Which Loans Are Best When Financing is Necessary?

Loans can help consumers buy a house, purchase new cars, further education or start a business. Credit card loans offer funds to update wardrobes, buy household appliances and furnishings, pay for cosmetic dentistry or take fun-filled vacations.

While loans allow consumers to finance things they cannot afford to pay for upfront, borrowers must be able to repay debts. Otherwise, they will destroy their credit rating and potentially be forced into personal bankruptcy.

Prior to the economic recession, loans were fairly easy to obtain. Many lenders offered bad credit and ‘no credit check’ loans; making it simple to qualify for secured and unsecured loans. Today, lenders scrutinize borrowers to ensure they are financial capable of repaying borrowed funds.

Borrowers must weigh the advantages and disadvantages of obtaining any type of loan. All bank loans are assessed interest which increases the amount of money to be repaid. Lenders can also charge late fees when payments are delinquent.

If borrowers default on loans, banks can initiate legal action to collect outstanding loan balances. When creditor judgments are issued, borrowers are responsible for legal and court costs in addition to late payment penalties and accrued interest.

Loans financed through banks and credit unions are secured with a promissory note. This legal contract outlines payment terms, interest rate, late fees, and payment dates. Personal loans provided by family or friends should include a promissory note to ensure both parties understand the terms and prevent family disputes.

Interest rates are based on the type of loan provided. Other factors affecting interest rates include the borrower’s credit score, employment history and who is providing the financing. Individuals providing personal loans are required to abide by state usury laws and prohibited from charging a higher rate of interest than banks or credit unions.

Credit card companies usually charge the highest rate of interest with rates ranging between 9- and 23-percent. Home mortgage loans usually carry the lowest rate of interest with rates ranging between 4.5- to 7-percent.

Borrowers who obtain mortgage loans for bad credit pay a higher interest rate because they are considered high risk. High interest loans often set borrowers up for default which leads to foreclosure. Instead of taking out a high interest home loan borrowers should strive to clear derogatory credit and obtain a fico score of 720 or higher. Depending on the severity of credit damage, restoring credit can take a year or more.

Bad credit borrowers who want to buy a home might find lease-to-own or seller carry back mortgages are better options. Rent-to-own involves providing a down payment to the seller who contributes a portion of rent monies toward the home purchase. Seller carry back mortgages require sellers to act as a lender for all or part of the purchase price.

Borrowers who obtained bad credit mortgages and have cleared derogatory credit should consider refinancing mortgages. This option allows borrowers to reduce interest rates and lower monthly installments. Interest rates are based on credit scores, so the higher the score, the lower the rate of interest.

Mortgage refinancing can be a good option for homeowners with good credit. Property owners should strive to obtain a 2-percent interest reduction. Refinancing requires borrowers to pay upfront costs such as loan application fees, property inspections and appraisals, attorney fees, and closing costs.

Borrowers carrying multiple loans might benefit from loan consolidation. This financing option can be especially helpful for students with several college loans and homeowners with two or more mortgages. Consolidation loans can reduce overall interest and help borrowers pay off loans earlier than anticipated.

Financing Unusual, Eco-Friendly and Just Plain Weird Homes

There’s a lot of attention being given to eco-friendly homes, ‘alternative’ homes and other dwellings that are not your average single-family home. You can find lots of information on the Internet, in books and magazines. However, one thing you might have a fair amount of trouble finding is an institution that will finance your alternative home venture, especially in today’s depressed economy. There have been a number of individuals who, when seeking financing, found that anything that wasn’t a standard ‘stick-built’ house was automatically in no-man’s land when it came to the ‘free mortgage market’.

For an interesting story of one couple’s search for financing, head over to greenhomebuilding.com/financial.htm and see what they tried before they found a financial institution (a local credit union) to loan them the money for their dome house. Despite the fact that ‘green’ homes are held up as the houses of the future, there still remain a sizeable amount of banks, credit unions and other lenders that won’t take risks on them.

Another stumbling block for alternative housing is that institutions want to see comparable home values. It’s kind of hard to produce comparables when you’re embarking upon an alternative housing project. However, this is another reason that lenders shy away from this kind of endeavor.

The three ‘musts’:

First of all, your credit has to be very good for a financial institution to even glance your way. Getting your credit up after a setback is not within the scope of this article, but there are plenty of ideas out there for you to explore. The better your credit is, the more likely your chances of a bank taking a second look at your proposal.

Second, have very clear plans about your building. It isn’t enough to say, “Oh this goes over here and we’re gonna put that over there.” You need blueprints, sources for your materials, qualified contractors (if you’re installing electrical and plumbing), and, if you’re not, explain what you’re going to do to heat and light the house. You also need to be extremely aware of municipal bylaws for dwellings as well as any standards you need to meet. Gather all the data you can on your house, comparable structures and the construction process.

Third, be aware of what insurance you need and how you’re going to obtain said insurance. Some companies do not cover homes that are not provided with conventional sources of heat and light or are made out of materials not covered by their standard policies.

There are lenders out there that finance alternative housing, but in the case that you can’t find one in your area or if all you can find is a lender who charges you an exorbitant amount of interest for a loan on an alternative dwelling, here are some ideas:

Try a local institution. Local credit unions and other lenders may be more flexible than the larger national and international banks. If they have strong roots in the community and take a personal interest in what’s happening around your town, they might be interested in financing an exciting new project that elicits strong interest from the public.

Search out other alternative home owners to get an idea of what their experience at valuation was like. If you can get valuations of any alternative housing, even if it’s not in your area, it’s at least something you can use to go on. Also, other alternative home owners may have contacts or ideas that you can use to find lenders.

Publicize your search for financing. Green is ‘in’ and many news outlets could find this a good story to cover. Lenders might feel better about investing in a ‘human interest story’ instead of (to them) some random person wanting to live in a hole in the ground.

Consider private lending. There are online resources, such as Prosper.com where you can post your story, provide potential investors your story and hope that enough decide to invest in your endeavor. Private lending is generally more expensive than a mortgage, but less expensive than most credit cards.

The fight to get alternative housing legitimized by the real estate and mortgage industry is an uphill battle. However, the more alternative dwellings built, the more voices will be raised for equality among home owners – whether that home is a conventional one or something a little different, a little greener and ultimately a little better for the Earth.

Auto Dealer Financing – Understanding How it Works Can Save You Thousands

A few years ago, I was in the market for a new car. After much debate, my partner and I decided that it would be best to buy rather than lease. This is not always the right choice for everyone, but it certainly was the right choice for us. Luckily, our friend owns a car dealership a few states away and educated us about some common practices in the car business, and how we can avoid potentially huge mistakes when financing a car. Here’s some tips to help you prepare for the negotiations:

1. Get a copy of your credit score before you ever set foot into a dealership. You can get a free copy of your credit report by visiting the websites for one (or all) of the three main credit bureaus: Equifax, Experian and Trans-Union. I did this, and boy was I glad. My credit history was pretty spotless and my credit score was really high. When I visited one particular dealership, the salesman went into the back office and pulled my credit report. He came back and said grimly, “Well, I have some bad news… you’ve got bad credit. I’m afraid the loan rate that you’ll qualify for is going to be much higher than I expected…there’s really nothing I can do.” I told the salesman he was a flat out liar and asked to see his manager. I was promptly assigned a new salesman. Had I not looked at my credit report ahead of time, I could have fallen victim to his lame attempt to puff up my rate. That would have cost me thousands of dollars over the life of my loan, and he would have gotten a nice big commission for his deceitful practices.

2. Join a credit union that works with your local car dealers. Credit unions often give loans (including home mortgages, lines or credit, personal loans and auto loans) at drastically lower rates than commercial banks. They also usually have lower fees overall and much better customer service because they are locally based. Check with your employer, union, school, or religious organization. I even know of a credit union that allows you to join if you are a member at a particular museum.

3. Check your bank or credit union website for their auto rates. This will give you an idea of what the the car dealer will offer as a high end rate. Because car dealers work in volume, they typically buy the loan rates from banks at a drastically reduced rate. Then, when they sell it to the consumer, they add extra percentages and pocket the difference. Typically the end rate is still lower than if you were to just walk in and ask a loan officer for a loan, but it’s possible to get amazingly low rates if you know exactly how to ask for it.

4. Ask the finance manager for the most current rate sheet. In my personal situation, at the time I was buying my new car, bank and credit union websites in my area showed rates for new cars at around 6%. After negotiating with the salesman I then met with the dealer’s financing manager. He told me that because I had good credit, I could qualify for a loan at 5.5%. Sounds like a great deal, right? Wrong! I asked the finance manager directly, “can I see a copy of today’s rate sheet? I want to know what you are buying the rate at today.” At that moment you could have heard a pin drop in the room. The finance manager was in shock. He was reluctant, but eventually gave me a copy of the rate sheet. The rate sheet showed that the dealer was buying the rate from my credit union at 2.5%. That’s right. If I would have taken his offer, the car dealer would have made 3% on the loan for a $35,000 vehicle. Instead, I told him, “I understand that everybody needs to make money, so I will give you 1% over what you are purchasing the rate for.” Because I had good credit, and he knew he couldn’t get away with it, I got a loan from my credit union for my new car at just 3.5%. Using a loan amortization calculator I found online, I figured that I paid about $3,200 in interest for that loan. Had I just gone with the finance manager’s original offer, I would have paid over $5,100 in interest for the same loan. By just asking one question, I saved myself around $1,900.