Beating Broke

Debt Consolidation Loans: What, When, Why

September 19, 2011 By Shane Ede 6 Comments

Many of us have heard of debt consolidation loans. Some of you might have even used one before. They’ve gotten a bit of a bad rap over the last few years because they get associated with debt consolidation companies, some of which can be a bit shady. But, they aren’t all bad. And, in some cases, they can be a very useful tool in your debt repayment strategy.

Debt Consolidation Loans: What Are They?

The concept is actually pretty easy to grasp. As the name implies, a debt consolidation loan is a loan that consolidates all of your other debt and puts it all under one single loan. Depending on the lender, you can consolidate just about any debt. We’ll talk about some of the things you might not want to consolidate in later. For many, the prospect of trading their high interest credit card debt for a lower interest rate loan can be very enticing.

Debt Consolidation Loans: When Should They Be Used?

While you can get a consolidation loan at any time, there are a few times when they are of the most use. The most common of these is when you have several credit cards that have high balances and higher interest rates. As we all know, paying only minimum payments won’t get us very far, but having several cards to pay sometimes leaves us with little left over to pay extra towards those balances. A consolidation loan can reduce the interest rate, and reduce the payment amount, making it easier to pay extra on the balance. One of the biggest factors to determining if you should use a consolidation loan is your resolve to stay off the debt treadmill. If you can’t commit to not adding any more debt, you’ll only find yourself worse off in the long run.

Debt Consolidation Loans: Why Should They Be Used?

A debt consolidation loan can be a great tool when you’re working on paying off your debt. The reduction in interest rates and payments can help ease the burden of your debt while also enabling you to pay off the debt at a quicker rate. Again, if you aren’t committed to not adding any more debt, and you start using those same credit cards again, you’ll find yourself in a much worse situation than you were before. Combined with a commitment to no more debt, they are a great tool.

Debt Consolidation Loans: Caveats

With anything, there are a few things that you’ll need to watch out for. Besides reloading your credit cards, that is. Some lenders will attempt to roll a car loan or a home equity loan into the consolidation loan. Only do that if there is no other option. Why? Both the car loan and the home equity loan are what are called secured loans. There is some physical asset that the lender holds title to should you default. If you roll either into the consolidation loan, you don’t own that physical asset until the consolidation loan is paid off. Consider this example. You have a car loan for $5000, on a car that has a value of $10000. You roll that car loan into your consolidation loan along with $20000 in credit card debt. The total for your consolidation loan is then $25000. Until you pay that $25000 off, the lender will keep it’s lien on the car. What if you get in a wreck and total the car? You can’t use it as a trade-in, or sell it to a salvage yard until that $25000 is paid off and you can get the lien removed from the car. It’s a hairy situation to be in, to be sure. All that said, getting an unsecured loan can sometimes be difficult, and depending on your situation, some lenders might require at least part of the loan be secured. You’ll have to determine if that’s a risk you want to take in order to take ownership of your finances.

Much like any other financial tool, a debt consolidation loan can be helpful under the right circumstances. Be careful, examine the details, and learn how it works, and you can make sure that it remains that way.

photo credit: Vectorportal

Taking Financial Ownership

September 16, 2011 By Shane Ede 16 Comments

I was reading a story somewhere where a person was being interviewed about their debt. In the interview, the person was speaking about how they had this credit card debt and how they just couldn’t get out from under it because of all the interest, fees, and other ways that the credit card company throws on the heap each month. They went on to talk about how they were in fear of having their car and house repossessed because they were falling behind. With each new problem, they were quick to point out the things that were keeping them back and causing their slide into bankruptcy.

Something occurred to me, then. They were taking no ownership in their finances. No matter what the financial woe was, it was always someone elses fault. The credit card companies were tacking on interest and fees. The bank was adding late charges onto their car loan and mortgages. Not once did they take any ownership of their situation. Not once did they say, “we shouldn’t have charged so much on the credit cards”, or “we bought more house than we could afford”. The blame was always on the other guy.

If there’s one thing I’ve learned in my journey towards beating broke, it’s that it’s all my fault. I signed that credit slip. I signed that mortgage. I signed the loan papers. Yes, some of the credit card companies have interest rates and policies that border on predatory. Yes, the banks will allow you to borrow right up to a point where you’re living paycheck to paycheck. But, I signed on the dotted line. Along the way, I discovered all of that, and I took financial ownership. And, in doing so, I took control.

Through financial ownership, I have control over where my money goes. I have control over which debt gets paid off first. I have control of how tightly the purse-strings are held. And, most importantly, I have control of my financial future. A future that I plan to make as financially independent as possible. Not at the whim and mercy of any bank, but a future where I can plan to buy things, and save money towards retirement.

My journey isn’t over, but I am beating broke. I’m taking financial ownership and making my future one that is free from broke.

I want you be able to say the same thing. It’s one of my goals for this site to help you beat broke. Beating broke is the first step in your financial journey towards a life free from concerns over where next months bills are coming from. You can do it. But, you’ve got to take financial ownership. You got yourself in the situation you’re in, and only you can get yourself out. Do it today. Accept that you are the only one that can take ownership of your financial situation, and you are the only one with the power to fix it. Take that step.

photo credit: woodleywonderworks

Are You Suffering from Optimistic Financial Denial?

September 14, 2011 By MelissaB 9 Comments

Some people suffer from a certain form of optimistic financial denial. They look at part of someone else’s circumstances and use that to justify their own way of life, without considering the entire picture. Take, for example, a relative I have that I will call Stacey (not her real name). Stacey is nearing retirement, and she doesn’t have quite as much socked away for retirement as she would like because finances were very tight when she was young and she and her husband just didn’t have the extra to put away. Her husband died young, and she entered the full-time work force in her early 40s, which is when she began putting away for retirement in earnest.

Stacey isn’t one to worry. She tells herself that she should be able to get by just fine with the money she will have in retirement and uses the rationale first, that you never know how long you will live, and second, that her parents did just fine on a limited retirement. She is firm about retiring at 62 and cannot be persuaded otherwise; she is not interested in working part-time early in her retirement.

Regarding Stacey’s first point, it is true that you never know how long you will live. I have, unfortunately, known plenty of people who retired and died within a year or two. Others died before they were even able to retire. However, Stacey’s parents lived to be 88 and 90, respectively, so if she takes care of herself, there is a good chance she will live well into old age.

Second, her parents did retire on a relatively small retirement savings, but they made some serious adjustments to their lifestyle. Here are some of the smart financial moves they made to make sure their retirement nest egg stretched:

they immediately sold their paid for house, freeing themselves from the expense of upkeep, property taxes, and heating and cooling a large home
they took some of the money from the house to buy a fifth wheel trailer, and they lived there during the summer months on their children’s property
they took some of the money and bought a trailer in a retirement trailer park in Florida. They were then only responsible for monthly trailer park fees and heating and cooling
they took the rest of the money and invested it
they only went out to eat occasionally, usually when their children were visiting them in Florida
they sent each of their 38 grandchild a crisp dollar bill for their birthday and at Christmas

On the other hand, here is where Stacey is:

she still owes $70,000 on her 1,600 square foot home
she has no immediate plans to sell, which means she is paying thousands of dollars a year on property tax, maintenance, and heating and cooling costs
she goes out to eat several times a week and plans to continue doing so when she retires as that is her main way to socialize
she only has 3 grand-kids, but she spends $100 to $125 per child per year for Christmas and birthday presents
she would like to travel, including traveling internationally, when she retires

While Stacey is right that her parents did not have a large, comfortable retirement, she is only looking at part of their financial picture. Her parents were willing to make significant changes to downsize their expenses so they could live comfortably on the retirement they did have. In fact, when her last parent died at 90, there was still enough left over to give a small inheritance to each of their 9 children. To have a comfortable retirement of her own, Stacey should also downsize her lifestyle. It is the only way to make the money stretch as her parents did.

When it comes to your own retirement, or financial planning in general, it does little good to compare your finances to others. Ultimately, it can lead to a form of optimistic denial that can lead to considerable financial stress in the future.

Do you know anyone who suffers from financial optimistic denial?

photo credit: robynejay