Top 10 Financially Stable Cities in America

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The global economic outlook is strong, according to recent information from Goldman Sachs. The firm predicts that global growth will reach 4 percent in the next year. The U.S. economy as we head into the new year is showing strong momentum and the unemployment rate is already below what the Federal Reserve deems as sustainable. Overall, the current economic environment is about “as good as it gets,” according to Jan Hatzius, Goldman Sachs’ chief economist.

Of course there are U.S. cities that are more financially stable than others. Here, we’ll take a look at 10 that are expected to top the list in 2018 based on growth, employment, and business opportunities. This list can help you gauge where you’ll have the best shot at getting your credit and finances in shape, and ideally, getting ahead with your personal finances.

  1. Provo, Utah

    This city was recently ranked as the best-performing city by the Miliken Institute, thanks to its robust high-tech sector and broad-based job and wage growth. The Provo/Orem region added 5,500 high-tech jobs between 2011 and 2016. San Jose, California-based Adobe has a major presence there and the region’s flagship college, Brigham Young University also accounts for a considerable amount of employment opportunities.

  1. Raleigh, North Carolina 

    Thanks to its low business costs and thriving research and development-driven industries, this city presents those looking for a new place to call home with big opportunities. Job growth over the next 10 years is predicted to be 42.66 percent. Raleigh’s competitive business climate continues to attract employers looking to relocate operations away from rising rents in major metro cities.

  1. Fort Collins, Colorado 

    This northern Colorado city is home to Colorado State University and it’s growing fast with many job opportunities in the tech sector. The average annual salary for one of the city’s major tech companies, Agilent Technologies, is $81,050. In fact, the whole of northern Colorado is growing right along with the rest of the state, with expectations of growing its population an additional 30,000 residents by 2040.

  1. Dallas, Texas 

    There are many Texas cities that could also make the list of financially stable cities, including Austin and San Antonio. But the Dallas/Plano/Irving region ranks in the top 10 thanks to its significant employment gains and overall strong economy. The region added 50,000 jobs in the high-skill professional, scientific, and technical service industries between 2011 and 2016. Dallas also has a stronghold in the housing market and is expected to lead in home sales in 2018. The median home price in the region is $339,950.

  1. San Francisco, California 

    The Golden City ranks high thanks to its steady increase in wages over the past seven years. Not surprisingly, the region’s tech growth continues to far outpace the rest of the country at 60 percent higher than the national average. Despite higher-than-average median salaries, extremely high housing prices make this city out of reach when it comes to a place to call home. In 2016, the median sales price for a single-family home was over $1 million.

  1. Bradenton/Sarasota, Florida 

    If you’re looking exclusively for string job growth, the Brandenton/Sarasota/North Port area is the place to be. It tops the chart in 12-month job growth. Last year the state of Florida’s unemployment fell to 3.7 percent, its lowest level in more than a decade. The current median salary is $40,592 and the median home price is $279,000.

  1. Nashville, Tennessee 

    Music City continues to outpace many other major metros in job and wage growth, with wages growing 36 percent from 2010 to 2015. Some 8,000 jobs were added across the professional, scientific, technical services, administration and support services industries in 2015 and 2016. Home to Vanderbilt University, Nashville also produces a large pool of employment talent and itself employs some 60,000 people. The salary average is $50,913.

  1. Charlotte, North Carolina 

    Like its eastern counterpart Raleigh, low business costs continue to attract employers to the Charlotte region. The professional, scientific, and technical services industries grew about 9 percent from 2015 to 2016, adding some 5,800 jobs. Median housing prices in the region — which was so hard hit in the housing crisis a decade ago — rebounded to $245,000 in 2016.

  1. Atlanta, Georgia 

    Known as the Empire City of the South, Atlanta grew its job economy by 45,000 people in 2016, spanning industries including dining, health, construction, and film and television. While salaries in the region aren’t exceptionally high (averaging $58,899), that is balanced by a lower median home price of $218,350 as compared to booming housing markets like those in Denver, Seattle and San Francisco.

  2. Seattle, Washington 

    While the city has always been a popular tourist destination, it has recently gained attention for a consistently strong job market over the past decade. With both Amazon and Microsoft headquartered in the city, software developers continue to flock there where they can earn an average salary of $132,000. For those looking for tech and software opportunities, Seattle presents a much more affordable option than San Francisco. The median sales price for existing single-family homes at the end of 2016 was $468,785, compared to $1,056,561 in the San Francisco Bay area.

If you’re concerned about your credit, you can check your three credit reports for free once a year. To track your credit more regularly, Credit.com’s free Credit Report Card is an easy-to-understand breakdown of your credit report information that uses letter grades—plus you get two free credit scores updated each month.

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7 Tips for Deciding How Much Car You Can Afford

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According to the most recent State of the Automotive Finance Market study from Experian, the average new car loan surged to a shocking $30,534 during the first quarter of the year. Unfortunately, those purchasing new cars didn’t lower their expenses that much. The study noted that the average used car from a franchise set consumers back $20,904, whereas the price of the average used car purchased independently climbed to $16,612.

But what’s really astounding is how long people promised to pay their loans back. New car loans—for both new and used vehicles—lasted an average of almost 69 months, the report noted. Obviously, this is a lot of cash, and there are borrowers who can’t truly afford these loans.

If you’re getting ready to purchase a car and don’t want to overspend or borrow too much, here are seven tips that can help.

#1: Review Your Budget

Whether you plan to finance your car or pay entirely in cash, you need to make sure you understand the financial implications of the purchase. Figure out how the monthly payment will affect your monthly budget or how paying in cash might affect your finances over all.

If you’ve been paying a $400 or $500 monthly car payment all along, you might already know what you can handle. But if you’re financing a car for the first time, you’ll want to sit down and write out a budget and your expenses to gauge how much you can truly afford without forsaking your other financial goals.

If you’re paying for a car in cash, make sure you’re not depleting your emergency fund—and that you’re leaving enough money behind for your regular bills and living expenses.

#2: Consider the Interest Rate

While the total cost of your new or used car is a good place to start your comparison, you should also check to see what interest rate you qualify for. Generally speaking, the interest rate you qualify for will depend on the quality of your credit score. (You can view your free credit report at Credit.com to get a sense of how your credit score may affect your rates.)

And if you think it doesn’t matter, think again. Even a few percentage points can make a huge difference. If you borrow $25,000 at 8% APR, for example, you’ll pay $506.91 per month and incur a total loan cost of $30,414.59. If you take out the same loan but qualify for 4% APR, on the other hand, you’ll pay $460.41 per month and only $27,624.78 over the life of your loan.

#3: Don’t Forget about the Length of Your Loan

While it’s important to gauge the affordability of your new car’s payment and the interest rate you qualify for, don’t forget about the length of your loan. Taking out a longer loan can help you qualify for a lower payment, but you may pay a lot more interest due to the longer stretch of time it takes you to repay.

And if you need to borrow for longer than you really want, it might be worth asking yourself if you’re spending too much.

“If you must borrow money for a car, make sure it is an amount that can be paid off in three to four years and the payment will comfortably fit within your monthly budget,” says financial planner Matt Adams of Money Methods. “If you need to finance a vehicle for anything longer than four years to simply get the payment within reach, you are likely buying more vehicle than you should.”

#4: Remember the Higher Ongoing Costs of New Vehicles

In addition to the sticker price of vehicles you’re considering, it’s smart to look into other costs you might incur, says financial adviser Ryan Cravitz of Milestone Wealth Management.

“Make sure that you don’t forget to account for the many so-called hidden costs when buying a particular car,” he says. “Factors such as the cost of insuring the vehicle, the average maintenance and repair costs, the fuel economy ratings, and whether you should buy the extended warranty are just a few things that should not be ignored.”

Also, don’t forget that a lot of these costs can be higher if you purchase a new car right off the lot. Auto insurance rates in particular tend to be heftier than you might expect when you purchase a newer, more expensive vehicle.

#5: Ask Yourself about the Trade-Offs

Taking on a new car loan is often one of the easiest ways to get into the car you want. While it’s difficult and time-consuming to save up tens of thousands of dollars in a new car fund, you can visit a dealership, finance a car, and drive off the lot in a matter of hours.

Unfortunately, you’ll likely pay a pretty penny for the privilege. While you may theoretically be able to afford the payments on your new car, something usually has to give. And that something might be an expense you miss being able to afford like you were back in the days you didn’t have a huge car payment hanging over your head.

“Remember that whatever you spend on your car, that’s money you won’t have for clothes, food, or going out with your friends,” says financial adviser Anthony Montenegro of Blackmont Financial Advisors. “So, weigh out the trade-off carefully and spend wisely.”

#6: Set a Firm Limit and Consider Your Options

While any of the tips above can help you figure out how much you can afford to spend on your new ride, some financial advisers suggest simplifying the process with a firm limit.

For example, New York financial adviser Joseph Carbone of Focus Planning Group recommends that his clients never take out a car loan that exceeds 10% of their monthly income. “Of course, everyone’s situation is different,” he says. But this situation can truly work if you let it.

Let’s say your take-home pay is $4,500 per month. Using this rule, your car payment should come in under $450 per month. That may not be enough to get you into the car you want, but it’s enough to get you into the car you need.

Financial adviser Brian Hanks also suggests considering more than one car as you make your final selection.

“After you choose a model car you think you want, pick your second favorite,” says Hanks. “Compare the monthly costs of your first and second choice cars side by side. Without a tangible second choice to compare against, it’s too easy to justify higher monthly costs for your first choice.”

#7: Spend Less Than You Can Afford

If you’re still struggling to decide how much to spend—or you’re worried about overextending yourself—take a step back. Unless you need a new car today, there’s nothing wrong with thinking through your decision for weeks or months until you know exactly where you’re at.

And if you still can’t decide, try to err on the side of spending less than you can afford, says financial planner Mitchell Bloom of Bloom Financial, LLC. Bloom says he sees a lot of people who under-budget for and overspend on cars to the point where it puts them in financial peril. Fortunately, this situation is completely avoidable if you do some legwork.

The bottom line: Keep your expenses low, save as much as you can, and have a long-term plan. And if this advice doesn’t mesh with the car you want to buy, you’re probably spending too much.

 

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Cities to Consider When Renting and Buying

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January is a natural time to take stock of your financial life, and to dream big dreams about 2018. Could this be the year you make the leap to homeownership? Or, will you make a big change and trade in your mortgage payment for a landlord?

In the complex calculus that’s required for the renting vs. buying decision, one variable stands out: Which is cheaper? If that seems like a hard question to answer, there’s a good reason: crunch the data from America’s largest cities, and you’ll learn it’s a perfectly split decision. According to an Urban Institute analysis, among 33 top metropolitan areas in the U.S., there are 17 places where buying is cheaper, and 16 where renting is cheaper. We’ll get to that list in a moment, but here’s a hint: renters in high-flying West coast cities might want to sit tight for a bit longer.

Renting vs Buying

Fewer life decisions carry more weight than the renting vs. buying dilemma. And that choice is getting harder. A generation ago, buying a home was seen as a rite of passage, a natural (and necessary) step towards adulthood. It was also a solid path to wealth. A $25,000 home purchased in 1970 was worth almost $100,000 by 1990, and about $200,000 today, using national average appreciation. Plenty of baby boomers who bought average-priced homes as young adults find themselves living in a nice nest egg now.

All that changed when the housing bubble burst. Millions lost their homes to foreclosure. Millions more found themselves “under water,” meaning their homes worth less than their mortgage balance. At the height of the housing recession, 23 percent of mortgage holders — nearly 1 in 4 — were under water. They’d lost money on their investment. The myth that housing prices can only go up has been busted. Many of those bubble-era buyers wished they were renting.

While the housing market has slowly recovered, blind faith in housing gains has not. Homeownership rates hit a 50-year low in 2015, and first-time home buyers are now waiting a record 6 years to move from renting to buying. In fact, young adults looking to upgrade out of their 1-bedroom apartments are increasingly renting single-family homes rather than buying. Single-family rentals – either detached homes or townhomes – make up the fastest-growing segment of the housing market, according to the Urban Institute.

But renting is no picnic either. With all these new renters, markets are reacting accordingly, and costs are now skyrocketing at about four times the rate of inflation. In some places, rents are up much higher. Seattle saw an average of 6.3 percent rent increases last year.

Such volatility in housing and rental prices isn’t the only reason the renting vs. buying equation bas become more complicated. Thanks to structural changes in employment — led by the various form of the gig economy and the contingent workforce — flexibility is key for workers. Gone are the days where a worker could buy a house with a 30-year mortgage and count on a consistent commute for the next three decades. People change jobs much more frequently now. Millennials experience four job changes by age 32, according to a LinkedIn study; they’ll move 6 times by age 30, according to 538.com

While it’s possible to sell a condo or house and move, it’s much easier for a renter to relocate for that great opportunity on the other coast.

Income Driven Decisions 

For most people, however, it comes down to money. You might think renting is always cheaper than buying, but that’s incorrect. A long list of variables must be considered when running the numbers, like these: How long will you stay in the place? How much are property taxes? How much investment opportunity cost will you pay when putting a large down payment into a home? How much will you spend on house repairs or condo fees? How much might your landlord raise the rent?

The Urban Institute provides an interesting answer to these questions by comparing the percent of monthly income a buyer or renter would have to spend to own or rent an average home in cities around the country. To ease the comparison, the constants are pretty simple. The report assumes median income, then calculates how of that monthly paycheck would be eaten up by owning – including mortgage payments, interest, taxes, and insurance payments on a median-priced home – or by renting a median-priced 3-bedroom home.

Ordinarily, these costs have to move relatively in sync. When rents get too high, consumers are pushed into buying. The opposite is true, too — when homes/monthly mortgage payments are too high, people are nudged to rent. So these costs tend to move together, or at least like two balloons tied together by a string, floating up into the sky: One pulls ahead for a short while, then the other, and so on. After all, people have to live somewhere.

Cities Good for Renting

But in some cities, these rules don’t seem to apply at the moment, and either renting or buying has sprinted ahead. In those places, you might say the market is broken. The Urban Institute calls this the “rent gap.” In eight large cities in the US — all on the West Coast — the rent gap is higher than 4 percent, meaning it’s considerably cheaper to rent than buy. But on the other hand, there are six major cities spread throughout the East and the Midwest where buying is cheaper, using this monthly costs test. In between are 19 cities where rental and buying costs are basically running neck-and-neck.

The rent gap is most pronounced in places where housing prices have soared. San Francisco is the clear “winner” in the places where renting is cheaper than buying; there, the gap is more than 42 percent. San Jose comes in second at 19%. Seattle, San Diego, Sacramento, Los Angeles, and Portland round out the list of places where the gap is higher than 5 percent.

Cities Good for Home Buying

On the other side of the list — places where buying is cheaper than renting — begins with the winner, Miami.

It would be a stretch to call Miami a bargain, however. A median-priced home still consumes 32 percent of a median earner’s income, above the recommended 30 percent. Still, renting devours even more.

“Because Miami is the second-most-expensive city for rental housing, however, the median rent consumes 42 percent of the median income. So even at this high cost, homeownership is still the better bet,” the report says.

Detroit, Chicago, Philadelphia, Tampa, and Pittsburgh round out the list of places where the rent gap is 5% or more towards buying.

There are buying “bargains” in other cities, too. Cleveland, Cincinnati, Orlando, Houston, and San Antonio all enjoy rent gaps that are more than two percent.

What to Consider

This list comes loaded with caveats, however. The biggest one: Purchasing a home brings the potential of appreciation, and renting does not. That means buyers can “profit” over time and see the value of their investment rise. The longer the time living in the purchased home, the higher the odds that significant appreciation will occur. But don’t forget, transaction costs are significant. Not all those gains are “profit.” Closing costs when buying, and then later when selling, can easily eat up 10% of those gains. Then, there’s always the chance the value of the home will go down, re-creating the situation from the early part of this decade, when buyers lose money. And of course, there’s the variable every homeowner loves to hate, surprise repair costs. Renters generally don’t face that risk.

In the end, the renting vs. buying choice is intensely personal, and always depends on your family’s very specific situation. It’s unwise to ignore macro trends, however. Even if you live in a city where housing costs seem high, it’s worth considering a purchase if rental costs are soaring, too. On the other hand, don’t simply assuming that buying is better. That’s 20th Century logic which no longer applies to the U.S. housing market.

 

If you’re wondering if your credit it good enough to buy or rent, you can check your three credit reports for free once a year. To track your credit more regularly, Credit.com’s free Credit Report Card is an easy-to-understand breakdown of your credit report information that uses letter grades—plus you get two free credit scores updated each month.

You can also carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.

 

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10 Ways to Manage Your Student Loans

Manage Student Loans

Student loans are a hot topic these days, with everyone wondering the same thing: How are current college students or recent college graduates going to repay theses debts?

While millions of Americans have been navigating these waters for years, new graduates may be nervous about the total bill for their degree. Education is still a wise investment to make, and paying these loans back is very doable.

Here are a few tips to help you manage your student loans and keep them from overwhelming you:

Choose a career field that will pay you back

For those who aren’t 100 percent sure what line of work they want to go into, a career in public service can be rewarding, in more ways than one. No only will you get the benefit of the opportunity to improve your community, but working for a local, state, or federal government agency makes you eligible to apply for the Public Service Loan Forgiveness Program. If you qualify, some of your student loan debt may be forgiven. Additionally, since the public sector is about to experience a mass exodus in the form of baby boomer retirement, there’s predicted to be millions of vacant jobs in the coming years for millennials to fill.

Add a little to your monthly payment

If and when you can afford it, add $10-20 to each monthly payment you make. This amount will be applied directly to your principal amount, as opposed to paying off some of your interest. This also creates a small avalanche effect of its own, since reducing the principal amount also reduces the interest accrued.

Get a part-time job

It’s not ideal, but if you’re already employed full-time, and your loans are still overwhelming, there might be some part-time jobs out there that can help ease that burden. The side-hustle economy is booming, and there are hundreds of jobs out there that can be done on your own time and at your own speed.

Expand your job search

If you’re not finding full-time work in your area that pays enough to help you manage your student loans, consider expanding your job search… across the ocean. A lot of other countries, such as Japan, Korea, and China, are looking for native English speakers to educate students. These jobs pay well and often offer paid room and board, so you can send as much money home to your student loans as you want.

Cut out wasteful spending

Instead of buying a morning cup of coffee every day on your way to work, make your coffee at home instead. At the end of each month, calculate the money you didn’t spend on daily coffees (or other similar luxuries) and consider adding that amount to your student loan payment that month.

Consolidate your loans

Professional loan consolidation or credit repair may be a good option for those who have multiple loans from various lenders, and may be paying several different interest rates. Loan consolidation can be done in a variety of ways, but if you’re not sure where to begin, a specialist can help you.

Find employers that offer tuition assistance

Many different industries that didn’t exist twenty years ago have taken root in America, and they’re looking for the best talent, which makes them competitive with their benefits packages. Many employers will now offer tuition assistance or reimbursement. Try asking a new or prospective employer if they would consider putting this in your benefits package. The worst they can do is say no!

Apply the ‘avalanche’ method

If you have multiple loans, make the largest payment to the one with the highest interest rate each month, paying it down in a shorter amount of time. When this is paid off, move to the next highest interest rate, then the next, and so on. While already a popular method of paying off large sums of credit card debt, this can also help those who have multiple loans at varying interest rates.

Refinance through a different lender

If all you want is to simply lower the monthly amount of your student loan payment, try refinancing through a different lender. New loans generally get lower interest rates, so take advantage of this.

Bump your payments incrementally

During the first year of student loan repayment, you may not be able to pay more than the bare minimum due, and that’s ok. But if you get a raise, and you can afford it, use the raise to bump up your payment a small amount. Do this every year and before you know it, you’ll cut months or even years of repayment off your loan.

 

If you’re concerned about your credit, you can check your three credit reports for free once a year. To track your credit more regularly, Credit.com’s free Credit Report Card is an easy-to-understand breakdown of your credit report information that uses letter grades—plus you get two free credit scores updated each month.

You can also carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.

 

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Risks to Consider Before Co-signing Your Kid’s Mortgage

Homeownership is a cornerstone of the American Dream for most, but many millennials are finding it difficult to afford to buy in.

Overall, millennials are still far behind in homeownership compared to previous generations were at their age. Only 39.1% of millennials lived in a home they owned in 2016 compared with 63.2% of Gen Xers, according to an analysis by Trulia Economist Felipe Chacón.

Student debt and stagnant incomes could share some of the blame. Millennials earn 78.2 cents for every dollar a Gen Xer earned at their age, Chacón found. Nearly half of millennial homebuyers report carrying student loan debt, according to the 2016 National Association of Realtors Home Buyer and Seller Generational Trends survey. They carry a median loan balance of $25,000.

Loan officers have to take a borrower’s total debt picture into account when running their application, and it’s become increasingly hard to qualify for a mortgage with a vast amount of student debt.

When they can’t get approved for a mortgage, it’s common for homebuyers to seek out a co-signer for their loan. Often, that person is a parent.

Co-signing a child’s mortgage loan is a serious decision, and parents should weigh all of the risks before making any promises. We asked financial experts what risks are worth worrying about to help clear out the noise.

  1. You’re on the hook if your kid stops making mortgage payments

When you co-sign a loan, you agree to be responsible for payments if the primary borrower defaults. If you’re expecting to retire during the life of the mortgage loan, co-signing is an even larger risk, as you may be living on fixed income.

Dublin, Ohio-based certified financial planner Mark Beaver says he’d be wary of a parent co-signing a mortgage for their adult child. “If they need a co-signer, it likely means they cannot afford the house, otherwise the bank wouldn’t require the co-signer,” says Beaver.

By co-signing, you effectively take on a risk the bank doesn’t want. And the list of potential scenarios in which your child may no longer be able to afford their house payments can be vast.

“What if your daughter marries a jerk and they get divorced, or he/she starts a business and loses money, or doesn’t pay their taxes. The risk is ‘what can happen that can make this blow up,’” says Troy, Mich.- based lawyer and Certified Financial Planner, Leon LaBrecque.

Bottom line: If you wouldn’t be able to comfortably afford the payments in case that happens, don’t co-sign.

  1. You’re putting your credit at risk

A default isn’t the only event that could negatively affect your finances. The mortgage will show up on your credit report, too, even if you haven’t taken over payments. So, if your child so much as misses one payment, your credit score could take a hit.

This may not be the end of the world for an older parent who doesn’t anticipate needing any new lines of credit in the future, Beaver says, but it’s still wise to be cautious.

You might think your child is ready to become a homeowner, but a closer look at their finances may reveal they aren’t yet that financially mature. Don’t be afraid to ask about their income and spending habits. You should have a good idea of how your child handles their own finances before you agree to help them.

“Sure, we don’t want to meddle and pry into our children’s business; however, you are putting yourself financially on the line. They need to understand that and be open about their own habits,” says Andover, Mass.-based Certified Financial Planner John Barnes.

  1. Your relationship with your child could change

Co-signing you child’s mortgage is bound to change the dynamics of your relationship. Your financial futures will be entangled for 15 to 30 years, depending on how long it takes them to pay off the loan.

Seal Beach, Calif.-based certified financial planner Howard Erman says not to let your feelings get in the way of making the correct decision for your budget. Think of how often you communicate and the depth and strength of your relationship with your child. If saying no might create serious tension in your relationship, you likely dodged a bullet.

“If your child conditions their love on getting money, then the parent has a much bigger problem,” says Erman.

Similarly, you should consider how your relationship would be affected if somehow your child ends up defaulting on the mortgage, leaving you to make payments to the bank.

  1. You might need to let go of future borrowing plans

Co-signing adds the mortgage to the debts on your credit report, making it tougher for you to qualify for additional credit. If you dreamed of one day owning a vacation home, just know that a lender will have to consider your child’s mortgage as part of your overall debt-to-income ratio as well.

Although co-signing a large loan such as a mortgage generally puts a temporary crimp in your ability to borrow, keep in mind you may be affected differently based on the dollar amount of the mortgage loan and your own credit history and financial situation.

How to Say “No” to Co-signing Your Child’s Mortgage

There is a chance you’ll need to deny your child’s request to co-sign the loan. If you feel pressured to say yes, but really want to say no, Barnes suggests you say no and place the blame on a financial adviser.

“Having [someone like] me say no is like a doctor telling a patient he or she can’t run the marathon until that ankle is healed. It is the same principle,” says Barnes.

He advises parents facing the decision to co-sign a loan for a family member to meet with a financial planner to analyze the situation and give a recommendation for action.

If you choose to take the blame yourself, you may want to take the time to explain your reasoning to your child if you feel it’s warranted. If you said no based on something they can change, give them a plan to follow to get a “yes” from you instead.

LaBrecque suggests that parents who want to help out but don’t want to take on the risks of co-signing instead give the child a down payment and treat it as an advance in the estate plan. So if you “gift” your kid $30,000 to make the down payment, you would reduce their inheritance by $30,000.

The “gift the down payment” method grants you some additional benefits too.

“[The] method has a more positive parent/child relationship than the potential awkwardness of Thanksgiving with the kid(s) and late payments on the mortgage. Also, the ‘down payment gift’ is a quick victory. The kid’s now made their bed with the mortgage; let them sleep in it,” says LaBrecque.

Similarly, you could choose to help your child pay down their debts, so they’ll be in a better position to get approved on their own.

If you must say no, try to do so in a way that will motivate them toward the goal rather than deflate them. Erman recommends lovingly explaining to your child how important it is for them to be able to achieve this success on their own.

How to Protect Yourself as Co-signer

The best way to protect yourself against the risks of co-signing is to have a backup plan.

“If a child is responsible with money, then I generally do not see a problem with co-signing a loan, provided insurance is in place to protect the co-signer (the parent),” says Barnes.

He adds parents should make sure the child, the primary borrower, has life insurance and disability insurance in case the widowed son or daughter-in-law still needs to live in the home, or your child becomes disabled and is unable to work.

The insurance payments will also help to protect your own credit history and future borrowing power in case your child dies or becomes disabled. But these protections would be useless in the event your child loses their job.

If that happens, “insurance will not pay your bill unfortunately, so even if you are well insured, budgeting is vitally important,” Beaver says.

If you choose to take on the risk and co-sign, Barnes says to make sure you and your child have a plan in place that details payment, when to sell, and what would happen if your child is unable to make payments for any reason.

Additionally, LaBrecque recommends you get your name on the deed. Don’t forget to address present or future spouses. Ask your lawyer about having both kids sign back a quit-claim deed to the parent. If you get one, he says, you’ll be protected in case the marriage goes south, or payments are made late, because you would be able to remove a potential ex off the note.

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How To Talk To Your Kids About Student Loans

Student loans are much more of a reality for kids today than they were for their parents and other previous generations of college students. The cost of education has risen so quickly that in 2014 almost seven out of 10 students graduating college had loan debt—nearly $29,000 each, on average.

This means discussing student loans needs to be a key part of family discussions on college. The earlier these talks happen, the better. I know this first-hand, as my eldest daughter is a college freshman this year.

Affordability is key

The conversation about how student loans work can include talks about what your family can afford in terms of college. At one end, a family may decide that they will find a way to pay for the best colleges to which their college-bound student is admitted—no holds barred. Even if both parents have to get second jobs, they will pay for their child to attend the most prestigious college to which he or she is accepted.

In our family, the chat was quite different: We told our daughter what we could afford and invited her to apply to colleges that were reasonably within our budget range. There was no sense in having her look for her “College Charming” and then tell her we couldn’t afford it.

We also talked early—during her sophomore and junior years in high school— about student loans and the importance of limiting them as much as possible. Why? Heavy student loan debt can be a tremendous burden on new college graduates. It can limit their choices of jobs because they often must earn enough to pay off their debt, especially if they can’t count on financial help from parents or other family members. In the long run, significant student loan debt, like any other debt, might also delay or limit the borrower’s ability to buy a home, start a business, or even begin a family.

How much is too much?

Syndicated author and radio talk show host Clark Howard suggests students not take out more in student loans (in total over four years of college) than the entry-level salary they can expect to earn their first year after college. If the student expects to earn $30,000 in their first job, that number should be the ideal student loan limit in total. (College students can estimate entry-level wages in their field with online tools such as salary.com.) Of course, seeking advice from financial aid consultants might be helpful (if pricey), and many colleges offer financial aid resources.

Learning about loans

The U.S. Department of Education requires students to enroll in online counseling when they first take out federal student loans. Sitting through it with your student may provide opportunities to help explain the concepts covered, such as accruing interest and repayment rules.

The repayment calculator was a huge eye-opener for my daughter, as she was able to see what her student loans could cost her in actual monthly payments. Making the loans real is a great way to discourage overborrowing.

More things for students to consider

Emphasizing a few key factors may be helpful to your student in understanding the essentials of college loans. For instance:

  • Personal expenses. Loans aren’t intended to cover personal expenses. Your child could cover pocket money by working during college, even if that’s just five to 10 hours per week.
  • Quitting college. If your student leaves school or drops down to less than part-time status, there is only a six-month grace period before your son or daughter must begin paying back federal student loans.
  • Credit score. Paying loans on time and as agreed to helps your student keep his or her credit score healthy, which is important when attempting to rent an apartment, get a car loan and much more. Credit reports are available for free one time each year at annualcreditreport.com.
  • Declaring bankruptcy. It’s very tough to walk away from unpaid student loans. Even if other debts are discharged during a bankruptcy, you will usually remain responsible for any federal student loans. Again, this underscores the importance of not overborrowing.
  • Charging college expenses. Using credit cards is not a good choice for paying for college. A close relative of mine charged his entire senior year of college on credit cards. As you might imagine, the interest rates make paying back the loan amount incredibly challenging.
  • Private student loans. These loans should be considered carefully, and perhaps only as a last resort. According to Howard, private student loan interest rates may be much higher than federal loans, and a student often has little flexibility on repayment plans. Like other school loans, private loans are not usually discharged during a bankruptcy. Students short on money might be better off attending a less expensive community college for their first two years to satisfy many general education requirements. Others might consider working more hours and attending school part-time if necessary. Borrowing from family members such as grandparents might be another option.

 

Post-college plans and opportunities

We emphasized to our daughter that paying off student loans should be her first priority after college. Our family places a high importance on living free of debt, and she’s getting the message that student loans are no exception to this rule. We are encouraging her to plan on “living like a student” for several years after she graduates so that she can put every dollar possible toward paying off her student loans.

Depending on your graduate’s line of work, he or she may also want to look into student loan forgiveness programs. Many teaching and public service jobs offer this as a benefit to encourage college graduates to work in underserved communities.

As Mary Hunt, author of the book Raising Financially Confident Kids, wrote: “It’s not as if student loans and big credit card balances are mandatory graduation requirements. … It is possible to graduate debt-free, but it does take a lot of work. And you’ll have to buck a financial system that encourages students to take the easy way out by diving into a lifetime of debt.”

 

3 Situations in Which a 401k Loan Can Be a Good Idea

Man Paying Bills With Laptop

If you hear the words “401(k) loan” and immediately think to yourself “ooh, that sounds like a bad idea”, good for you! You’re on the right track.

In most cases borrowing from your savings isn’t a smart move, particularly when it’s from an investment account like your 401(k) that’s meant to sit untouched for decades so that it can grow and eventually allow you to retire.

But a 401(k) loan is unique. We covered the ins and outs of how it works in a previous post, but here are the basics:

  • The loan comes directly out of your 401(k) investments.
  • Repayment is made through automatic payroll deductions.
  • Both the principal and interest are paid back into your 401(k), so you truly are borrowing money from yourself.
  • The loan is typically easy and quick to get.

The fact that you pay the interest back to yourself is especially unique and makes 401(k) loans attractive in certain situations.

So while you should proceed with extreme caution when considering a 401(k) loan, and while in most cases there are better options available to you, here are three situations in which a 401(k) loan can be a good idea.

1. Increase Your Investment Return

There are certain situations where you can use a 401(k) loan to increase your overall investment return. Here’s a hypothetical example showing how it can work.

Let’s say that the following things are true:

Given that scenario, here are the steps you could take to increase your expected investment return while only adding a small amount of risk:

  1. Take out a 401(k) loan, borrowing money from the bond portion of your account.
  2. Put the loan proceeds into a taxable investment account and invest it in the exact same bond fund (or something similar).
  3. You will earn the exact same return on the bond fund as you would have in the 401(k), less the cost of taxes you have to pay on any gains.
  4. As you pay back your 401(k) loan, the 4.5% interest is essentially a 4.5% return since it’s going right back into your 401(k).

In other words, you’re getting essentially the same return on your bond fund in the taxable account, minus the tax cost. But you get a higher return in your 401(k) because the interest rate is higher than the expected return on the bond fund.

And since your bond investment is unlikely to fluctuate too much (though it can certainly fluctuate some), in a worst-case scenario where you lose your job and have to pay the loan back in full within 60 days, you will likely to have the money available to do so.

Here are a few things to keep in mind as you consider this approach:

  • The more expensive your 401(k) is, the more likely this is to work out in your favor. That’s because you can choose a lower cost bond fund in your taxable account and save yourself some fees over the life of the loan.
  • The higher your tax bracket, the less advantageous this is since the tax cost in the taxable investment account will be higher.
  • Make sure you’re not sacrificing your ability to contribute to your 401(k), and definitely make sure you’re not missing out on any employer match.

2. Paying off High-Interest Debt

If you have high-interest debt, taking a 401(k) loan to pay it off could be a good idea.

Before you do so, make sure you’ve exhausted all other options. Do you have savings you could use to pay it off? Are there any expenses you could cut back on so you could put that money towards your debt? Are there any creative ways you could make a little extra money on the side?

Any of those options are better than a 401(k) loan simply because they don’t require you to borrow against your retirement and they don’t come with the risks that a 401(k) loan presents.

But if you’ve exhausted those other options, paying off high-interest debt with a 401(k) loan has two big benefits:

  1. Your 401(k) loan interest rate is likely lower than the rate on your other debt.
  2. You pay the 401(k) loan interest to yourself, not someone else.

The big risk you run with this strategy is the possibility of losing your job and having to pay the entire 401(k) loan balance back within 60 days. If that happens and you’re not able to pay it back, the remaining balance will be taxed and subject to a 10% penalty. That outcome is likely much more costly than your high-interest debt.

3. Financial Emergency

If you’re in a situation where you absolutely need money for something and you don’t have the savings to handle it, a 401(k) loan may be your best option.

Here’s why:

  • It’s quick. You can often get the loan with just a few clicks online.
  • There’s no credit check. You’ll be able to get it even if you don’t have a great credit history.
  • It likely has a relatively low interest rate and you pay the interest back to yourself.

In an ideal world this is exactly what your emergency fund would be there for. But of course life happens and a 401(k) loan can be a good backup plan.

Be Careful

A 401(k) loan should almost never be your first choice. Other than situation #1 above, which should only be done very carefully, in most cases there’s another route that would be better.

But in the right situations a 401(k) loan can be helpful and may even lead to better returns. As long as you proceed with caution, it can be a valuable tool in your financial arsenal.

The post 3 Situations in Which a 401k Loan Can Be a Good Idea appeared first on MagnifyMoney.

What is a 401(k) Loan and How Does it Work?

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If you’re in need of money and your savings account balance is low, you may be tempted to use the handy little loan provision that most 401(k) plans offer. That’s right! You can probably borrow money from your 401(k). Right from your own account! It’s a nifty feature, but is it a good idea?

Today we’re going to start examining that question by diving into what exactly a 401(k) loan is and how it works. The next post in this series will look at a few situations in which borrowing from your 401(k) can work in your favor.

Let’s get into it!

Quick note: Every 401(k) plan has different terms and conditions and some plans don’t allow for loans at all. Consult your Summary Plan Description for specific details about how your plan handles loans.

What Is a 401(k) Loan?

When you borrow from your 401(k) you are actually borrowing money directly from yourself.

The loan is taken directly out of your 401(k) account balance. Then a repayment plan is created based on the amount you borrowed and the interest rate and those payments are made back into your 401(k) account, typically through an automatic payroll deduction.

In other words, you are borrowing from yourself and paying yourself back. Both the principal and the interest on the loan eventually make their way back into your 401(k).

How Much Can You Borrow?

Figuring out how much you can borrow from your 401(k) can be a little tricky, but here’s a quick summary.

If you haven’t had any outstanding 401(k) loan balance within the past 12 months, you are allowed to borrow the lesser of:

  • $50,000, or
  • 50% of your vested 401(k) balance. If that amount is less than $10,000 then you can borrow up to $10,000, but never more than your total account balance.

Sounds simple, right? But wait, there’s more…

If you have had an outstanding 401(k) balance within the past 12 months, the amount you’re allowed to borrow is reduced by the largest balance you had over that period.

Let’s look at a few examples:

  • Example #1: Joe has $25,000 in his 401(k) and has not had a 401(k) loan balance within the past 12 months. He is allowed to borrow up to $12,500.
  • Example #2: Theresa has $15,000 in her 401(k) and has not had a 401(k) loan balance within the past 12 months. She is allowed to borrow up to $10,000.
  • Example #3: Becca has $150,000 in her 401(k) and has not had a 401(k) loan balance within the past 12 months. She is allowed to borrow up to $50,000.
  • Example #4: Steve has $25,000 in his 401(k) and did have a 401(k) loan balance of $5,000 within the past 12 months. He is allowed to borrow up to $7,500.

What Is the Interest Rate?

Each 401(k) plan is allowed to set their own loan interest rate. You should consult your Summary Plan Description or ask your HR rep for details about your specific plan.

However, the most common interest rate is the prime rate plus 1%.

What Can the Money Be Used For?

In many cases there are no restrictions on how you use the money. It can be put to work however you want.

But some plans will only lend money for certain needs, such as education expenses, medical expenses, or a first-time home purchase.

How Long Do You Have to Pay the Loan Back?

Typically, your 401(k) loan must be paid back within 5 years. If the loan is used to help buy a house, the term may be extended up to 10-15 years.

The catch is that if your employment ends for any reason, the entire remaining loan balance is typically due within 60 days. If you aren’t able to pay it back within that time period, the loan defaults.

What Happens If You Default on the Loan?

A 401(k) loan defaults any time you aren’t able to comply with the terms of the loan. That could be failing to make your regular payments or failing to repay the remaining loan balance within 60 days of leaving the company.

When that happens, the remaining loan balance is counted as a distribution from your 401(k). That has two big consequences:

  1. Unless you’re already age 59.5 or meet other special criteria, that money will be taxed and hit with a 10% penalty.
  2. The defaulted amount is not eligible to be rolled over into an IRA or other employer retirement plan. So there’s no way to avoid the taxes and penalty.

The good news is that the default is not reported to the credit bureaus and therefore has no impact on your credit score. Though if you’re applying for a mortgage or other loan, the lenders may ask about any 401(k) loan defaults and factor that into their decision.

How Do You Apply for a 401(k) Loan?

And as long as you have a vested 401(k) balance, the process loan application process is typically pretty simple.

Other than adhering to any specific restrictions your plan may enforce (see above), it’s usually as easy as requesting the loan. That can often be done online or at worst with a little paperwork through your human resources department.

There is no credit check for 401(k) loans, which can make them easier to get than other types of loans. And loans must be available to all employees, so you should be able to get approved no matter what your position is in the company.

Other Considerations

Here are a few other things to consider as you weigh the pros and cons of taking out a 401(k) loan:

  • Other than the possibility of default, the biggest potential cost is the missed investment returns while the money is out of your 401(k). Depending on the size of the loan and the market returns during the life of the loan, that could be significant.
  • Your spouse often has to sign off on the loan.
  • You can have more than one 401(k) loan out at a time, but the total loan balance can’t exceed the limits described above.
  • There may be a fee involved with taking out the loan.
  • Your loan payments do not count as 401(k) contributions, and your employer may or may not allow you to keep contributing to your 401(k) while your loan is outstanding.
  • Because the loan is not reported to credit agencies, a 401(k) loan is not a way to build your credit history or increase your credit score.
  • You typically cannot take a loan from a 401(k) you still have with an old employer.

Is a 401(k) Loan a Good Idea?

Those are the nuts and bolts of 401(k) loans, so is taking out a 401(k) loan a good idea? The answer is a definite maybe. There are times where it can be the best option, times where it’s a bad idea, and times where it can actually increase your overall investment return. Regardless, you should be sure to do a deep analysis and determine if you will definitely be able to pay the loan back in a timely manner before utilizing the 401(k) loan.

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Help! My Kid Messed Up My Credit

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Whether you handed over your credit card too many times, co-signed a loan or made your child an authorized user on that travel rewards card, there is a chance that your credit took a hit. Your hope was that they’d be responsible, but giving them access to your line of credit can all too often become a free-for-all with serious consequences. If that describes your situation, here’s what you can do.

Co-Signers Must Pay — & Rebuild Their Credit

“If your child fails to repay according to terms, the co-signer will suffer the same consequences as the primary borrower when it comes to their credit rating,” Bruce McClary, vice president of Communications for the National Foundation for Credit Counseling, explained via email. Worse still, “if their child skips town, the lender can pursue the parents for repayment.”

A proactive step may involve refinancing the loan exclusively in the name of your child before the account falls into delinquency. If it’s a student loan in question, you can also refer your child for student loan counseling with a nonprofit agency, McClary said.

If the worst has already happened, however, there’s really not much you can do. (You could take your child to court, McClary said, but you would still be on the hook until the matter is resolved in your favor.) Take a long, hard look at your finances to determine the best way to repay the loan. Then in the meantime, focus on rebuilding your credit, one step at a time. To start, you’ll need to obtain a copy of your credit report — you can view your scores, updated monthly, for free on Credit.com — and check them for accuracy. (You go here to learn how to dispute any errors you might find.) You can also fix your credit in the long-term by keeping debt levels low, making all future loan payments on time and limiting new credit applications while your score rebounds.)

Credit Card Holders May File Charges

As with any balance charged to a credit card, the lender will identify the person responsible for repayment as the one named on the account, McClary said. The same rule applies for authorized users — the cardholder is responsible for charges on the card.

If your child went on a shopping spree without your permission, you may consider seeking legal advice regarding options for filing charges. You can also file a dispute of charges with the issuer and submit a police report to establish the claim of fraudulent activity. Finally, a parent can add a statement explaining the situation to their own credit report.

Remember, when giving your child access to your credit, you’re not just giving them permission to make purchases in your name, you’re putting your own credit on the line. Make sure you’ve gone over the value of having good credit — and how bad credit can hurt you both.

[CREDIT REPAIR HELP: If you need help fixing your credit but don’t want to go it alone, our partner, Lexington Law, can manage the credit repair process for you. Learn more about them here or call them at (844)346-3295 for a free consultation.]

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Making That Last Loan Payment: What You Need to Know

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Paying off a loan is one of the best financial feelings there is, and nothing kills that vibe more than finding out you made a mistake in the process. When you should be celebrating, you’re left frustrated and wondering why and how you messed up.

These mistakes could also end up damaging your credit score or leading to other financial consequences if you aren’t careful in planning your loan payoff.

For example, if you think you paid off the loan but a balance remained after what you thought was your final payment, you could incur late fees or a late payment entry on your credit report. Payment history has the most impact on your credit scores, so missing bill due dates can cause serious damage. Sometimes, people don’t realize they messed up their loan payoff until they notice a drop in their credit scores or receive a notice from a debt collector.

You don’t want to learn these things the hard way, so we asked loan experts to tell us about the most common loan payoff mistakes borrowers make. Here’s what they say you need to know.

Ask For the Payoff Amount

An outstanding loan balance will continue to accrue interest until it’s paid in full. If you check your current balance and schedule a payment to cover the whole thing, that balance could grow slightly between the time you entered the payment information and when the payment processes. This is the most common thing people overlook, according to experts in the student loan, auto loan and mortgage industries.

“I think some people may not understand that the payoff amount is different from the amount on their last statement,” said Nikki Lavoie, a spokeswoman for Navient, a major student loan servicer. “Borrowers should really ask their servicer for the payoff quote because it really might be more than you think.”

That scenario most frequently pops up when you’re trying to pay off a loan ahead of schedule (which can help you save a lot of money), but the same issue can arise even if you’re taking the loan to term.

“If a borrower has incurred any additional charges, including late fees, non-sufficient check fees, or other charges that were not included in the original loan amount, those charges may still be owed even after the final installment payment is made,” Rich Hyde, chief operating officer of auto lender Prestige Financial, wrote in an email. “Additionally, if any of the monthly payments have been made a few days late, there could be remaining interest charges.”

Overlooking that extra balance is where things can get really messy. Heather McRae, a senior loan officer at mortgage lender Chicago Financial Services, said people tend to learn the hard way how important it is to confirm your payoff amount.

“What I mean by ‘they found out the hard way’ is they stopped making payments because they thought they paid off the loan and then they begin to receive late notices from the creditor,” McRae wrote in an email. “I have seen this happen and its negative impact on credit.”

Depending on your creditor, you might be able to find out the payoff amount by checking your account online, or you could call and ask for it. Make sure you ask what date that amount is good through and how long it will take for the payment to process once it’s received. Paying through the mail will likely be the slowest option (leaving the most room for error), but even paying online requires careful attention. For example, your payment might post the same day if it’s made before 4 p.m. eastern time, but if you’re making a payment at 5 p.m. Pacific time on a Friday, your payment may not go through till Monday. Yes, it’s a little complicated, so that’s why you want to take the time to ask questions about a payoff quote.

Making the appropriate final payment is the main mistake Lavoie, Hyde and McRae see borrowers make when paying off a loan, but there are a few other things to know.

Keep Good Records

It’s not a bad idea to hold onto proof that you paid off a loan, just in case someone tries to collect on it later. To do that, you’ll need to ask for a notice stating the loan is paid in full, which you may receive automatically, but you may not. Ask your lender when you can expect to receive that notice, and follow up if that date passes and you haven’t gotten anything.

Stop Your Automatic Payment

If you’ve scheduled an automatic transfer from your bank account to your creditor, make sure that payment stops after you’ve made your final payment. Again, this often happens automatically, but you may have to manually stop it.

Watch Your Credit

Following a loan payoff, you’ll want to make sure it’s reported to the major credit reporting agencies. You should regularly review your credit anyway — you can get your free credit reports once a year at AnnualCreditReport.com — but it’s especially important after a major change like a loan payoff.

You may see your credit score change after that loan payoff, as well, so don’t be surprised when you check your credit scores and see some different numbers. How much your score changes will vary by situation and other credit history, but you can get an idea of why your scores changed by reviewing your free monthly credit report summary on Credit.com

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