Understanding banks

When it comes to banking, there are some important rules to understand. Every American needs somewhere to put their money. Although grandparents may have kept it at home, in today’s world there is no need to do the same. Today’s market allows for great savings vehicles and although the savings rate is not what it used to be, it still brings in some return on investment.

• Banks and safety. For years banks have had insurance for individual accounts of up to $100,000. Due to the recession, the federal government upped that to $250,000 per account. Although after January 1st of 2010 the insurance will return to the lower number, it is still a great way to protect your savings.

• Bank fees. Remember that every service costs and that includes the service of holding your money. Banks pay lower rates on interest-bearing accounts than brokerages or mutual fund companies, but may take out hefty fees. In particular many people get caught in the “minimum required balance on deposit” trap. This is where a bank charges a fee if a balance falls below a certain predetermined level. These fees can easily add up to hundreds of dollars in a year. Be sure to understand your bank’s rules so you can avoid fees as much as possible.

• Understand interest rate at your bank. Not all banks calculate interest the same way. You want to ask your banker about each accounts’ “annual percentage yield.” Banks normally quote both interest rates and APYs, but only APYs are calculated the same way everywhere. Interest rates can vary greatly.

• Try other savings vehicles. If you don’t have the need for quick cash, try using CDs, or Certificates of Deposit, for your money. These are accounts that offer you better interest rates than just plain savings accounts. The catch here, though, is that you have to agree to leave your money untouched in the account for a specific period of time. That time can vary from 3 to 48 months. If you think you’ll need cash soon, opt for a lower lifespan for the account. On the other hand, if you won’t need the money, then take advantage of the typically higher interest rate on longer life spanning accounts.

• Watch ATM fees. ATMs are one of the most convenient advances of the decade. They are everywhere and allow you to take out money at a moment’s notice. The problem, however, is that they also charge you fees each time you enter your PIN. On average, the fee your bank charges to use another institution’s ATM is $1.50 according to BankRate.com. On top of that, you also will get hit by a fee to use the ATM and that can range anywhere from $2 to $5.

Banking in 2010

Using a bank is a great way to grow your money and protect it. Like with any contract, though, there is fine print. Be sure to understand your bank’s rules and regulations so that you are maximizing your return. You want your money to be safe, insured and in a prime position for growth.

The word debt often carries negative connotations, but there are times when debt is considered a good thing. Student loans, for instance, can be considered good debts. It would, of course, be preferable not to have to borrow money to pay for college, but not everyone can finance a higher education with private funds, scholarships or grants. For many, student loans are the next best way to finance an education.

Perkins loan

There are several different kinds of student loans. One familiar type is the Perkins loan, which is funded by the federal government. This loan generally carries a low interest rate, but it also is one of the smaller loans. Perkins loans are small, low-interest loans available to students who demonstrate exceptional financial need.

Stafford loan

The Stafford loan is another popular student loan option. A Stafford loan is also variously known as a Federal Family Education Loan (FFEL), a direct loan, and a Ford loan. Stafford loans can be funded by banks, colleges, or the government. They may or may not be federally subsidized, depending upon a student’s individual circumstances.

PLUS loans

Parents’ Loans for Undergraduate Students (PLUS loans) are another common type of educational loan. PLUS loans are not made directly to students. Rather, as the name implies, PLUS loans are made to the parents of students. A PLUS loan carries a low interest rate and the loan amount is based directly on the student’s actual cost of attending school. Loans amounts are calculated based on the cost of tuition, books, supplies, fees, and transportation costs, after deducting the amount of any other financial aid obtained by the student. A PLUS loan helps bridge the gap between the actual costs of education and other available financial aid obtained by the student.

Student loans and bad credit

Students and their parents are sometimes hesitant to apply for educational financial aid because of bad credit histories. Often, however, student loans can be obtained even with poor credit. Generally speaking, bad credit does not automatically preclude an applicant from qualifying for financial aid so long as the credit history does not include previous defaults on student loans.

Basic lending requirements

• Basic lending requirements for a Perkins loan or a Stafford loan may  include:
• A valid social security number
• U.S. citizenship or be legal non-citizenship
• High school diploma or GED
• Enrollment in or acceptance to a college offering a degree or certificate
• Demonstrable financial need

Individual qualifications and financial need vary widely from person t person, and no one can guarantee that a loan request will be approved. However, students who meet these basic requirements are encouraged to apply for loans as needed.

Tax deductions

Student loans are considered to be good debts for a several reasons. Obviously, a student-loan borrower is investing in his or her own future. Additionally, the interest paid on student loans may be deductible for income tax purposes. To find out more about potential tax benefits, student-loan borrowers should get advice from a tax professional.

An investment in yourself

In the long run, there is no better investment than an education. Although most people work hard to avoid borrowing large amounts of money, some debts – and student loans in particular — are worth incurring. Even for people with bad credit, student loans are available to help those people who are interested in achieving high academic goals do exactly that.

It's going to take some time, but it is definitely worthwhile.

In part one of this series on getting rid of credit card debt, we discussed both drastic and practical ways of approaching financial recovery. Now that you have considered those first steps, it is time to figure out what to do next in order to embrace debt-free living. The following suggestions are certainly not easy, but those who are now in full debt recovery will tell you that they are certainly worthwhile.

Get on the phone and discuss your credit card debt

Now that you’ve created a snapshot of your debt, go down your list and call each credit card company. If you are late on a payment to them, explain why and give them a date by which you can send a payment. Even if it is a small payment, be honest about when you can send it in and then do exactly that.

If you do not have frequent late payments or are not behind in your bill, and if your FICO score is decent, call each credit card company and try to negotiate a better interest rate than the one that you currently have. One way of doing this is to single out one of your cards with a more affordable rate and call the companies with higher rates to inform them that you are considering sticking primarily with the one with the lower rate. Or, another way of approaching this is to research companies offering better rates and tell the credit card companies with higher rates that you are considering changing to one of those cards because of the rate difference. If a lower rate is not immediately offered, don’t be afraid to ask them to lower it. The worst thing that can happen is that they can say no and, compared to the high interest rates that you’re paying, that shouldn’t be nearly as frightening.

If the credit card company refuses to lower your interest rate, consider moving your debt to a card with a more comfortable rate and, after doing so, you may consider canceling the high rate card.

The road to debt recovery begins with a single month

After cutting your credit cards and/or negotiating a lower interest rate, look at your monthly personal budget and very carefully calculate the largest possible payment you can make on all of your balances each month. Next, add ten dollars to the minimum payment requirement offered by each credit card company. Now, add up all of the minimum payments, plus the ten dollars that you added in the previous step. If the minimum amount that the credit card company allows you to pay is lower than the maximum amount that you can afford to pay each month, go ahead and subtract the lower amount from the higher. The remaining sum is what you should consider applying to the card that is charging the highest interest rate.

After the high interest rate card is paid off, you may consider canceling that card, but don’t stop there. Now it is time to go back to the beginning and repeat the entire repayment process all over again by focusing on the card with the next highest interest rate. Do not lower the amount that your calculations permitted you to pay before the first highest card was paid off, however. Instead, continue to designate this exact same amount out of your personal budget for paying off credit card debt until it is all gone. Continue to repeat this entire process of paying your credit card debt off by assassinating the highest interest rate cards first and working your way down until you are left with cards that have affordable rates and you are debt free.

Carefully consider emergency cash options

Once you are debt free, if you ever find yourself in need of a cash advance, before turning to a credit card, carefully weigh that option against that of a loan till payday or an installment loan from a personal loan company. Always know your options, study them closely and select the one with the lowest repayment terms for your personal budget.

Making a hard decision is the first easy step to a debt-free life

It takes some sacrifice and a lot of discipline, but you really can get rid of credit-card debt for good. Relax. Breathe. Others have done it and you can too. Paying off credit-card debt can seem overwhelming when you look at your statements each month and realize that you’re not even putting a dent in it. You may have tried getting personal loans, applying for extra cash till payday, or even working a second job, but you still feel like you’re drowning in debt.

It isn’t easy to break the credit-card spending cycle but it is, in fact, completely possible. You first have to believe that financial recovery can be achieved and then you have to make the commitment to work hard at it.

Simple (but not-so-easy) steps to financial freedom

Cut up your cards. If you’re ever going to get your credit-card debt under control, you must stop adding to it. There’s no room for negotiation on this one: Cut up your credit cards. This can feel like a drastic action, but if you’re serious about getting out of debt, you cannot use credit cards.

Consider other emergency-cash options. If the thought of not having any credit cards is too much for you to handle at first, choose one card to keep for emergency use only. Store that card in a safe place or give it to someone you trust, but don’t carry it in your purse or wallet. If the card has a high credit-limit, consider asking the credit-card company to lower it. Remember, when you’re in need of emergency cash, a credit card is not your only way out. You can get a short-term loan or an installment loan online even if you have bad credit, without the risk of over-spending.

Don’t be too quick to close accounts. Don’t be too quick to close your credit cards before you’ve paid them off. Many people have made the mistake of closing their accounts when they cut up their cards, without understanding the negative effects this action would have on their credit ratings. For one thing, closing an account stops the clock on that part of your credit history. If you’ve had credit cards for a long time and have made the payments as required, that history can have a positive impact on your credit rating. Closing an account can also negatively affect your debt-to-credit ratio, which can have a direct affect on your credit score. So cut up your cards, but do some research and ask around before you cancel any accounts.

Be honest with yourself. Take an honest look at your credit-card statements and tally up what you owe. This is scary for people who purposely avoid looking at the bottom line because of the stress it causes. Ironically, however, not knowing what you actually owe can be the most stressful part of all. Make a list of your account balances and make a note of the interest rate on each. List the balances in descending order of interest rates, so that the account with the highest interest rate is at the top of the list. Next to each entry, write down the minimum required monthly payment. Finally, note the name and phone number of each credit card company.

Make a realistic personal budget. Once you’ve decided to get serious about credit-card debt recovery, have cut up your cards and taken an honest look at what you owe, take some time to make a realistic personal budget setting forth your monthly income and expenses. Look at what’s left after deducting the essentials – rent or mortgage, car payment, utilities, food, etc., — and decide how much of your disposable monthly income you can devote to paying off your credit-card debt.

What’s next?

Read part two of this series for suggestions about what to do next. There, you’ll find advice about negotiating with credit card companies and getting rid of account balances with high interest rates. If you exercise some willpower and resolve and take these suggestions seriously, you really can find your way to a debt-free life, once and for all.

If you’re getting tired of paying increasingly high fees and penalties to your bank while getting only pennies in interest every month, you’re not alone. A growing number of Americans are now closing their bank accounts and moving their hard-earned cash to credit unions instead. What if you were to do the same? Would you really be treated any better, and would it be worth the hassle?

Credit Unions vs. Banks

The main reason consumers tend to have better experiences dealing with credit unions is that their corporate structure is totally different from the banks’.

• A credit union is owned by its customers, each of whom automatically becomes a member. Each member has one vote, regardless of how much money they’ve deposited in the credit union, or how much they’ve borrowed – which makes the credit union a uniquely democratic institution. In contrast, a bank is owned by its shareholders, whose interests are always given a higher priority than those of its customers.
• A credit union is a non-profit, whereas a bank is in business to make money for its shareholders. This means that instead of working to maximize profits, a credit union’s management can focus on giving all its members the best possible deal. Since credit unions don’t pay taxes, there’s more money to go around, too. If there is a profit, it’s distributed to members in the form of a dividend. You’ll also be pleased to learn that the members’ money isn’t used to pay the kind of sky-high salaries and bonuses that bank executives receive.

Lower Fees and Loan Rates

If you go overdrawn or bounce a check on your credit union account, you’ll have to pay a fee and/or a penalty, but it will still cost you far less than your bank would charge. You’re also less likely to pay for ATM withdrawals, checks or electronic banking if you’re with a credit union, plus you receive a slightly higher interest rate on your money. These factors combined are likely to net you a decent chunk of change every month.

If you get a mortgage, auto loan or other loan from a credit union, you’ll benefit from a very competitive interest rate, which can save you thousands of dollars over the life of the loan. For instance, the current average rate on a 48-month car loan from a credit union is 5.15 percent, while one from a bank might have a rate of 6.34 percent. Similarly, if you obtain a one-year adjustable rate mortgage from a bank, you’ll typically pay 4.73 percent – but get one from a credit union instead, and the rate could be as low as 4.32 percent.

Credit Cards are Cheaper

A recent Pew Charitable Trusts survey found that credit unions charge 20 percent less interest on credit cards than banks do. Only 25 percent of credit unions charge a fee for transferring your balance from another credit card, compared to 88 percent of banks. A word of caution, however: make sure your credit union issues its own credit cards. Many of the smaller ones simply offer credit cards issued by the major banks such as Chase, in which case you’d be subject to Chase’s fees and conditions.

It’s easier to get a loan from a credit union

Since credit unions mostly stayed away from sub-prime mortgages, they were largely unaffected by the recent credit crisis that is still making the banks reluctant to issue loans, even to those with good credit. Credit unions have taken up part of the slack, and have been increasing their lending lately. So if you have a reasonable credit history and FICO score, a credit union could be your best bet if you’re seeking a loan.

Who can join a credit union?

You might think credit unions are open only to specific groups, and that you have to belong to a particular trade union, church or ethnic group to join one. Actually, these days anyone can find a credit union that will accept them. You do need to have a common bond with other members, but membership rules are often a lot more relaxed now, and many credit unions are open to entire communities or occupations.

There are several online resources where you can find out more about credit unions and locate one that will accept you as a member. You too can benefit from moving your deposits, loans and other financial products to a credit union today!

The Federal Reserve is rewarding people who are looking for mortgage, auto and personal loans with a continued near-zero interest rate. It’s good news for any borrower and considering the state of the economy, it most likely will last a bit longer. The Federal Open Market Committee sustained its target for the federal funds rate to stay between 0 and .25% throughout the month of January. The importance of the move is that banks make overnight loans to one another at the federal funds rate and that influences rates on short-term loans, variable-rate credit cards and short-term CDs. So far it’s been thirteen months straight that the Fed has kept the federal funds rate at the current near-zero rate.

A change is coming

Though the near future of interest is most likely safe, things could change. The first signs of legislators wanting to push the funds rate upwards are showing. One member of the Federal Open Market Committee Thomas Hoenig said he believes that the “economic and financial conditions had changes sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted.” Chief economist for Quicken Loans Bob Walters said, the statement is the “first crack in the armor.” He believes once a few more committee members start agreeing with Hoenig, the rate most likely will start elevating.

Borrowers versus savers in the economy

For now keeping the federal funds rate low is good news for borrowers but not so good news for savers. Keeping the rate so low means that yields on insured bank deposits are going to stay low. For example, the national average on money market accounts in the beginning of January was just 0.24%. Certificates of deposit were about the same. For anyone looking to save, this is not the best time and that’s on purpose. The Fed is pushing people to start borrowing and lenders to start lending.

In addition to the federal funds rate being kept low, the Fed also bought more than a trillion dollars’ worth of mortgage-backed securities since the end of 2008. The goal for the purchase was to “reduce the cost and increase the availability of credit for the purpose of houses.” Anyone looking for a mortgage, auto or personal loan may find it much easier in this economic climate than they normally would. Walters added, “The Fed is making the loan process as easy for as many people as possible. The goal is to put money back into consumers’ pockets.” The Fed is hoping that increasing consumer’s assets causes them to return to their old ways of spending.

The future of the market

The Fed announced that after March of 2010 it will stop buying mortgage-backed securities. Everyone in the mortgage industry knows what that means: most likely, mortgage rates will quickly start rising. Mortgage analyst Adam Quinones thinks that the increase in mortgage rates might be moot. He said, “There isn’t a better time for the Fed to make an exit.” In addition, interest rates on securities will start rising slowly. For anyone looking to take out mortgage, home equity, auto or personal loans, now could be the best time to do it.

For Personal Loans, apply HERE!

What Suze Orman Says About Payday Loans

On her website, Suze Orman’s thoughts about payday loans are clearly expressed. Understanding that most people find this option a lifesaver when they are in dire straits, as part of her Get Out of Debt Special web section, Suze Orman admits that there are times when payday loans make good sense. However, she also stresses the importance of repaying payday loans and, especially, paying down loans with high interest rates. She even encourages those who are able to utilize funds from a 401k account to do pay loans down, when necessary.

Debt Should Always Be Handled Responsibly

While payday loans can be a timely help when a person needs it most, there are a few things that should be analyzed when a person finds themselves considering this option. To begin with, how is one’s current income being spent? Experts like Suze Orman and others all agree that most people are in debt as a result of poor spending habits, relying too heavily on credit and as a result of mismanaging their income. Payday loans exist in order to help a person get out of debt. However, one’s debt can be increased and their credit damaged if payday loans are not responsibly handled. Before taking the lifeline offered by a loan until payday, one needs to closely scrutinize why their income is not adequately covering their expenses. And, where necessary, make adjustments so that regular income is sufficient.

More of Suze Orman’s Advice on Payday Loans

Suze Orman’s advice on payday loans also includes comparing the option of taking a cash advance on a credit card in lieu of a payday loan when possible. Orman’s recommendation is based on scenarios where the interest rate on payday loans being offered may be higher than what a person can comfortably repay. In terms of repayment, a person in debt should always choose the option that is the most comfortable for them. However, for those who cannot access a cash advancement on a credit card, payday loans might be the best option in order to meet one’s financial obligations.

Financial Freedom is Within Reach

Besides offering words of wisdom on payday loans, Suze Orman’s strategies for getting out of debt should be studied closely, as should the advice of other financial experts. Far too many individuals live stressful lives that are consumed with debt-related worries. However, information and educational resources that support better financial management abound in today’s marketplace. Those who find themselves relying more and more on the assistance of payday loans should educate themselves on debt reduction, personal finance and credit repair, when necessary.

Cash Advances Relieve Debt, Not Responsibility

Payday loans are understandably a very helpful alternative for those in serious need for fast, hassle-free financial relief. Many cash advance companies lend money without requiring a personal credit check. In many cases, all that is needed is proof of employment via recent pay stubs in order to obtain a personal loan. As Suze Orman’s books and appearances always highlight, however, being educated on handling one’s own finances is crucial. Payday loans offer relief, but only when they are obtained and repaid as responsibly as all other debts.

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The home price index

The recession is officially over according to experts and now is the time to watch home prices rise. For a long time house values declined causing much stress for homeowners. A new study however, just revealed that for the fifth month in a row US home prices moved upward. According to the Standard & Poor’s/Case-Shiller, the home price index edged upward about 0.4% from September to October. Economists are predicting, however, that there is a winter decline still to come due to the hefty number of foreclosures entering the market and a decrease in government aid. Dean Baker, co-director of center for Economic and Policy Research said, “I’d be very surprised if we don’t go below the lows we hit this year. We still have a very glutted housing market.”

Variations in the market

One of the reasons the US market is still difficult to predict is the varying conditions of cities. For example, Denver and Minneapolis have seen price increases over the past six months. On the other hand Chicago and Florida have seen numbers falling steadily since August. One of the key indicators to watch however is the home price average. Dr. Michael Firesethe, of Harvard School of Economics, said, “Many of the predictors of the market can be tied to public perception. When home values are on the rise, people tend to feel more secure. When they are more secure, they start spending more money.”

Consumer confidence is a huge factor when it comes to gauging the market for success. Two main issues with consumers are the unemployment rate and home values. Now that home values are fluctuating, but moving up slowly, it’s unemployment that people are watching closely. Although the unemployment rate is still high, it grew in December at a slower pace than it has for the past six months.

The real estate market

The real estate market’s performance is really the number one indicator of how the economy is changing. To encourage home buying, the government created a federal tax credit for first-time home buyers. There were thousands of buyers who rushed to close their deals prior to the November 30th deadline. Watching how much activity there was in sales of homes, it’s easy to see how eager people are to take advantage of tax credits. Because of the rush to close on homes, the government extended the tax credit through April 30th.

In addition to the first-time home buyer credit, there is also a program that includes homeowners who relocate after living in one location for five or more years. This credit is up to $6,500. Consumers understand that now is a great time to buy if they can get a loan and many are taking advantage of the “buyer’s market” that the recession created. To keep interest rates low, the Federal Reserve also bought up $1.25 trillion in mortgage-backed securities. The government is doing all it can to continue the growth of the real estate market and push the economy back to a position of positive growth.

The 40-year mortgage is growing more popular, but is it a true answer to debt relief? Many loan officers are promoting lower mortgage payments, citing the 40-year long term as a huge benefit to cash-strapped homeowners. But how exactly are they beneficial?

President of MortgageGrader.com, Jeff Lazerson, stated that the 40-year mortgage “is a joke.” He added, “Amortizing a loan over 10 more years does very little to decrease the payment, and the industry has historically priced 40-year loans more expensively than 30-year loans, so the benefit that the consumer perceives they should get, [in reality] they don’t get.” Typically, these types of loans come with higher interest rates, and over the course of four decades, the consumer will end up paying much more in interest than a 30-year mortgage holder would.

An example

To see how a 40-year mortgage weighs against a 30-year mortgage, here is an example. If a consumer borrowed $100,000.00 at 5% with a 30-year mortgage, their monthly payment would be approximately $540. Borrowing at the same rate, but for a 40-year mortgage would bring their monthly payment down by $54, to $482.

Typically finding a 40 year and 30 year mortgage with the same interest rates is impossible. Normally 40-year mortgages come with a higher interest rate automatically. So, looking at the above example with a 5.25% interest rate on the 40-year mortgage, it now brings the payments to $499 a month. That still would bring a savings of $37 a month as opposed to the 30-year mortgage.

The real savings come into play when you look at the overall interest payments on the lifetime of the loan. See the chart below for the final numbers.

In the end, the 40 year mortgage at 5.25% means an additional $46,560 in payments. That’s a significant amount considering the monthly savings was only $37. Is having an extra $37 to put towards debt relief important enough to lose almost $50,000 in the end?

The Upside

There is a small percentage of people who would opt for the 40-year mortgage. These are the consumers who are not particularly sensitive to the time of the loan, and want the smallest monthly payment they can possible find. Robert Satnick, president of Prime Financial Services, stated, “What’s nice about a 40-year loan—if it’s not an interest-only loan—is that they are contributing something, even though it’s a small amount, to pay down their principle. It increases the pride of ownership, rather than, at the end of the five years, [consumers end up] owing as much as they borrowed.”

A Way to Maneuver

The 40-year mortgage can also be managed by making larger payments. Bob Walters, Chief Economist at Quicken, stated, “The term of the loan doesn’t have to be locked into 40 years. You can’t make it longer, but you can certainly make it shorter.” Making extra payments to pay off the loan can quickly help consumers dramatically. Walters added, “People can still benefit from a 40-year loan by paying it off quicker, taking advantage of the lower payment, but adding money to it as they move along.”

Consumers Decide

For consumers looking for monthly debt relief, the 40-year loan may be a viable answer. As long as they understand that their total payments, if they stick to the actual loan structure, will be significantly higher in the end than a 30-year mortgage. If a consumer is looking to sign up for a 40-year mortgage, they should understand the terms and conditions, and then choose wisely.

Steer away from risks with IBonds.

IBonds, iBonds or I bonds, whatever you call them, they are becoming more popular nowadays. It’s pretty obvious why: they are practically a no-risk investment.

IBonds are savings bonds issued by the U.S. Treasury and the interest rate is frequently adjusted for inflation. It is adjusted every six months, to be more precise.

Adjusting for inflation

Adjusting the interest rate on IBonds for inflation guarantees that the holder will get a real return on his or her investment. For example, say you keep your money in a savings account that gets 3 percent interest for a year, inflation goes up 3 percent that year. The savings account is technically worth the same amount it was a year ago. You haven’t made any profit.

The interest rate on IBonds is adjusted in such a way that you are always making a profit on your investment.

What’s the catch?

IBonds are meant to be a long-term investment. There is a penalty for pulling out funds before five years. If you cash out your IBonds because you need some debt relief or a quick cash advance, you will lose your last three month’s worth of interest. You can’t cash it out at all during the first year after it’s purchased.

Also, you can’t open one for your baby and then expect them to be able to retire on it at 65. IBonds only collect interest for 30 years.

More on IBonds

Right now, brand-new IBonds are earning a 5.64 percent interest rate plus a rate that is adjusted every six months. As you probably know, that is a lot higher than a traditional savings account at a bank.

Learn about how to purchase IBonds in Part 2.

Fannie Mae holds the most mortgages in the United States.

By now you know that Loan Modification and Refinancing are achieved through lowering the interest rate on a mortgage. The federal foreclosure prevention plan says bankers and other lenders can lower the interest rate on a  mortgage to 2 percent in order to get payments low enough.

How low is low enough?

The lender reduces the interest rate until payments are only 31 percent of the borrower’s income, after the government pitches in its share. However, that 2 percent interest rate won’t stick around forever.

Interest rate terms

The new interest rate negotiated with your borrower will stay locked in place for five years. After the five years is up, the interest rate will slowly start to climb back up to the original interest rate on your mortgage.

However,  if your interest rate is higher than the prevailing interest rate available at the time you modify your loan, the rate will only climb up to the prevailing rate. Right now that is in the neighborhood of 5 percent.

Slow and steady

The interest rate will not suddenly jump back up to a normal rate after five years. Instead, it will climb at a rate of 1 percent per year until it is up to the rate where it will stay until the mortgage is paid. For some people, that could be up to 40 years because the federal program allows for mortgage terms to be increased to that length.

Get caught up

In case you missed it, Loan Modification Part 1 and Part 2 talked about eligibility requirements for the federal foreclosure prevention plan. Part 3 goes into detail about providing proof of hardship. Part 4 discusses how the federal program works. Part 5 warns about mortgage aid scams.

Part 6 discusses who is not eligible for the program. Part 7 talks about renters whose landlords get foreclosure notices. Part 8 contains details about deadlines to apply for foreclosure prevention.

The final part of this series, Loan Modification Part 10, discusses debt counseling.

Wells Fargo Mortgage rates are at historic lows. The bank’s 4.89 percent interest rate sent it to the No. 1 spot on the list of new mortgages. Furthermore, Wells Fargo took bailout money from the Troubled Asset Relief Program and used it for its intended purpose: to give people personal loans for homes.

Bailout done right

Wells Fargo got $25 billion in October when it sold shares to the government through TARP, and it gave out $24 billion in mortgage loans in January. While AIG is using taxpayer money to give executives “retention bonuses,” Wells Fargo is using mortgage rates and bailout money to put people in homes.

Second place

Bank of America gave out $22.9 billion in new home loans in January. That’s 48 percent more than it lent in December. Most large banks are lending at the current mortgage rates, averaging less than 5 percent.

Third place

JP Morgan Chase, which also received bailout money from the TARP fund, gave borrowers $9.6 billion in mortgages for new homes.

High demand for refinancing

Banks are also using the lower interest rates to help people struggling with payments or in danger of foreclosure. Loan modification and refinancing account for much of the 21 percent jump in mortgage applications.

“Wells Fargo is experiencing a significant increase in contact from customers who want a responsible lender to help them with a refinance or home purchase. This is a great time for customers to achieve homeownership in a way that is sustainable for the long-term,” said Greg Gwizdz, executive vice president, national sales manager, Wells Fargo Home Mortgage.

Personal Money Store can help you with loan modification, too. Check it out: 5 Things You Should Know About Foreclosure Prevention.

Lending on track

Wells Fargo mortgage rates aren’t the only thing driving borrowers to take out loans. Auto, student, and other personal loans increased by huge amounts. The bank gave out $2.4 billion worth of student loans in January.

A British Bank is run with precision!

During the economic crisis, payday loans have helped consumers during short-term emergencies. Yet the root causes of the crisis – banks – must be repaired if this kind of consumer credit can continue to exist. The world banking establishment has been reeling for months as the economic crisis has dried up the rivers of consumer credit. Banks and short-term consumer lending must go on, so banks are attempting to right the ship. That’s what the Bank of England is trying to do by reducing interest rates to one percent, reports the BBC. This comes none too soon, as UK unemployment had risen to 1.92 million by the final quarter of 2008.

The general idea here is to encourage lending, but many are concerned that such low interest rates will also harm savers. Business groups feel that the new rate won’t be enough to fix the problem. In an official statement, the Bank of England said this cut, as well as other government measures, “would provide a considerable stimulus to activity as the year progressed.” The European Central Bank has yet to act in kind; rates are currently holding at two percent.

Will it be enough?

Paul Broadhead of the Building Societies Association told the BBC that such a low rate “could hinder the funds available to societies to lend as mortgages.” In the corporate sector, The Federation of Small Businesses believes that the cuts aren’t working as the Bank of England intends and that other assistance is required for businesses to remain solvent. Yet the Bank still anticipates a “significant impact.” Perhaps the impact will be the opposite of what they intend? Citizens who cannot get short-term loans from banks will still have the option of a cash advance, however.

Some like the cut, however

Ernst & Young Item Club supported the cut, but encouraged that they drop even further, “possibly to zero.” John Philpott, chief economist at the Chartered Institute of Personnel and Development said: “The Monetary Policy Committee is right to cut Bank Rate to 1%, even though some question the merit of doing so without greater effort to increase the availability of credit to hard-pressed businesses.” As Philpott sees it, this is the kind of early action needed to boost the money supply.

Saving for a rainy day? This is it! Spend!

Time will tell what impact the lower interest rate will have, and whether more cuts are on their way for the Bank of England. Your payday loans source wonders about the argument of the savers, however. Isn’t increased spending needed to stimulate the economy?

Related articles

• Bank Rate: Cut Again, Say Experts (news.sky.com)
• Don’t cut interest rates building societies tell Bank of England (telegraph.co.uk)

Online payday loans are a relatively new way for consumers to obtain the short-term cash they need during emergencies. While these loans have been popular with the general public,  critics claim that the cost of payday loans in general is excessive and requires low rate caps. These critics believe that low rates will lead to a greater percentage of loans being funded and a lower rate of loan default.

However, in a study entitled “The Effects of Usury Laws: Evidence from the Online Loan Market” by Stanford University’s Oren Rigbi, we see empirical evidence that just the opposite is true. Borrowers who experienced a low cap did not produce the results the critics would have expected.

Using the latest online tools for analysis

Using data from a lending marketplace Web site called Prosper.com, Rigbi draws a connection between interest rate caps, the probability of faxless payday loan funding, how much a consumer requests and the chance of payment default. Borrowers studied on Prosper.com faced different caps ranging from six to 36 percent in Rigbi’s study, then a “behind-the-scenes change in loan origination” caused rates to normalize at 36 percent in all but one state of borrower origin.

Rigbi found that higher interest rate caps actually

increased the probability that a loan was funded, especially if its borrower was risky and had been previously just “outside the money.” I do not find that borrowers change the loan amounts that they request or that their probability of default rises.

Interest ≠ usury

Indeed, even though common usage in the West is to equate the two, the true definition is rather different.

As he stages the sides of the argument, Rigbi clearly delineates how opposed the two sides are. Opponents argue that capping interest removes high-risk borrowers from being able to obtain payday loans or even establish a credit history. Those who support the cap feel it ultimately “reduces the interest rates a given borrower pays because lenders have market power.”

At this point, Rigbi instructs readers to consider (traditionally) how interest rate caps affect credit markets:

First, higher caps should make lending to higher risk borrowers profitable. That is, higher caps may result in credit being extended to borrowers who were previously denied credit. Second, because the riskiness of a loan depends on its size and not just the identity of the borrower, higher caps may cause a given borrower to request larger loans. Third, higher caps may increase the probability that borrowers default on loans, particularly if the caps were “protecting naive borrowers from themselves.”

Yet the payday loan study results break with tradition

Rigbi finds that the largest increase in payday loan funding occurred for consumers with less than perfect credit. Furthermore, they do not request larger loans when the cap was higher or default more often. This seems to fly in the face of the oft assumed necessity for governments to be responsible for their own populace by levying heavy consumer protections. That, critics feel, is the only way consumers obtain a fair price for credit. However, based on this study’s findings, higher interest rates did not produce negative results, but profitable ones for lenders and positive outcomes for borrowers of payday loans.