Different Loan Options and Their Requirements

There are many reasons that people apply for a loan. You may need a loan to buy a home or car, to cover tuition or medical expenses, or simply to pay off an outstanding debt. Whatever your reason, there are a wide range of loans available and understanding the differences and requirements for approval will save you time and energy.

Mortgage

A mortgage falls into a closed loan. This type comes generally from a bank, a sub lender, or through the government in the form of an FHA or VA loan. Mortgages offered through a traditional bank have higher standards and requirements that you must meet in order to get an approval. They require a credit score on the high end of the 600s but mostly prefer people with a credit score that exceeds 700.  If you go through a sub lender or the government, you can qualify for a home loan with a score of 580 or more.

Home equity loan

A home equity loan is a loan available to homeowners who have equity in their home. There are two types, a straight home equity loan and a home equity line of credit. A bank issues the money from a home equity loan in a lump sum with a repayment of monthly fixed rate payments. A home equity line of credit is a revolving line of credit with a variable interest rate that you can use and then borrow again once you pay some of the balance off. If you should decide to sell your home while you have the loan, you will need to pay it off prior to your closing.

Personal loans

A personal loan issued through a traditional bank requires a source of collateral, generally a home and an excellent credit score. If you don’t own a home or have a fair or poor credit score, there are various types of other personal loans offered through online lenders where the line of credit loan requirements that are less stringent. They generally require only that you have a steady paycheck, a checking account in your name, and a social security card.

Car loans

It used to be that you could only get a car loan if you had a good credit score. Today, that’s changed. More banks realize that many people have a mark or two against them for reasons that were out of their control. You will pay a higher interest rate than if you had good credit, but if you pay the loan on time for a year or so, you can refinance it through another bank at a much lower interest rate.

Consolidated loans

A consolidated loan is for the purpose of paying off your outstanding debt and then consolidating it into one affordable payment. For many people who own a home, this provides an easy way to free up hundreds of dollars from their budget each month. There are several different types of consolidation loans available, including secured, unsecured, and a student debt consolidation loan. The secured requires the use of collateral, generally a home. Whereas, the unsecured loan bases it on several other factors including your credit score and income and, because there’s no collateral, has a higher interest rate.

Short-term loans

Most times, a short term loan is very easy to acquire. The requirements are much more lenient than that of a traditional bank. A short term loan can range from several months to several years. The downside to acquiring one of these versus a personal loan from a bank is that the interest rates are generally much higher. These type loans offer someone with mediocre to poor credit the chances to pay off debt, cover repairs and other expenses.

Before borrowing any money from a bank or another lender, make sure that you carefully calculate your budget to make sure that you have the money coming in each month to accommodate another bill. If you don’t, then taking on more debt is only going to make your situation worse.

How to Improve Your Credit Score and Save BIG on Interest Fees in 2013

This guest post was written by Jason Bushey. Jason is a personal finance blogger and consultant.

If your New Year’s Resolution of improving your credit score already feels like it’s hit a dead end, fear not – there are some simple ways to get your credit on the right track in 2013.

Improving your credit can go a long way towards lowering your interest fees on big-ticket loan items you might have your eye on, including home loans car loans. A strong credit score is made up of multiple factors, but there are some simple practices that are easy to follow that will improve your credit over the upcoming year.

The very first thing you can do to improve your credit in 2013 is apply for a new credit card. If you have poor credit, there are some credit cards for bad credit available for consumers in your exact situation.

Bad credit credit cards can improve your score in a number of ways, the first being that a new line of credit can have an immediate positive impact on your credit score. How so?

Well, new credit lines make up 10% of your FICO scores. Along those same lines, the amounts you owe on your total available credit line make up another 30% of that score. Basically, your credit utilization ratio – the amount of credit debt you owe in relation to your total available credit – should always remain under 30% and in a perfect world it would be less than 10%.

When you open a new credit card account, right away you’re lowering your credit utilization by adding total available credit to your profile. So the impact is two-fold: you’re adding new credit and lowering the amounts you owe. This should lead to a modest boost in your credit score in 2013.

However, the biggest factor determining your credit score is your payment history. On-time payments and payment delinquencies make up a full 35% of your FICO scores, so the number one thing you can do to improve your credit score in 2013 is make paying your credit card bill on time each month a priority.

Not only will on-time payments improve your credit score exponentially – especially those made on your new credit card – but consequently you’ll be lowering your credit utilization ratio, too. That’s another win/win when it comes to rebuilding your credit, and is of course a simple practice to understand.

The third thing consumers can do to improve credit scores in the upcoming year is dispute old debts. This means obtaining your credit report – we’re all allotted one free report per year by law – and combing through for things that don’t look quite right.

If you see something fish-y or odd on your credit report, then the next step to take is to send the credit reporting agency (CRA – this would be either Equifax, TransUnion or Experian) a debt validation letter. This is a simple, to-the-point letter asking the CRA to verify or validate this debt as legitimate.

The CRA then has one month after receiving the letter to respond. If they can’t validate the debt, that negative blemish will be wiped from your report. If they do validate the debt but you’re still not sold that this debt is legitimate, you can follow up with a dispute to the creditor reporting the debt to the CRA.

Remember – the key to disputing errors on your credit report is through documentation. Don’t pick up the phone! Draft a letter, send it off and await the response. Removing errors on your credit report is one of the most important things you can do to improve your credit score in 2013, and while it might seem irksome to write letters and await responses from big agencies, think of the hundreds or even thousands of dollars you can save in interest with your healthy new credit score.

If you respond more to lists, here are three ways to improve your credit score in 2013:

  1.  Apply for a new credit card.
  2. Make on-time payments each month, no matter what!
  3. Obtain a copy of your credit report and dispute, dispute, dispute!

An active, responsible consumer with multiple forms of credit who ALWAYS pays on time is a consumer with great credit. Rebuilding your credit score might sound complicated, but the road to excellent credit is simple if you make it a priority. And if you have goals of owning a home or buying a new car, it’s imperative that you have a good credit score moving forward.

Compare Home Loans for Great Honeymoon Rates

While it’s most important for homebuyers to think about every aspect of their loan options, it also makes sense to compare home loans so you can take advantage of great honeymoon rates. Having a few years of fixed interest rates could help you save money for future repayments.

Comparing Honeymoon Rates

Many lenders use honeymoon rates to attract new clients. These fixed rates can last from one year to ten years. In most cases, you get the lowest honeymoon rate when you choose a small introductory period. One year will usually give you a considerably lower rate than ten years.

It’s important to compare these honeymoon rates to make sure you save as much money as possible. Interest rates can differ considerably from lender to lender. Ask the home loan companies to give you comprehensive lists of their honeymoon rates. That way, you can compare them side by side.

 Consider How Interest Rates Might Change

Having a low introductory rate can help you save money, but when you compare home loans you also need to think about how your rate will change after the honeymoon period. In some cases, you might find that higher interest rates offset the savings that you might get from the honeymoon rate. In other cases, though, you might find that you still get a good deal even after the introductory period ends.

If you expect your financial situation to change dramatically over the next five to ten years, then you could benefit from low honeymoon rates even when you know the rate will increase considerably in a few years. Honeymoon rates can make your home more affordable for one or more years while you save money and earn a higher income. When your income increases, you can afford the higher interest rate.

Before you can decide this, though, you have to compare all aspects of the loan and take an honest look at your finances.

 

This post was submitted by Tomorrow Finance – An Australian Mortgage Comparison Website.

Talk to Your Child about Students Loans and Smart College Plans

More and more, we are hearing about students who are buried under a mountain of student loan debt. Some default and suffer severe consequences. Others manage to pay back the loans, but the minimum payments are so high, they have to move back in with their parents and don’t pay off the loans for 20 or even 30 years. Meanwhile, their lives are on hold.

Instead, take the time to talk with your child about student loans. Many students who have such a high debt load chose to go to expensive private or out-of-state colleges.  Examine the many choices that are available. Can your child go to a community college first?  Can he or she get a good education at a local university? Using both of these strategies will cut your child’s student loan debt immensely.

Remind your student of life stages she may miss out on or have to delay if she has a five or six figure student loan debt:

  1. Home ownership.  Many people buy a home once they graduate from college, if they are not burdened with student loan debt.  Home ownership has many advantages—you have your own space, you can take advantage of significant tax deductions, and you are not “throwing your money away” as some say you are if you rent for a long period of time. In the current economic climate, interest rates are so low that a home loan is even more affordable. However, if your child has student loans with expensive monthly payments, he can’t take advantage of the power of home ownership.
  2. Getting married. The median marriage age for women is 25 and 27 for men.  However, young professionals who are deep in debt often push back this time frame until their 30s. If both your child and her partner have debt, they could be in an even more difficult financial situation. Many delay marriage until they have reduced their student loan debt considerably.
  3. Having children. Just as these students delay getting married, they also delay having children. Having children is expensive, and when the majority of your money is going for student loan repayment, thinking about the tenants of “adulthood” such as home ownership, marriage and children, can seem out of reach.
  4. Retirement savings. Many college graduates initially neglect their retirement savings so they can apply more money to their student loan debt.  However, they then miss out on the power of compound interest that can make their retirement savings stretch further. Instead, they wait to invest until their mid to late thirties, when they will have to invest more for the same retirement they could have had if they had started investing in their twenties with less money.

Often students don’t realize the consequences of deciding which college to attend. Take the time to explain to your child how much student loan debt can burden their future and their ability to buy a home, get married, have children and save for retirement.

What is a Credit Rating?

A credit rating is a score that summarizes the credit worthiness of a business or government.  It is usually made by a credit rating agency (such as Standard and Poors or Moody’s) and is based on the debtor’s ability to pay back the debt and the likelihood of default.  The higher the credit rating, the less likely the debtor is to default, thus the safer it is to loan money to them.

 

 

What Are the Common Credit Ratings?

 

Credit ratings are broken down into short term and long term credit ratings.  Some companies call them different terms, but short term ratings always look at the possibility of default within a year, while long term looks over a long time frame (such as 20 years).

 

While each rating company is slightly different in the term it assigns, the general breakdown is as follows:

 

Investment Grade Ratings

Prime Credit: AAA (or Aaa for Moody’s)

High Grade: AA (AA+, AA, or AA-)

Upper Medium Grade: A (A+, A, or A-)

Lower Medium Grade: BBB (BBB+, BBB, or BBB-)

 

Non-Investment Grade Ratings

Non-Investment Grade Speculative: BB (BB+, BBB, or BB-)

Highly Speculative: B (B+, B, or B-)

Substantial Risks: CCC (CCC+, CCC)

Extremely Speculative: CCC-

In Default: D (or C for Moody’s)

 

 

What Are They Based On?

 

These credit ratings are based on a variety of factors, but all relate to the risk that a borrower will fail to make the payments which it is obligated to do.  The risk is that the lender could lose principal and interest, and face increased collection costs.  The loss can also be complete or partial.

 

Some typical factors for analyzing risk include operating experience, management expertise, asset quality, whether they have a current account, leverage and liquidity ratios, and more.  Most lenders employ sophisticated algorithms to analyze and manage risk.  Most of these algorithms are confidential, but you can assume the basics are included, like cash flow, amount of debt, and more.

 

Furthermore, any lending is typically subject to terms and conditions on what the company can do going forward, to lower the credit risk to the lender.