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.

Does debt have you bound up and feeling like a police officer bound up, not able to reach the donuts? Try consolidating your debt with a home equity loan. (image from flickr)

When struggling with personal debt, you may be tempted to apply for a personal loan, payday loans or try to borrow money from other sources from time to time simply to relieve the financial pressure you may feel weighing in upon you.

In this article we will attempt to address some of the advantages and disadvantages of the various debt payment options that may be available to you to pay down, pay off  and take control of the debts you owe.

Payday Loans

Payday loans, although a valuable service for emergency funds, are not the best option for paying off or consolidating debt. Payday loans are more a source of emergency funds for dire situations, such as when your car breaks down and you need money for quick repairs or if you want to avoid a late payment penalty with a creditor.

Because payday loans usually limit you to a maximum of $1,500, it is likely that a payday loan would not be sufficient to cover and or consolidate your debts anyway. There are better options available to you that can provide you with a lower interest rate.

Withdrawals On Your 401(k)

A lot of people resort to using funds that they have put aside in their 401k savings plan. This is a tempting but ill-advised approach to debt relief.

Remember, the funds that are in your 401k are reserved for your retirement years. Using these funds to bail yourself out of financial trouble today may cause another crisis for you several years from now. You may find at retirement you don’t have sufficient funds in the account to last through your retirement years.

Taking money out of your 401k will cost you more than you think. You have to take into account how much you will be taxed for on the withdrawal of these funds plus the total amount of interest these funds would have acquired between now and the age you retire. This adds up to be a significant sum.

Home Equity Loans

Home equity loans are usually the best option for consolidating and paying off your debts. Home equity loans are obtained by borrowing against the equitable portion of your home’s value. This gives you the advantage of lower interest rates than most other options. Plus, interest paid on home equity loans is tax deductible.

When borrowing against your home equity, be sure to remember defaulting on or failure to pay your home equity loan payments can result in losing your home.

Avoid Repeating The Cycle

The biggest thing to remember when paying off your consumer credit debt, regardless of the options you choose, is to avoid repeating the cycle again by running up your credit card balances that have been paid off.

If you find that your money spending habits are habitually putting you under financial stress, you may find it helpful to work with a debt counseling service that can help you manage your finances in the future. Click to learn more about debt consolidation.

Debt, what was once frowned upon as an irresponsible act or circumstance of the less fortunate in society, is now embraced by the masses. Between consumer credit cards, bank loans, and payday loans, the average American now possesses an average of $9,200 in credit card debt with an average interest rate somewhere between 15 and 19 percent.

Debt is a lot more difficult to understand since we have gone from a predominantly cash-only society to an increasingly cashless society.

Since our evolution away from cash towards credit, we have developed habits that have put our society as a whole at risk.

Too much use of the plastic!

Financial Decisions Today Will Affect Our Family And Country Tomorrow

America’s credit addiction has left millions of families living with nothing left in reserve going from one paycheck to the next just trying to make there minimum payments. Many families use third party services such as payday loans to help make ends meet.

The growing fear of many experts  is the future of today’s debt-saturated generation. The wide availability of credit and irresponsible borrowing has left consumers putting more money into interest rates on financed merchandise than their 401k’s.

With promotions shouting the availability of finance options like “No money down”, “No payments” and “No interest for up to 36 months,” consumers have a hard time passing up things they want but can’t afford.

Knowing The Difference

Debt used to be more clear-cut than it is today, which requires us to know and understand the difference between good and bad debt so we can make smarter decisions for our financial futures.

The following will help you determine the difference.

Good Debt

Good debt is usually defined by the simple fact that it’s going to provide some kind of return. By return I don’t mean better entertainment value such as that which is returned tenfold from the purchase of a brand new large screen plasma display or LCD television. I also don’t mean cosmetic value such as that returned by putting a fancy new pair of rims on your vehicle. By return we are solely talking about the financial return that is returned to you as a result of your financed transaction.

Types of good debt would include things such as borrowing money for a home or for a college education. These things make good financial sense. A home, although much goes to interest over the life of the loan, provides an equitable return with age and usually becomes the single greatest asset that a person owns.

College, on the other hand, can create years of student loan payments, but the increase in wages due to the college degree more than endorse this as good debt because of the profitable gain that will compensates for the original investment.

Bad Debt

Bad debt is just the opposite. You can usually identify bad debt by the lack of equitable return, such as a rent payment. Financial gain is never reaped as a result of renting a home or apartment. Consumer credit card debt is also a bad form of debt if it is not paid off in full each month, because credit payments continue to take from you without any comparable return.

The Gray Matter When It Comes To Debt

Sometimes it is hard to determine whether a financed transaction will be good debt or bad debt. A couple of examples of these gray areas would be car loans or payday loans.

Car Loans

Car loans and the like would typically be considered bad debt because they are in a constant state of depreciation. However, vehicles are an asset that most can’t afford to live without and may be required simply to get to work and get paid, therefore cars are a worthwhile investment. But purchasing one should be carefully considered.

When buying a car, it is strongly advised that you don’t buy one new off the lot as a newer vehicle depreciates much quicker than one that is a few years old. Plus an older vehicle’s taxes and payments are considerably cheaper, thus saving you more each month.

Payday Loans

Payday loans are another area which would fall into the “gray area” when considering good vs. bad debt depending on what they are used for.

Applying for a payday loan just to get some extra cash for a weekend in Las Vegas is a prime example of bad debt, but if you were to use a payday loan to avoid the fees on a late mortgage payment, a payday loan could save you money, which would make it a perfect example of good debt.

Make The Right Choice For Your Future

Remember the key is simply to determine the equity of the transaction. Will it save you money or not? Before you charge or finance your next transaction, try to determine whether your purchase would be considered good debt or bad debt.

Good debt will leave you in a better financial position for a safer, more stable and more profitable future.