it? If so, do you have a list of the best credit card consolidators who might give me a loan?
Answer: Of course you want to believe this loan is for real. That way, you could keep borrowing, and not address the issues that have you $20,000 in debt just five years after your previous debts landed you in Bankruptcy Court.
Here’s a bulletin: You have a spending problem, and another loan isn’t going to fix it. You need to learn to live within your means. You may argue that financing an education is commendable, but did you need that tuition loan because you spent freely on other things?
Look in your phone book for your local Consumer Credit Counseling Service and make an appointment to discuss your finances. This not-for-profit organization’s counselors can teach you about money management and budgeting. If you’re really having problems paying your bills, they can set up a debt repayment plan and negotiate with your creditors for lower interest rates. (Note: Be sure you’re dealing with the true not-for-profit CCCS; some disreputable companies use sound-alike names.)
Even if the lender you’ve found is legitimate--and you’re right to wonder--you don’t want to pay hefty upfront fees to get a loan. If your credit is so bad that you have to pay a big fee or a high interest rate to get the money, you need to concentrate on improving your credit rating. That means paying off your debts as quickly as possible and not adding new ones.
Once your credit improves, you should be able to qualify for better loan terms.
But get your financial house in order first.
Save More by Bypassing Mortgage Program
Q: My husband and I recently purchased a home. We have received several offers for a bimonthly mortgage payment program. The benefit seems obvious: The total interest paid on the loan over time is reduced because you are paying down the loan with a check every two weeks instead of every month. Is this program recommended? What are the drawbacks, and how would it affect our taxes?
A: Paying down your mortgage faster can indeed save you money on interest. But you can save yourself some more money by ignoring the costly programs you’re being offered and doing it yourself.
What most of these plans do is have you send half your monthly mortgage payment to your lender every two weeks. Because there are 52 weeks in a year (or 26 bi-weekly periods), you’ll be making the equivalent of 13 monthly mortgage payments each year. This plan will shave six or seven years off your loan and potentially save you tens of thousands of dollars in interest.
The problem is that most of these programs charge several hundred dollars in “setup” fees. All you really need to do to start paying off your loan faster, however, is to add some extra money to your regular mortgage payment and make it clear to the lender that the excess should be used to pay down your principal. Some lenders make this easy by providing a space on your mortgage coupon for extra principal payments. If yours doesn’t, contact it to find out how to go about making extra payments.
Most of your payments in the first several years will be deductible interest, so that’s good news if you need that tax deduction.
Before you launch on this plan, however, you should understand that most mortgages offer a pretty cheap way to borrow money. You might very well do much better in the long run by investing extra money in stocks or bonds instead of making larger loan payments.
If you want to go ahead with extra payments, wait until you’ve paid off all the other, more expensive debt in your life. There’s no sense making extra mortgage payments if you’re carrying a credit card balance or paying off a car loan at a much higher interest rate.
Sometimes a Principle Is ‘Highway Robbery’
Q: I can’t believe the person who wrote to you recently and said paying for credit reports was “highway robbery.” To me, paying the $8 fee for each report is well worth the money. For $24, I can check all three major credit bureaus and sleep better knowing that someone hasn’t abused my credit.
A: Good for you, although you probably can save $16 by just checking with the credit bureau that’s closest to you. That bureau is likely to have the most information about you, and, thanks to information-sharing with the other bureaus, is most likely to have any negative information that could hurt your credit.
Different people have different ideas about what constitutes highway robbery. The writer you refer to was objecting not just to the price but to the principle of paying for information about himself--in his words, “his own information.”
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Liz Pulliam Weston is a personal finance writer for The Times and a graduate of the personal financial planning certificate program at UC Irvine. Questions can be sent to her at money talk@ latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012. She regrets that she cannot respond personally to queries. For past Money Talk columns, visit The Times’ Web site at www.la times.com/moneytalk.
