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A lot of financial counselors are now suggesting to their clients that they should borrow money on their home with the use of a home equity loan to invest into the stock market. These people of course are earning a nice big commission from selling the home equity loan and are probably pushing the idea for that reason alone. If you’re being offered a home equity loan at 7% to invest in the market, it probably won’t make sense to borrow that money to invest, but are there ever any situations when one should borrow to invest?

Unfortunately, there’s not a clear and easy answer here. It all depends on your risk tolerance. There’s the risk of investing the money in the stock market, and the risk of incurring additional debt. Some people who are more risk adverse such as myself would choose to minimize our debts and invest later when we have money. Others, such as my room-mate mike, will borrow anything he can at a decent rate to invest in small-cap mutual funds. He might come out ahead with his venture, but no one can say for certain.

It’s just a matter of how much risk you’re willing to take. First, there’s the risk of borrowing additional money. You’re essentially agreeing to pay money in the future for the money that you have now. There’s always the possibility that they money won’t be there to pay off the debt because of a job loss, death in the family, or something of the sort. If you’re debt free, have plenty of savings, and make a good income, incurring a little debt isn’t very risky. If you don’t make a ton of money, already have a car payment and credit card debt, incurring more debt is probably a poor idea. You’re already close to the edge, you don’t need to move any closer to it.

There’s also the additional risk of the investment. Investing in the stock market is by no means a guaranteed return. The $4000 I invested into VFIFX at the beginning of the year is worth about $3978 as I write this. I know that over the next 40 years it’ll probably make a lot of money, but there’s never a guarantee. The stock market could go down significantly in the near future, or it could reach another set of new record highs. We do know that over a very long period of time you can easily average 10-12% in most mutual funds.

When you combine the risk of the added debt and the risk of investing in the stock market, it becomes a major consideration. Imagine if you tried something like this right before the dotcom bubble, lost your job and then your investment when down the tubes, ouch! You could also be very successful if you did this at the right time. If you borrowed money in 1995 and left it until December of 1999, you’d come out with a nice pile of cash from your venture, but you’re never going to know ahead of time.

If you can get someone to loan you the money at a relatively low interest rate and want to take the risk, go for it! If you’re more risk adverse and would rather be certain in what you have , borrowing money to invest probably isn’t for you.

As the abuses of the payday loan industry and the number of people trapped by these practices continue to be exposed in the national media, several public officials have called for an end to their predatory practices.  Investigations have found that many of these practices were unfair to consumers and the terms of the loans were created to keep the borrowers trapped in a vicious cycle of debt.  Because of this information, many lawmakers have called for restrictions on the payday loan industry so they will no longer be able to take advantage of low income citizens.

What Is The Problem?

At issue are the practices commonly used by the payday loan industry to obtain high fees from the economic hardship loans they make to individuals that need a short term loan.  These payday lenders will often charge their borrowers close to 400% interest for the short term loan and require the loan to be repaid within two weeks, which is often not long enough for the individual to make enough additional money to pay off the loan.  The result is that a large number of the individuals that take out a single payday loan often have to take out multiple additional payday loans to get back on their feet, while the payday loan industry collects its massive fees on each transaction.

The payday loan industry claims that the interest rates and fees that they charge for the loans are necessary to provide a profit for the company.  They claim that they are often the only place for these individuals to obtain the money they need in times of economic hardship and that changing the terms of their loans would result in the payday loan companies closing and putting thousands of individuals out of work.  They also claim that any action taken against the payday loan industry will end up hurting the average consumer by removing a solution to their economic needs.

What Lawmakers Propose

Lawmakers across the country are understandably skeptical about the claims put forward by the payday loan industry.  For years, they have been listening to the payday loan industry make the same claims while watching more and more of their constituents fall into to the trap set by the lenders.  It has been estimated that the average consumer that takes out a payday loan will end up taking out 9 or more loans throughout the course of the year and end up paying the lender hundreds of dollars in fees in order to break free of the loan.

Some lawmakers believe that the practices used by the payday loan industry are unfair and are looking for ways to curb them.  One notable example is the bill making its way through the legislature of Ohio, which would place unprecedented new restrictions on the payday loan operators that do business in the state.  Any business that objected or refused to abide by the restrictions would not be allowed to do business in Ohio. 

The bill would cap the interest rate that payday lenders are allowed to charge borrowers at 36%, more than 100 times lower than what many in the industry currently charge, and limit the number of loans that an individual could take out in any calendar year to four.  Any individual that wants to take out three payday loans in a 90 day period would have to attend a financial management class to help them manage their finances and avoid having to take out a payday loan.  Lawmakers believe that these are some of the steps that need to be taken to eliminate the cycle of debt perpetrated by the payday lenders.

Over half of all new marriages that are formed in the United States will end in divorce today. With odds like that, it makes sense that engaged couples should do everything they can ahead of time to make sure that the “D” word, doesn’t happen. Since the number one cause of divorce in North America is money fights and money problems, it would only be logical that couples should absolutely be on the same page when it comes to money before they say, “I do.” Here are 5 different things about money that you and your spouse should discuss before getting married.

What do we make? This is an easy question. You and your spouse should have a pretty good idea of what you’re going to make as a couple after you get married. This will make it easier for you to budget, and keep each other honest because that each spouse knows exactly what’s going in each month. You might not think that couples would lie to each other about how much they make, but it does happen.

How are the bills going to be handled? Is one spouse going to write the monthly budget, or are they both going to do it together? Are you going to combined your finances, or keep them separate? Who’s going to physically write the checks each month? These are all –very- important questions that you need to figure out ahead of time. This will make sure that neither spouse has unmet expectations when it comes to money, and you’ll never hear something like, “I just always thought you were going to take care of the bills”.

What are our financial goals? After you pay your bills, where do you want your money to go? Do you want to give some of it to charity, save some for retirement, or perhaps pursue a hobby? Future spouses need to discuss this before the wedding day and have a good idea of what both people want to spend their extra income on. The trick to this is that each couple needs to have a fair share of any extra income to pursue their dreams, hobbies, and goals if they’re not 100% in agreement.

What’s going to happen to our existing assets? Often times couples are in two different financial spots in life. One might be doing just fine and be debt free with lots of cash in the bank, and the other might have $20,000 in student loans. Is the spouse with more money going to pay off the other person’s loans or is the person with the debt expected to pay it off?

Does the wife want to be as stay at home mom? I’ve always been a proponent that if a mother would like to stay home with her children, she should be able to, at least for a while. It’s very important to know whether or not this is something the couple wants to do in advance so that they can make it a priority.

For the sake of your marriage, please discuss these things with your future spouse before hitting the alter. With money related issues being the single greatest cause of divorce today, it’s a must!

There are many individuals across the nation that are in debt today and have no idea how they arrived there.  They had good paying jobs, good credit, and, until recently, their homes were gaining in value rapidly.  The very individuals that were the least likely to have debt problems in the past now count for a large percentage of the individuals struggling with or drowning in debt.

So, why are there so many individuals in debt today?  What happened to cause a large percentage of the population to have a negative savings rate while incurring thousands of dollars in creditor debt?  The answer is both unsurprising and frustrating in its simplicity.

The Problem

The main reason that many individuals get trapped into a cycle of debt is that they forget to think about the long term consequences of their actions.  Over time, people have been conditioned to want the latest and greatest thing (especially if their neighbors have one) and because of easy credit, they have not had to wait, be patient, or sacrifice to get the items that they wanted.  If the individual did not have the money to pay for the items that they wanted, instead of saving their money to obtain the item, they placed it on their credit card or took out a home equity loan to finance their purchases.

Because individuals did not have to worry about where they were going to get the money to pay for their purchases, many did not see the need of saving money for a rainy day.  After all, if they needed to pay for anything, they could just charge it to their credit card.  As their credit cards became maxed out and the equity in their home disappeared, these individuals found themselves owing massive amounts of money to their creditors with no money left from their paycheck to pay for anything else.

To be fair, there are a fair amount of individuals that have fallen into debt because of the loss of a job, unexpected medical bills, divorce, and other calamities that are beyond a person’s control.  But the truth is that many of these individuals had little to no savings when these calamities hit and if they would have had a monetary cushion in the bank, they would not be in the situation that they are in now.  Money held in savings is generally what is used in the event of an emergency situation and not having that cushion forces individuals to put those high dollar purchases on their credit cards, where the interest rates cause these purchases to cost even more.

The Solution

Becoming free of debt will require individuals to break this mindset of immediate gratification and begin to live in a different way, where credit cards and home equity loans are last resorts, not first choices.  As long as the person is putting purchases on their credit cards, they will owe money to the credit card companies and interest payments, finance charges, and fees will cause these balances to grow quickly.  The first step to getting yourself out of debt is to begin paying for all of your purchases with cash, checks, or a debit card so that you cannot spend money that you do not have.

Another item that is a key item in extracting yourself from a mountain of debt is to track all of your spending.  By tracking your spending, you will be able to see where you can trim unnecessary purchases from your life and put the money that you save towards your debt balance or towards your saving account so that you will have a cushion in the event of an emergency situation.  Getting out of debt is not easy, but if you are willing to change your spending habits, you will get out of debt much more quickly.

It’s easier than ever to borrow money to pay for all the things you want in life. You’ll be offered financing for your house, your car, a large television, new furniture, recreational vehicles and the like. Even for smaller items you can use a credit card to get yourself into a significant amount of debt. If you’re not careful, you can easily wind up with $20,000 or $30,000 in miscellaneous debt that seems to keep piling on up. Most of the loans you’ll be given on all of this miscellaneous debt have very unfavorable terms. You can easily find yourself in loans where you’re paying 25% or 30% in interest each year. Here’s how you can get yourself out of this kind of sticky situation.

Get Organized. Read over all of your statements as carefully as possible. Find out what all of the interest rates are on each of your debts. If they’re not on the statement that you have, call up the company providing the loan and ask. Put all of your debts that have an interest rate greater than that of 10% APY into a pile. These are the ones you need to take action on first.

Survey the Damage. Take all of your higher-interest loans and total up all of the balances. These should be listed right on each of the statements for your debts and should only take a few minutes to do.

Visit the Local Credit Union. Take all of your most recent statements on your high interest debts and walk down to the local credit union. Be sure that you visit your local credit union, and not a bank, especially a major chain bank. Smaller credit unions usually will offer you better interest rates. Speak with a loan officer and tell them that you would like to get a small personal loan so that you can pay off your debts quicker. Unless you have terrible credit, you should be able to get a decent loan. If there aren’t any good options, you might consider checking out the online lending service called Prosper.

Take the Check and Pay Off Those Debts. Take the money that you received from the personal loan, deposit it into your checking account and pay off those high interest debts the day that the check clears. Don’t let yourself get tempted to spend it, it’ll only put you further in the whole. After you pay off your debts, don’t be fooled, you still owe the money, now it just doesn’t hurt as bad.

Get in Attack Mode. Now that your interest rates are more reasonable, seriously work on paying down your debts. Start with the highest interest rate loan first and systematically pay them down. You can find all sorts of ways to save money in your budget if you go through it with a fine-toothed comb. If you’re like most Americans, chances are you don’t even have a budget. Creating your first budget and following it will put you well on your way so you can spend less money and put it towards your debts.

This is the hardest part of the equation, it involves actual work, not just moving money around on paper. You’re going to sacrifice to dig out of the whole that you’ve put yourself in. This means working extra and spending less money. It’s hard work, but it’s the only way to do it. There aren’t any secrets that are going to make your debt magically disappear.

Alpha Consumer published the latest personal finance carnival, and it’s jam packed with articles about the stimulus rebate checks, gas prices and how the bloggers of personal finance are dealing with the economic squeeze.  Here are a few blogging appetizers for you, but be sure to visit Alpha consumer for the entire edition.

• The Money Kings tell us to reduce the amount of gas we use - great idea, considering Jeremy has shared with us that we’re spending over $13 a gallon to drive.
• Finance is Personal convinces us why the emergency fund is essential.
• American Consumer News assesses the financial situation in five steps.

If you’re ready to take serious action and get rid of your debt once and for all, one of the best do-it-yourself methods is something called the “Snowball method”. As you follow this method, your payments to your creditors will gradually get bigger, like a snowball rolling down a hill, and you don’t ever have to increase your income to do it!

While most get-out-of-debt plans have you start paying money on your highest interest accounts first, based on the theory that you don’t want to pay them all of that interest- the snowball method is a little out of the ordinary as it doesn’t even pay much attention to your interest rates.

What you need to do first is make a list of all of your credit card accounts and loans, utilities, and living expenses. Anything that you pay on each month, make sure you put it on your list. Don’t put them in any particular order, just make sure you write everything down. Include the account name, the total amount you owe, and the amount of minimum payment required each month.

You also need to know how much income you have each month. You want to know your after-tax, after-insurance, after-all-deductions amount. The actual cash you have access to each month! From your income, go ahead and subtract your living expenses (rent, mortgage, electric, heat, etc). What is left? This amount is what you have available for paying credit cards and loans.

Re-organize your expense list with your credit cards and loans. This time, put them in order with the account you owe the LEAST at the top, and write them in ascending order like this:

You are going to pay the minimum payment on each of your accounts except for the first account on the list. On that account, you’re going to send as much as you have, every month, until it is completely paid off. So if after paying your living expenses and minimum payments on the other accounts you have $70 left, that is how much you will send every month until that account is paid off.

When the first account is paid off, you will add that $70 to the account that is second on the list. So if the minimum payment on account 2 was $20, now you will be sending them $90 a month, every month, until it’s completely paid off.

When that account has been paid, you now have $90 a month that can be added to the minimum payment of account 3. See how your payment amount is getting larger, like a snowball rolling down the hill? You didn’t need a raise or lottery winnings to make your payments bigger, you just needed discipline and a plan! Your accounts will get paid off very quickly if you stick to this plan, and avoid creating new debt as you’re paying down on your exiting debt.

Another important thing is to stay motivated. Personal finance is just about behavior as it is math. Keep yourself motivated by reading financial books, watching money news, and encouraging yourself.

Over the last decade or so, millions of individuals across the nation have found themselves sinking deeper and deeper into debt.  Getting out of debt has become more difficult over the years because many debtors have found that they make more money by keeping people in debt, by charging the individuals late fees, over limit fees, and higher interest rates on their debt instruments.  Becoming debt free is not easy and it can take a fair amount of time to become completely debt free, but once the lessons have been learned, it is possible to remain debt free forever.

1. Dramatically Reduce Your Spending
The first thing that you must do to become debt free is to dramatically reduce the amount of your paycheck that you spend each month.  The main reason that individuals begin to drown in debt is because they are living beyond their means “trying to keep up with the Jones” and are using credit instruments to bridge the gap.  To become debt free, you must break the mindset of having the latest clothes and electronics as soon as they come out or going out to lunch every workday and start using the money that you save to pay down your debts.

2. Stop Charging Items
It will do you no good to pay down a credit card if you are just going to be placing charges on the credit card later in the month.  Purchases paid for with a credit card can end up costing the individual much more than if the purchase had been paid for in cash because of the finance charges, interest rate charges, and in some cases, late charges levied against the purchase by the credit card issuer.  If you do not have the money to pay for a purchase in cash, you will be better off postponing the purchase until you can pay for the items with cash.

3. Track Your Spending
Tracking your spending is a very important part of becoming debt free because it allows you to see where your money is going.  Many individuals have found numerous ways to reduce their total spending by examining the many unnecessary purchases that occur in everyday life.  For example, you could save up to $3.50 per ATM transaction just by going to an ATM branded by the bank where your account is held, and assuming 1 ATM withdrawal per week, over the course of a year you would save nearly $200 in ATM fees.

4. Create An Emergency Fund
One reason that many individuals become mired in debt in the first place is because an unexpected expense has come up and the person did not have enough money in their savings to cover the cost of the expenses, so they put the charge on their credit card.  Unexpected expenses will routinely occur in life, such as having to repair a car, a child growing out of their clothes, or other minor emergencies, and having the money in a savings account to cover these unexpected expenses help you resist the urge to charge the purchase to your credit card, where you will still have to pay the entire amount plus interest costs.

5. Make The Repayment Of Your Debt A Priority
To truly become debt free, you must make the repayment of the debts you already hold a priority in your life.  Instead of spending your “extra” money on things such as dinners out, movie tickets, or the hottest new CD, you should use that money to pay down your debts.  Although these expenses may seem small at the time, they do add up over time and the money that you spent on that immediate gratification purchase would have been better put to use breaking debt’s hold on your life.

James Scurlock has spent the last several years of his life creating a book and now documentary about the abuses of the credit card industry and banking as a whole on the American populace. Recently his documentary, “Maxed Out”, has become available for all of us to see on DVD. The film has already won several awards and no doubt will continue to sell a great number of copies on DVD. However there are quit a few stories of people in the film that one must wonder if Scurlock wanted to accurately portray the credit card industry or just demonize them.

There’s a story of a woman in the film who lost her husband, and can no longer make her $4,000 monthly house-payment. They show footage of her selling some of her things at a garage sale and packing up some things at her home because she’s afraid she’s going to lose it. The woman went to several cash advance places to pay her mortgage and got in over her head.

We can’t help but feel bad for this woman in the film, but why is this story in a film that’s exposing the “evils” of the banking industry? Shouldn’t the family have planned for such an occasion and bought some basic life insurance to make sure money was around if one of them were to die? Did they not sign a contract stating that they would pay the house payment each month, and if they did not, the bank would have the right to foreclose on them?

There are also two mothers in the film who have had children that committed suicide because they racked up a high amount of debt in college and couldn’t take the stress of it anymore. It’s an absolute shame that those two young people were lost in such a tragic way, but that doesn’t make it Visa’s fault! A couple of young adults made some poor decisions and couldn’t handle the responsibility of dealing with the mess that they’ve made, the credit card industry had nothing to do with that!

These are just a couple of examples of the emotional appeals that are used in the film to try to persuade the audience that the banking industry is somehow out to get us, come on, really? They’re just trying to make a profit, and there’s nothing wrong with that. Sometimes it can be questionable as to who they loan money, but that’s just because there’s so much money to loan out right now. If an individual and a bank can agree on a loan, that’s between them.

We don’t have the right to tell banks whom they can and cannot do business with. If someone freely enters into a contract and signs up for a financial product and didn’t happen read all of the fine print or realize entirely what they were getting themselves into, that’s because they didn’t do their homework and consider the consequences of their actions. It’s a matter of personal responsibility, nothing more, and nothing less. It’s not the banking industry’s fault that some people make bad decisions with financial products.

Obviously, potential mortgage lenders look at your income for the last two years and your credit score when determining if you are “home loan-worthy.” However, income can now be “stated,” and bad credit does not mean you will be unworthy in getting a loan. Bad Credit is just as attractive to many lenders as good credit since it means a lender can charge you a higher interest rate and get you to pay more points and fees to get a better rate. In fact, since there are so many “secret” factors that go into lending you money, by simply making a few tweaks before applying, you can get approved for the best of the best loans. Here are some other factors Potential Home Loan Lenders look at when deciding if they should lend to you or not.

1. Are your credit accounts current? If your accounts are not current now, then you are not making enough money to make your mortgage. Get those balances current before applying for a credit card.

2. Have all of your balances been paid on time within the last 12 months? Paying on time for 12 straight months will make you an “A-Paper” borrower, something lenders consider just as important as your score. If you are an “A-Paper” borrower, you will get bumped up to the better end of loans you credit score will qualify you for. Therefore, go 12 months with timely payments to give you that extra boost regardless of your score.

3. Do you have a lot of negatives on your credit report? Negatives are usually late payments, balances over their limits, and items charged off for collections. You can “dispute” these items on your credit report and have them removed, which will make you look more attractive in the application process and raise your score at the same time. (Plus it only takes 30 days to do.)

4. How many times have you applied for credit in the last three to six months? Too many credit inquiries lowers your score and says you are trying to get yourself into a heap of debt. Try to make it through three to six months without applying for new credit before applying for a home loan.
5. How much money do you have to pay towards other credit on a monthly basis? A creditor will figure your mortgage at approximately 50% of what you make. This number varies depending on the lender. Your credit report totals all of your payments right up front. If you are paying more then 50% towards credit cards and other loans, then you will most likely be rejected for a mortgage. Ask your creditors to lower your interest rates so that the total monthly payments on your credit report will go down. Also, try to pay down as much of your credit balances as possible so that you can get a higher pre-approved mortgage amount.

6. How much longer will you be paying your car loan? If you have a car loan, and you only have one year’s worth of payments left, mortgage lenders will usually not take that debt into account when calculating your potential mortgage amount. Therefore, if you have more then one year of payments left, pay it down to one year in order to get a higher mortgage.

7. Consider getting VA loan info if it’s available to you. Often you  can get lower down payments and better interest rates by using an FHA loan or a VA Loan

Remember, knowledge is power. A pre-approval letter is knowledge and it gives you bargaining power when it comes to home loans. By cleaning your credit before applying for a mortgage, you can bargain for the best loans and make the toughest home offers. Do these things before applying for any loan, whether it’s a FHASecure loan, a VA loan or conventional mortgage, and soon you will own the home of your dreams.