Double Check Everyone's Math

If you owe anyone money: student loans, a mortgage, etc., then make sure that their math is correct. I've calculated my government student loan payment recently and found that it is incorrectly calculated. I am paying more in interest every month then I should be according to all the amortization calculators that I was able to run.

After writing them an email, they responded by lowering my payment by $1.50 per month, we will see how they will calculate interest this month. However, it is hard to argue what they are charging because, unlike Sallie Mae, the DLS Website does not calculate daily interest and the outstanding interest is always the same throughout the month and is around $10, while it should be around $70.

My Sallie Mae payment is also incorrect due to pre-payments, but at least they are calculating the daily interest correctly, therefore, I don't mind paying a few dollars extra a month. However, if you are having trouble repaying your loans, every dollar counts, therefore, do the math.

Micro Lending or Peer to Peer Lending Websites

If you are looking for a personal loan, great places to look are the micro lending or peer to peer lending websites. You apply for a loan and investors contribute a portion of that loan so that you have several people lending to you at one time. The interest rate is determined by what you want to pay, by what the investors want to pay, and your credit rating. Here are a couple of the more famous websites:

Prosper
Lending Club

The best use I can think of for this type of loan is for start-up money for a business. Don't consolidate your student loan debt using these websites as they won't come with perks such as IBR repayment or deferment options.

You could also be an investor to a person seeking a loan. The websites advertise high returns, however, be ware, as some of the high risk loan seekers do not repay and you, as an investor, will have to file for collections of your loan and you might loose the money you lent out. What I like about these types of websites is that you can lend $50 to 50 different people. This feature allows you to diversify yourself.

Monthly, Bi-Weekly, vs. Weekly Payment

Ever wondered how much difference a bi-weekly payment will make vs. a a monthly payment on a loan? How much difference is there between a weekly loan payment and a monthly loan payment?

Now you can see using this calculator:

RBC Mortgage Payment Calculator

Financial Clean-Up

If you haven't done so already, now is a great time to get your finances in order. Taxes are done; it's a fresh financial year. Now is a good time to start making folders for 2011 taxes: one for receipts, one for paycheck stubs, one for interest payments you make on your mortgage or student loans, etc.

If you start organizing now, taxes will be a breeze in April, or maybe you will be so organized that you can do your taxes in January and get it over with.

Now is also a good time to make some long and short term financial goals.

Here are mine:

1. Continue to contribute 15% towards retirement through 401(k) and IRA
2. Pay extra on my student loans, but just enough extra that I only pay $2,500 in interest in 2011
3. Have an emergency fund of 6 months that I don't have to touch because I have enough in checking as well (recently I pulled some money out because I had a family medical emergency, a car accident, and I want to prepay some rent to negotiate the rent down)
4. Start saving money on the side to pay off my private student loan in 2013 (as discussed in a previous post, my whole payment is currently interest because I am only paying capitalized interest and after doing some math, it works out better if I only pay $2,500/per year in interest for the tax deduction and then pay off my loan in full in 2013, when I won't be able to rack up the $2,500 in student interest payments for the tax deduction) - I would like to see $3,000 in this account by Dec 31st, 2011
5. Get a raise of around 13% from my current salary by April 2012 - currently supposed to get a raise at the end of May and then again in April
6. And of course, be able to take all my vacation days by going somewhere, buy Christmas presents for the family, and spoil my nephew-to-be

Installment Loan Utilization Ratio and Credit Limit

Some people see a utilization ratio of their installment loans when they check their credit report. If you see a utilization ratio of your student loans or of your auto loans, for example, do not be surprised that it's close to 100% or over 100%. For many student loans, expect to see amount owed greater than the credit limit listed as well, making it seem that you have gone over your allowed limit.

Do not worry. Student loans and auto loans are installment loans and, therefore, even though a report might show the same type of features that it does for credit card, it is not counted the same. The credit scoring agencies are able to tell the difference between revolving accounts (credit cards) and installment loans and know that if you just took out a loan of $10,000 for your car, then your utilization will be 100% on the first payment as the balance and credit limit will both be $10,000. If you have student loans with capitalized interest, it will say that your credit limit is i.e. $10,000, yet the balance is $14,000 because you have so far run up a total of $4,000 in interest costs.

Credit scoring agencies know and understand the difference and the only utilization ratio and credit limit that you need to worry about is that of your revolving accounts.

401(k) Loans and Why They are a Bad Idea

There are companies that will allow you to withdraw a loan against your 401(k) plan. It might sound like a brilliant idea for a new car or whenever you are planning to borrow money. You borrow money from yourself and pay yourself back, not a bank, with interest. Below are some things to consider.

FACTS:

1. First of all, if you need a loan, maybe you don't need to buy what you are thinking of buying. Your emergency fund should cover any real emergencies. You should save up for a car so you can buy it out right by making payments to yourself for the first 3-5 years of your auto ownership life, etc.
2. Some companies are not able to give you a loan from a 401(k).
3. Most have a minimum amount that you are required to take out such as $500-$1000.
4. If you are able to borrow, you should be allowed to borrow up to 50% of your vested balance and up to $50,000.
5. The term is generally 5 years, however, if a loan is used for a mortgage, you might be able to take out the loan for 15 years.
6. Typically, the interest rate that you pay back to yourself is prime plus 1%.
7. Payments are set up for automatic withdrawal from your paycheck.
8. There are usually loan and origination fees.

WHY IT'S A BAD IDEA:

1. There are origination and loan fees.
2. The interest that you will be paying yourself back will probably be less than the amount that you would have earned through market gains.
3. If you default on the loan, it will be counted as a distribution. Therefore, in addition to the regular taxes that you have to pay, there will be a 10% penalty fee on that amount. You also loose that money from your 401(k).
4. When you pay back the loan, you use your tax dollars to contribute to an account that should help to shelter your income. Therefore, you will be taxed twice. Once, when you repay the loan and then again when you pull that money out in retirement! Although, if you look at all of your money and not just the 401(k), you did take the loan and never paid taxes on that money, so when you are repaying the loan with taxed dollars, you are simply paying postponed tax on the the original loan amount.
5. If you quit your job or are fired, you typically have 60 days to repay your loan balance in full or the remaining balance will be considered as an early distribution causing you to be taxed on the amount. You will also have to pay a 10% penalty on the remaining unpaid loan balance.
6. The biggest factor, in my opinion, is that you cannot contribute to your 401(k) until the loan is fully repaid. This provision makes you miss out on the compounding benefits of retirement accounts and the employer match AKA free money.