Let’s review some of the fabulous financial “innovations” that have provided so many fantastic opportunities for individuals over the last couple of decades:

• Option ARMs
• Interest-only home loans
• Payday loans
• Fee harvester credit cards
• Derivatives

Most of these “innovations” turned out to be little more than creative ways for a few people to make insane amounts of money at the expense of the rest of us. Especially since these “innovations” are not economically sustainable on a widescale over a long period of time — as we have witnessed. The fine print, legalese and sometimes-shady practices employed in order to give people access to these financial products is, in some cases, enough to confuse even those who are financially savvy.

So maybe a little less financial innovation, and a little more adherence to “old-fashioned” principles of solid finance, is in order. Sure, it may provide consumers with “limited borrowing choices” according to the American Financial Services Association, but the choices available will be much better in terms of personal finance. And maybe, just maybe, we’ll get to a point where we aren’t lending money to people who really shouldn’t be borrowing that much of it in the first place.

Yes, the consumer is responsible for due diligence. But at the same time, people in positions of trust, helping consumers make important financial decisions, should also be held to a certain standard. They should be required to be honest and transparent, rather than trying to bury the truth in pages of fine print.

Image source: Gregory F. Maxwell via Wikimedia Commons

Post from: EveryJoe

Do We Really Need Financial “Innovation”?

• Bible Money Matters (Lending Club)
• Cash Money Life (Lending Club)
• Generation X Finance (Zecco)
• Bargaineering (Lending Club)
• Moolanomy (Lending Club)
• My Dollar Plan (Lending Club)
• My Money Blog (Zecco)
• Prime Time Money (A great post on how to work your 0% balance transfer)
• Remodeling This Life (Lisa Leonard Design giveaway)
• Debt Free Adventure (Lending Club)

Enjoy. And remember, there are always good bargains to be had, and ways you can enjoy the benefits of some sort of promotion if you look around. Just remember: Balance. Sometimes what you do to get the free stuff ends up costing you more in time and effort than it is worth.

Image source: sxc.hu

Post from: EveryJoe

Saturday Staples: Lending Club $2,500 Prize

Today, TuitionU relaunched, offering expanded offering for student loan funding, and incorporating the P2P lending platform GreenNote into its program. One of the most intriguing things about the new TuitionU is that credit unions are in on the act. Credit unions have not traditionally been part of the student loan scene.

Brian Cox, the Chief Busines Development Officer on the project, told me that he is very excited about involving credit unions. “Credit unions often offer lower fees and interest rates to their members. Seeing them get into private student lending is great, since it provides a win-win.” Cox said that students who need access to better private student loans to close a funding gap win, and credit unions, who are looking for a younger customer base, have the chance to win more members.

In order to get a student loan this way, though, one has to be a member of the credit union. But TuitionU takes care of that as well. “We have a filter set up on the site,” Cox explained. “You put in your state, and then you can select available credit unions and read the membership requirements. If you qualify, you may need to put in five dollars to open an account. But then you can have access to what could be a much better loan. It’s definitely worth the small amount of extra effort.”

Cox said that some of the credit unions in the program have a very wide membership base, making it easy to join. “The NASA credit union is a good example,” he explained. “For five or 10 dollare you can join one of the NASA societies — which are open to anyone — and then you can be a credit union member.”

For those who still don’t qualify for private student loans through banks or credit unions, it is possible to use the GreenNote P2P lending platform. The student loans work, for students, just like those you get through federal programs, with lower interest rates, 10 year repayment and a six-month post-graduation grace period. TuitionU also offers college funding options through federal programs and school payment plans.

Post from: EveryJoe

TuitionU: Student Loans from Credit Unions

Of course, you sort of do that right now. When you put money into a CD or an interest bearing bank account, you are essentially lending the bank money. The bank pays you a yield (often small) for keeping the money there and lends the money to others at a much higher rate. With the new scheme introduced by Prosper, though, you could fund bank loans.

Here’s basically how the process would work:

1. The bank gives out a loan, as usual (the bank will have a limit of $25,000 for loans it wishes to list for funding).
2. After the bank has received three on-time payments, it can offer the loan for bid on Prosper.
3. Investors can partially fund the loan, as P2P lending generally works.

The idea is to provide a place where banks can sell their higher-quality loans. It is an interesting idea, providing a sort of secondary market for regular folks.

What do you think? Would you buy a loan from a bank?

image source: sxc.hu

Post from: EveryJoe

P2P Lending Could Come to Banks

Anyway, I was a little surprised when one of my credit cards (issued by GE Money Bank) cut my credit line. Especially since I was nowhere near the limit and paying off my charges every month. This is my cash back card. But then I did some digging. See, when we bought our Prius a couple of months ago, we did our financing through the dealer for the special rates. Well, turns out the dealer blasted our information to a bunch of different lenders. (Yes, yes — stupid to get financing through the dealer. But that’s over and done.)

We got our good rate, but that’s not all we got. We got a bunch of inquiries on our credit report. And, even though we ended up with Chase financing, one of the banks that came back with a quote was GE Money Bank. Now, I can’t prove this, but I’m betting that our credit card line decrease came in part because GE Money Bank saw that we were taking out a loan for a car. The other part might have been the 15 point drop in the credit score that we had in the aftermath of car shopping, switching our satellite provider (credit check) and the fiasco with my Bank of America credit card. I fully expect that in 30 more days most of the credit score drop will be recovered.

I’ve tried to reason with the issuer, but to no avail. I was just told — more than once — that certain factors make me a bigger risk. Whatever. Of course, now this is going to ding my credit score even further, since now I have less available credit. Blegh. The other issue is that maybe my other credit cards will cut my credit line as well. Or raise my interest rate. Those new Fed credit card rules can’t come into effect fast enough.

image source: JudeanPeoplesFront via Flickr

Post from: EveryJoe

Credit Line Reduction On One of My Cards

It is possible to stop foreclosure once it starts, but it can be difficult. You will have time, however: In most states, the foreclosure process takes between 90 and 180 days, giving you some time to try and save your home before you are evicted. Check your state laws to see how long the foreclosure process lasts, and figure out a plan of action that might help you save your home. Remember: If you have to let something slide, it’s better to miss payments on unsecured debt rather than put your home at risk.

Option #1: Refinance the house

If you have 60% to 70% equity in your home, it is sometimes possible to refinance your home. Your mortgage, plus the missed payment amount, is paid to the bank by the refinancing institution. This requires specialty financing, and can be expensive in terms of fees in some cases. And it can be difficult in this climate to find someone willing to refinance your home.

Option #2: Pay the amount you are in arrears

Your next option is to make up all of your missed mortgage payments. This can be a daunting task. Many banks require an “all or nothing” payment to make up the entire amount you owe. Additionally, it can be even more difficult because you will have to make your current month’s mortgage payment on top of what you are behind with.

Option #3: Payment plan for the amount you owe

Another options is to negotiate a payment plan for the amount you owe. You can get a third-party to help you with this. If you can scrape together a partial payment for what you owe, you can — in some cases — arrange with your mortgage lender to set up a payment plan to cover the rest. This payment plan can be separate from your regular mortgage payment, or it can be added to your mortgage payment as part of a loan modification that extends the term length of your mortgage loan. Missing a payment under such a plan, however, can result in immediate resumption of the foreclosure process.

Option #4: Declare bankruptcy

Bankruptcy should always be the option of last resort. However, there are cases in which you can save your home by going through Chapter 13 bankruptcy — if you qualify, and if only in certain cases. Chapter 7 bankruptcy can delay a foreclosure, but you will still need to save up your money to save the house.

Look at your options and try to work with your mortgage lender and/or mortgage servicer in order to work out an agreement. Unfortunately, because loan modification or stopping foreclosure is voluntary on the part of the mortgage lender, you might not be able to do anything. But you can learn more about your options — and improve your chances of success — by visiting the HUD Web site and getting a list of approved foreclosure counselors in your state.

image source: respres via Flickr

Post from: EveryJoe

Stopping a Foreclosure Once It Starts

Wasn’t the point of the bank bailouts originally to keep the credit markets going? And if so, a) why are banks still not lending even after receiving the money and b) at the very least, why are they calling in all these huge debts and putting all these companies out of business?

A lovely point! Everything that has been done, from emergency loans to TARP to the latest bank rescue plan from Timothy Geithner has been aimed at trying to free up capital so that banks will start lending — especially to consumers. Unfortunately, as you may have noticed, this hasn’t necessarily translated into loans for the rest of us. Here are some of the reasons that banks aren’t really that interested in taking the taxpayer money that is supporting them and lending it back out (with interest, of course):

1. Banks just don’t want to lend. One reason banks aren’t lending is because they don’t want to. They’d rather use that capital to shore up their books. Plus, they’ve been burned by their horrible decisions. Of course, the argument could be made that they are over-reacting, going too far the other direction. Technically, though, banks are lending — just not to you or me. Insider lending, to executives and directors, is going on right now.
2. Banks still have to cover toxic assets. Many bank still have toxic assets on their balance books, and they are using some of the money to balance that out. Also, foreclosures and credit card loan defaults are still expected in the coming months, so banks are hoarding cash to get to that point.
3. Banks owe money to others. Consider AIG: Most of the money it has been getting, rather than going to junkets or bonuses (as outrageous as that is), has been funneled to its own creditors, like Goldman Sachs. Other financial institutions are also paying off their debts.

As far as calling in debts, banks are just trying to get what they can, as quickly as they can. They are hoping to get lump sum capital — as much of it as they can.

Bottom line: Our leaders may have wanted banks to lend to us, but unfortunately have taken a “trickle down” approach. And we know how well that’s been working. Banks have just been holding on to the capital because they don’t really need worry about it. All they have to do is yell about how if they fail the whole economy goes down and everyone panics and agrees to give them more money.

Perhaps it would have been more effective for our leaders to buy our consumer debt. It would have cost less (more than $11 trillion — most of it for financial institutions — has been spent on economic stimulus so far). And it would have had a positive effect on bank balance sheets and automatically boosted everyone’s ability to borrow more. Even if more consumer lending is not the best thing, it’s our leaders’ stated goals. What they’ve done so far hasn’t even brought them to a point to where that is feasible.

Post from: EveryJoe

Reader Question: Why Aren’t Banks Lending?

The end to low interest student loans?

Right now, in order to encourage lenders to offer rock-bottom interest rates on student loans, the government hands out subsidies. Now, though, without these subsidies, lenders won’t be very likely to give out low interest student loans that make it possible for many middle class students to attend university. While increasing the amount of money available for grants is laudable, it only makes things worse for those families — like mine — who make too much to qualify for grants, but who don’t make enough to actually afford college without help.

Additionally, without federal subsidy protection, I foresee issues with getting approved for student loans. The credit and income requirements are likely to be strengthened as well. Unless Obama finds a way to provide grants for those who don’t qualify right now, we could see fewer middle class students able to afford college.

What do you think? Should the government continue to provide subsidies for low interest student loans?

image source: sxc.hu

Post from: EveryJoe

Will You Be Able to Afford a Student Loan?

One company, Pertuity Direct, offers a rather interesting version of social lending. Recently, I spoke with Pertuity’s CEO Kim Muhota, as well as Charlie Schliebs, who is on the board for the associated National Retail Fund.The explained that Pertuity’s model is one of underwriting loans, and then packaging them into funds that investors can then earn a return with.

“With other person-to-person social lending, it can be tiring to go through all the profiles and decide who you should lend to,” Muhota says. “It puts the consumer in the place of a creditor. We actually take care of the lending part of things and the investor can choose to invest in a pool of loans.” He also touts the more secure nature of Pertuity’s system: “Your personal information is not made available to the investor. It is all taken care of with our backend loan writing and pricing structure.”

For those who are concerned about investing in funds comprised of pooled personal loans, Schliebs has this assurance: “Our loans are aimed at prime borrowers. There are two retail funds, one that has only borrowers with a credit score of above 720, and the other for a credit score of between 660 and 720. Additionally, these are regulated funds that work simply and transparently.”

Muhota says that the company is looking to expand its loan offerings — especially with regard to loan term length. For now, all loans to consumers are three year loans. “We also offer them at a fixed rate. For budget planning, especially from a debt management standpoint, this is very useful. You know that in three years you will be done, and you can budget the same amount for the entire term.” He also says that there are no prepayment penalties, so if you can pay off your loan sooner, you are not penalized.

Schliebs shares some of the fee structure for the retail funds — something that investors worry about. “Right now, total fees end up being a little under 2%. The funds are professionally managed by Gemini. However, as the funds grow, we expect the fees to decrease. There is also a loan servicing fee of about 1%.”

Finally, Muhota offers some insight into one of the more intersting aspects of this social lending structure. “You don’t have to look at profiles,” he says, “but you can if you want. We allow investors Pertuity bucks that they can “award” to borrowers whose stories they find compelling. These bucks translate into real money that the borrowers can use to lower the principal of their loans.”

At first glance, Pertuity Direct looks like it might be promising. I like the idea of being able to invest in funds with quality borrowers — as well as the fact that I don’t have to try and figure out who to give a loan to.

Also, this process takes away some of the guesswork from borrowers, who may be concerned that they don’t end up with full funding. With Pertuity, you are either approved for the loan, or you aren’t. Of course, the downside to that is that you won’t get even partial funding. And, of course, you have to have at least a FICO score of 660 to qualify.

With any investment — including (and maybe especially) social lending — it is important to recognize the risks. No matter how solid something may seem, you always run the risk of loss.

What do you think of the idea behind Pertuity Direct? Have you tried other social lending sites?

Post from: EveryJoe

Interview: Pertuity Direct Social Lending

Is overdraft protection worth it?

One of the things I love about personal finances is that they’re, well, so personal. Really, it depends on your habits. First, though, a little background on overdraft protection.

What is overdraft protection?

Overdraft protection is a loan. It is a line of credit that you are allowed (usually between $1,000 and $10,000, depending on what you are approved for) to use when your account goes into the red. The idea is to help you avoid the hefty fees that come, per transaction, when you overrun your account.

There are, however, fees associated with overdraft protection as well:

• Interest charges (usually in the neighborhood of 13% to 18% APR).
• Annual fee (around $25).
• “Advance” fee (somewhere between $5 and $7 per transaction, if you don’t move the money from your credit line yourself and the bank has to do it for you after you go negative).

Is overdraft protection worth it?

Now we answer the question. If you occasionally go into the red due to cash flow realities, carelessness or for some other reason, overdraft protection can be worth it — especially if you know the money will be replaced almost immediately. Fees on overdrawing your account can range from $34 to $45 per transaction (my bank charges $38), putting you ever deeper in the hole. Each $4 coffee that you buy results in a hefty fee once you go negative.

Even at the relatively high interest rate, overdraft protection can be worth it, since, as a revolving line of credit, the interest is only charged while you are negative. Just one transaction that puts you negative could make overdraft protection worth it. If you feel that it will ease your cash flow, it is worth considering. But remember: Overdraft protection is a loan.

If, however, you are very scrupulous about your account, and if you stay out of the red all the time, with adequate padding, there is no reason to get overdraft protection. It’s just so much extra cost.

image credit: sxc.hu

Post from: EveryJoe

Ask the Piggy Bank: Is Overdraft Protection Worth It?