Is Being Debt Free Worth it?

I had a great talk with Millennial Money Man yesterday and my favorite piece of advice he gave me was to “write what you’re passionate about.” It took me literally five seconds to think of the one thing I’m really passionate…

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Should You Make Payments During Coronavirus Student Loan Deferment?

As Americans grappled with the financial consequences of the pandemic in March of this year, the federal government took several actions to help cash-strapped consumers. For starters, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act in late March of 2020, which included a temporary suspension of payments and interest for government-owned student loans through the end of September 2020.

Beyond just suspending payments and interest, the act also halted all collections activities on federal student loans. Americans pursuing Public Service Loan Forgiveness (PSLF) would see these non-payment months counted toward the 120 months of payments needed to have their loans forgiven. 

You can continue making payments on your federal student loans during the deferment period if you want to. Whether you should, depends on your goals and your situation.

This announcement was a huge relief for Americans with student debt since it meant they could pause federal student loan payments without accruing interest or facing penalties for several months. And recently, this assistance was extended for the remainder of 2020.

About the Student Loan Deferment Order

According to a memorandum from the White House, this extension intends to “provide such deferments to borrowers as necessary to continue the temporary cessation of payments and the waiver of all interest on student loans held by the Department of Education until December 31, 2020.”

What does this mean for borrowers? The extension of this order means that those with federally owned student loans (not private student loans) can continue skipping payments for the duration of 2020. Interest won’t accrue on federal student loans during this time, and penalties won’t come into effect for those who choose to defer loan payments.

How Does This Help Student Loan Borrowers?

Although unemployment numbers have improved since the summer, the initial pause on federal student loan payments was of massive help for borrowers struggling with job loss or a loss in pay. After all, getting a break from student loan payments made room for funds to go toward other household needs and bills. Keep in mind that the average student loan payment is approximately $393 for all borrowers, but that many with advanced degrees pay significantly more than that every month.

When the Presidential action was released, it was unclear whether borrowers pursuing PSLF will still receive credit for non-payment months. However, a U.S. Department of Education press release clarified that PSLF borrowers would, in fact, receive credit toward loan forgiveness as if they’d made on-time payments.

Just keep in mind that this order does not apply to consumers with private student loans. Only federal student loans qualify for this protection, although some private student loan companies are offering their own separate deferment options to consumers who can show financial hardship.

Pros and Cons of Making Payments During Automatic Deferment

One interesting detail from this order is buried in the fine print:

“All persons who wish to continue making student loan payments shall be allowed to do so, notwithstanding the deferments provided pursuant to subsection (a) of this section.”

In summary, you can continue making payments on your federal student loans during the deferment period if you want to. Whether you should, depends on your goals and your situation.

Benefits of Making Loan Payments 

If you haven’t faced a loss in income, then you might be tempted to continue making payments on your student loans. The benefits of doing so include:

  • Paying down your student loan debt faster. The Department of Education says that, through the end of 2020, “the full amount of your payments will be applied to principal once all the interest that accrued prior to March 13 is paid.” This means that every cent thrown toward your loans right now applies to your loan balance, quickly reducing your student debt on a dollar-for-dollar basis.
  • Saving money on interest. Because of the way interest accrues on student loans and other debts, reducing your balance will automatically save you money on interest over the long haul. The more you pay toward your student loans now, the more money you save.

Disadvantages of Making Loan Payments

There are a few potential downsides to making student loan payments when they’re not required. Plus, borrowers with certain types of student loans should not be making payments right now. 

Here are a few considerations to keep in mind.

  • You may need the money later on. Even if your income is fine right now, the financial fallout from the pandemic is far from over. If you choose to make student loan payments through the end of the year and lose your job in a few months, you might wish you had saved that extra cash instead. 
  • Those pursuing PSLF shouldn’t make payments. If you’re pursuing PSLF, then this deferment period is counted toward the 120 on-time payments you need for loan forgiveness. If you continued making payments through the end of the year, you would be throwing money down the drain.
  • Most borrowers on income-driven repayment plans have little incentive to make payments. If you’re on an income-driven repayment plan like Pay As You Earn (PAYE) or Income Based Repayment (IBR), then your loan payment is only a percentage of your discretionary income, and your loans will be forgiven after 20-25 years of on-time payments. Borrowers who aim to have their loans forgiven after 20-25 years anyway should skip payments through the end of the year and set aside their cash for a rainy day instead.

The Bottom Line

Individuals who want to pay off their loans quickly would be smart to pay as much as they can, but only if they can afford it. It also makes sense to be cautious about any extra income you have for the time being. After all, more economic pain may be on the way, and it’s possible you could face a loss in income later in the year.

Without any interest accruing on federally owned student loans during this historic forbearance, however, you could always put your student loan payments into a high-yield savings account until the end of the year. At that point, you can assess your financial situation and make a large, lump sum payment toward your loans if you want.

This strategy creates a greater safety net for the remainder of 2020 while also paying down debt faster with a large payment before the end of December. Run the numbers and make sure you have a plan (and a back-up plan) in place.

The post Should You Make Payments During Coronavirus Student Loan Deferment? appeared first on Good Financial Cents®.

Source: goodfinancialcents.com

What Is A Consumer Loan?

A consumer loan is a loan or line of credit that you receive from a lender.

Consumer loans can be auto loans, home mortgages, student loans, credit cards, equity loans, refinance loans, and personal loans.

This article will address each type of consumer loans.

Get Approved for personal loan today.

Types of consumer loans:

Consumer loans are divided into several kinds of categories. They include auto loans, student loans, home loans, personal loans and credit cards. Regardless of type, consumer loans have one thing in common: you have to repay the loan at some period of time. 

Auto loans

Most people who are thinking of buying a car will apply for an auto loan. That is because buying a car is expensive.

In fact, it is the second largest expense you will ever make besides buying a house. And unless you intend to buy it with all cash, you will need a car loan.

So, car loans allow consumers to purchase a vehicle where they may not have the money upfront. With an auto loan, your payment is broken into smaller repayments that you will make over time every month.

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You can choose between a fixed or variable interest rate loan. But the most important thing is, whether you’re buying a new or used car, it’s important to compare loans to help you find the right auto loan for your needs.

Start comparing auto loans now!

Home loans

Another, and most common, type of consumer loans are home loans. A home loan or mortgage is a loan a consumer receives for the purpose of buying a house.

Buying a house is, undoubtedly, the biggest expense you’ll ever make in your life. So, for the majority of consumers who want to purchase a house, they will need to borrow the money from a lender.

Home loans are paid back over a period of time. Those mortgages term are typically 15 to 30 years. They can be variable rate or fixed rate. A fixed rate means that your repayments are locked in for a fixed term.

Whereas a variable rate means that your repayments depend on the interest rate going up or down when the Federal Reserve changes the rate.

Over the loan’s term, you will pay back the principle amount of the loan plus interest. This makes it very important to compare home loans. Doing so allows you to save thousands of dollars on interest and fees.

Personal Loans

The most common types of consumer loans are personal loans. That is because a personal loan can be used for a lot of things.

A personal loan allows a consumer to borrow a sum of money. The borrower agrees to repay the loan (plus interest) in installments over a period of time.

A personal loan is usually for a lower amount than a home loan or even an auto loan. People usually ask for $500 to $20,000 or more.

A personal loan can be secured (the consumer backs it with his or her personal assets) or unsecured (the consumer does not have to use his or her personal asset).

But most of them are unsecured, so getting approved for one will depend on your credit score, income and other factors.

But consumers use personal loans for different purposes. People take out personal loans to consolidate debts, such as credit card debts. You can use personal loans for a wedding, a holiday, to renovate your home, to buy a flt screen TV, etc…

Student Loans

Consumers use these types of loans to finance their education. There are two types of student loans: federal and private. The federal government funds a federal student loan.

Whereas, a private entity funds a private student loan. Generally, federal student loans are better because they come at a lower interest rate.

Credit Cards

Believe it or not credit cards is a type of consumer loans and they are very common. Consumers use this type of loan to finance every day expenses with the promise of paying back the money with interest.

Unlike other loans, however, every time your pay with your credit card, you take a personal loan.

Credit cards usually carry a higher interest rate than the other loans. But you can avoid these interests if you pay your balance in full immediately.

Small Business Loans

Another type of consumer loans are small business loans. These loans are used specifically to create a business or to expand an already established business.

Banks and the Small Business Administration (SBA) usually provide these loans. Small Business Loans are different than personal loans, because you usually have to provide a collateral to get the loan.

The collateral serves as a way to protect the lender in case you default on the loan. In addition, you will also need to provide a business plan for the lenders to review.

Home Equity Loans

If you have your own home, you can borrow money against it. These types of consumer loans are called home equity loans. If you’ve paid off the mortgage on the home, you can borrow up to the full value of the home.

Vice versa, if you’ve paid half of the mortgage on the home, you can borrow half of the value of the house. You can use a home equity loan for several purposes like you would with a personal loan.

But most consumers use this type of loan to renovate their house.  One disadvantage of this type of loan, however, is that you can lose your house in case of a default, because your house is used as a collateral for the loan.

Refinance loan

Loan refinancing is a basically taking a new loan to replace an existing one. But you get this loan specifically either to refinance your existing mortgage or to refinance your student loans or a personal loan.

Consumers usually refinance in order to receive a lower interest rate or to reduce the amount of monthly payments they are making on their existing loans.

However, reducing to a lower payment will lengthen the time to pay off the loan and you will accrue interest as a result.

Consumers also use this type of loan to pay their existing loans off faster. However, some mortgage refinancing loans come with prepayment penalties. So do you research in order to avoid that extra charge.

The bottom line is consumer loans can help you with your goals. However, understanding different loan types is important so that you can choose the best one that fits your particular situation.

So do you need a consumer loan?

Get Approved for personal loan today.

Speak with the Right Financial Advisor

If you have questions about your finances, you can talk to a financial advisor who can review your finances and help you reach your goals (whether it is making more money, paying off debt, investing, buying a house, planning for retirement, saving, etc). Find one who meets your needs with SmartAsset’s free financial advisor matching service. You answer a few questions and they match you with up to three financial advisors in your area. So, if you want help developing a plan to reach your financial goals, get started now.

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