January 31, 2007, 11:01 am

The Consolidation Loan

by: admin    Category: Types of Financial Products

Every month, it’s the same thing. You deposit your pay stub and the next day, nothing’s left. If your monthly payments are too high and you are struggling at the end of each month, the consolidation loan might be an option. In this article, we will explore this financial tool and the idea behind it.

Definition

A consolidation loan is a regular personal loan. The main difference lies within the need. This type of loan is used to pay off other debts such as credit cards, lines of credit or other personal loans. In many cases, the individual accumulated too many debts on his revolving credit account and wants to be brought back to a define monthly payment.

The rate and term of the loan are determined by the regular personal loan’s rules. The bank might charge a higher interest rate as this type of loan is more risky for them. As the main goal is to regroup all debts under one loan and decrease the payments, most loans will be on a five years term.

Needs

As previously mentioned, the consolidation loan was created to pay off other debts. This is the main reason why financial institutions will most likely request to close all revolving credits. This financial product helps to decrease monthly payments but also forces you to respect a budget.

In fact, by cutting off your credit cards, you will decrease significantly your psychological buying power. I use the word “psychological” as many individuals consider their granted limit or their credit cards as a mean to finance goods. Some people literally use them as they were with unlimited funds. The personal can’t be increased unless you apply gain for more money. Therefore, you will be more controlled over you spending habits.

Qualifications

As long as you don’t wait until the last minute, you should be able to qualify for a consolidation loan based on your credit rating and your TDSR. Most institution will consider your TDSR after consolidation. Unfortunately, we often see people applying for this kind of loan when they already missed payments or when they have too many debts to consolidate. My advice to you is to consolidate your debts as soon as you realize that you won’t be able to pay more than the minimum payment required on your credit cards. You should also close any revolving accounts in order to re-establish a well balance budget.

Negotiation

When an individual applies for a consolidation loan, it means that he definitely needs the help from others. This immediate need for credit reduces his negotiation power to nil. Several lenders will make a “take it or leave it” offer. If you really need this loan, you will have to take it as offered.

To conclude on the consolidation loan, I must remind you that the faster you consolidate the better your chances to get rid of your debts are. The consolidation is the action of bringing together more than one debts. That will help to reduce your monthly payment and will put you on a fixed repayment schedule. Be sure to not waste the money saved by consolidating. If you do so, you will be soon in the same bad situation and you might not be able to consolidate your debts again.

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January 24, 2007, 11:01 am

The Credit Card

by: admin    Category: Types of Financial Products

There is a little piece of plastic that will follow you everywhere you go and I’m not talking about your driver’s licence. In the 21st century, the credit card has become the men’s best friend or should I say worst enemy? In fact, a credit card can be both. Some use it to gain points for free gifts, others report all their obligations on it a pay huge amount of interest.

Definition

A credit card gives you the access to a predetermined amount of money. This maximum limit can be increased and decreased by both the individual and the grantor. The amount is revolving as the holder of the card makes his payment. A minimum payment is requested every month in order to cover the interest and a very small amount of capital.

The interest rate on a credit card is a major negative point. It can go up to 30% for some retailer’s credit cards. However, you have now the option to pay a fixed amount of money per year in order to have a better rate. The term of this option defers from one institution to another.

Many other features are now offered to get credit cards more attractive to the population. Several cards offer reward programs like points or cash back. You can also purchase all kind of insurance from life insurance to extending warranty on purchased goods.

Needs

While most people use the credit card to spend money they didn’t earn yet, others use it to build a strong credit history. In addition to that, by using some of the options such as cash back rewards and by paying off your balance every month, usage of credit cars could be a very powerful tool to manage your personal finance. In fact, by paying the full amount owed on your cards, you will not pay interest. Therefore, you will benefit from many advantages without paying astronomical interest rate! This technique requires self control and a lack of maturity could end up in a complete financial disaster. Credit cards should be used for short term need and to get reward from several features.

Qualification

The credit card is the easiest product to qualify for. Credit cars companies are mostly interested in one thing; your credit bureau. With this report, they will be able to determine if you can pay back your debts. In many cases, your Beacon Score will be the determinant factor. The limit granted will vary according to your credit score and your declared income. It is very rare they would request for proof of income and assets as they can validate your employment with your Credit Bureau.

Negotiation

There is not much room for negotiation on credit cards. Grantors will increase your limit from time to time and will offer their clients to pay an additional amount every year to qualify for a better rate or to get reward programs.

As you can conclude, the result of your credit cards usage is up to you. You can crumble under high interest rate or you can use it to build your credit history and benefit from a lot of goodies. In the end, it’s only a matter of self control.

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January 18, 2007, 11:00 am

The Line of Credit

by: admin    Category: Types of Financial Products

You are planning to renovate your kitchen but you don’t know how much it will cost and you don’t need the full amount right away as you want to purchase the material over a few months. The line of credit might be the financial product for your project.

Definition

A line of credit, also known as flex line, is an amount of money that is available anytime. There is no need to get the full amount on day 1 as you can access your account with a client card, cheques and even with internet. The limit granted by financial institution represents the maximum amount you can withdraw.

The rate on a line of credit is always variable. This rate is related to the prime rate. Rates can go from prime + 0 to prime + 7% and even more depending on your profile and the financial institution.

The payment for each month will also depend on the lender’s policy. Some request a minimum payment as small as the monthly interest and others ask for 3% of the balance. Other agreements can also be made depending on the situation but most institutions go with a percentage of the balance.

One of the major characteristic of this product is that the amount of money is revolving as long as the line of credit is opened. This means that you are allowed to withdraw money from the flex line after you made a lump sum payment. Most institutions will request that the line of credit fluctuate over time as it is not meant to be maxed out all the time.

Needs

When you apply for this product, the need for money is usually known, but the amount needed is not defined. Lines of credit are good for projects like renovation, wedding, starting a company or an overseas trip. It gives flexibility to the individual as he has the opportunity to withdraw according to his needs and the minimum payment is less than on a personal loan. As the line of credit grants more possibility in your financial planning, you must remain vigilant with its usage. Paying interest only months after months will result into high interest cost at the end of the year.

Qualification

For most banks, more flexibility means more risk for them. Therefore, it is harder to qualify for this type of loan. A minimum income and a well established credit history is required on a regular basis. If your income is too low, some institution will also take their decision based on your net worth. Most institutions will consider 10% of you net worth as the maximum amount for a flex line. Some special programs for students and new companies exist as well. Lenders will always request a low TDSR as well. If you don’t qualify, you might want to resubmit with a co-applicant or try to qualify for a personal loan.

Negotiation

As the rate is established according to your credit history and the amount requested, you might be able to negotiate this point. Having a good repayment history will also help you to review the minimum monthly payment. With a high net worth, you can also ask to revise the approved amount.

To resume this product, we might say that the line of credit is one the most financial product. It is harder to qualify for because the amount granted is revolving. Therefore, it requests a better financial planning.

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January 14, 2007, 11:00 am

The Personal Loan

by: admin    Category: Types of Financial Products

Years after years, banks, insurance companies, investment companies and other financial institutions create new financial products. In the following articles, we will review many different ways of getting credit from one of those lenders. We will start this series of articles with the personal loan. We will then cover it characteristics along with the factors that could increase your chance of approval.

Definition

By definition, a personal loan is an amount of money borrowed at a prescribed rate on a predetermined lapse of time, also know as amortization. During this period of time, the borrower must make payments. Those are equally divided along the term of the loan. An individual might repay his loan on a weekly, bi-weekly or monthly basis.

The rate can be variable or fixed. The variable rate is usually lower because it fluctuates with the Prime Rate. The Prime Rate is set by the financial institution according to the Government’s overnight rate. The overnight rate is the interest rate at which major financial institutions borrow and lend one-day (or “overnight”) funds among themselves. Fixed rate guarantees the same interest rate and the same payment for the whole life of the loan. It reduces the risk for the borrower but determined the revenue for the lender. This is why fixed rates are higher; a premium must be paid to the institution to compensate potential gain for a variable rate increase. If you do not have a tight budget, I definitely suggest you take a variable rate.

On top of your regular payment, you can also apply a lump-sum payment on your loan. Most institutions won’t charge a penalty fees like it would be the case for mortgages. Therefore, you always have the option of paying partially or totally your personal loan at anytime. On the other hand, many banks will require a whole new application if you want to recalculate the payment after reducing the balance of your loan by a significant amount. They call this process a renegotiation. All those terms must be validated before signing the loan contract.

Needs

Personal loans are mostly used when an individual requires a sum of money at a specific time. The need is then known and the amount as well. An individual might need money to buy a car, a boat, furniture or to buy a land. The personal loan is a good product when the amount required will not fluctuate over time and the personal is able to make fixed payment.

Qualification

When your application gets to the credit underwriter, some factors might influence his decision. The most important point of analysis will be your Credit Bureau. As previously mentioned in other articles, the Credit Bureau is a summary of your credit behaviours. Therefore, your Beacon Score is related to your credit worthiness. If you pay your debts on time and you don’t keep your credit cards to the top, you have good chances to qualify for a personal loan.

Another point will be your Total Debt Servicing Ration (TDSR). In order to calculate this ratio, you must add up your monthly payment (all personal loans payments plus 3% to 5% of the balance of your credit cards and lines of credit) and divide it by your monthly income (without child support or other government allocations). Financial institution will consider your application if your debt ratio is below 40%.

Some lender might also look at your net worth if the amount of the loan is substantial. Lending $35,000 when your net worth is at $25,000 might be risky for the bank. In these cases they might ask for collateral or a co-applicant. We will with about those two topics in the futures.

Negotiation

There are few points for negotiation with a personal loan. The rate is usually determined by your credit rating and the amount itself. You might be able to negotiate a reduction if you have an above average credit rating or if you already have several products with the same institution. A good repayment history with the same branch could be a good point of negotiation. You can always shop around to see what other banks will give you. Most personal loans have a maximum amortization of five years. This can also be negotiated with your banker with strong arguments (high net worth, repayment capacity, credit history…).

In conclusion, please remember that your whole application will be verified (from your employment to your Credit Bureau). It is useless to not disclose relevant information as everything will be validated. The personal loan is a useful tool to provide a fixed amount of money that you can repay overt the next five years.

By definition, a personal loan is an amount of money borrowed at a prescribed rate on a predetermined lapse of time, also know as amortization

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January 7, 2007, 11:00 am

Factors that influence your Credit Score

by: admin    Category: Credit Rating & Credit Bureau

You obtained a copy of your Credit Bureau (by the way, you can get a free credit score without a credit card!), you know how to read it but you are left unsatisfied of your Beacon Score? Good news! There are some easy ways to improve it. In this section, we will look at several factors that influence your Beacon Score and how to turn them into positive points.

In the first part of your Credit Bureau, the credit reporting agencies show the percentage of the available limit used. The more you use your credit to the max, the worst your credit score will be. Financials institutions consider that you may have difficulties managing your revolving credit (credit cards and lines of credit). Therefore, they will be more reluctant to grant more money. Try to keep your balance as low as possible. This will show that you are not in a desperate need for credit and you know how to manage your personal finance. Keep in mind that the worst thing you can do is to max-out all your credit cards. You are better off increasing the limit for a small period of time. However, if you ever do such thing, you must not use the extra room you just created. The goal is to keep your balance low and not to increase your limit anytime you want. In the end, financial institution will decline your request after too many attempt to increase your present limit.

Interesting information can be found in the summary. It is the number of months of credit history. That provides the exact number of month you have been using any kind of credit that is reported to those agencies. A credit score is a reflection of the bank’s confidence in you. As you use your credit over the years, more and more institution will approve your request based on your good credit history. It is your only way to prove that you can pay back your debt over time.

Every institutions rank your credit account from R1 to R9 (see chart below). The number of late payment and the gravity of each of them will be a major factor in the establishment of your beacon score. If you miss a payment recently, your credit score will decrease drastically. On the other hand, a late payment occurred fours years ago won’t affect your Beacon Score that much. You must be aware that late payments are reflected on your credit bureau for 7 to 10 years. Therefore, it is primordial to make the minimum payment on all your loans in order to avoid bad marks from banks. You may also conclude that it is not easy to rebuild your scoring from the moment you broke financial institutions’ confidence.

Number Rating

R0 Too new to rate; approved but not used

R1 Pays within 30 days of billing, or pays as agreed

R2 Pays in more than 30 days but less than 60 or one payment past due

R3Pays in more than 60 days but less than 90 or two payments past due

R4 Pays in more than 90 days but less than 120 or three or more payments past due

R5 Account is at least 120 days past due but is not yet rated R9

R6No rating exists

R7 Paid through a consolidation order, consumer proposal or credit counselling debt management program

R8 Repossession

R9 Bad debt or placed for collection or bankruptcy

The number of opened account is also a factor that may change the bank’s perception of your file. Personally, I suggest having 3 to 4 credit cards and one line of credit. It should be more than enough to fulfill all your needs. You must remember that the more account you have, the lower your credit score will be. The reason is fair and simple. Credit accounts bring you the possibility to indebt yourself. If you have too many, you may crumble below a ton of debts. According to this fact, try to avoid applying for credit cards during promotion to win a single t-shirt!

The number of credit inquiries needs to be explained to your lender. Your credit bureau will show if you are presently shopping around for a better rate or because you are in a desperate need for credit. This is why you need to be honest to your banker and explain up front why you have so many recent inquiries if this is the case.

Another important thing is to disclose to the potential lender if you ever went bankrupt or if you did a consumer proposal. Those stay in your credit bureau for seven years and could ruin your beacon score for a longer period of time. A consumer proposal happens when an individual can’t afford to pay his present debts and offers his creditors to pay only a part of the debt by smaller payments. The creditors then take the unpaid amount as a lost. Some say it is better to go bankrupt but the only thing I can tell you is that it doesn’t make a big difference for the lender. In both situation, the individual didn’t meet his financial obligation and the grantor took a lost. Then again, the bank’s confidence in you is broken for several years.

As you can see, many factors influence your beacon score and its calculation is heavily complex. It is important to be aware of behaviours that may hurt your credit bureau and modify your way of using credit.

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