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In the last decade or so, there’s been a large glut of capital that banks have had. In response, they have come up with new and creative types of loans to try to get people to borrow more money. One of the most successful and prevalent types of these loans is a home equity loan, which is sometimes referred to as a home equity line of credit. In nearly all cases, home equity loans are not a good financial product to buy.

A home equity loan is nothing more than a second mortgage on your home. You are borrowing money and using your home as collateral. If you don’t pay the loan, they’ll take your house. It’s as simple as that. There are also home equity lines of credit which is the equivalent of a secured credit card that’s backed up with your house as collateral.

Home equity loans are often pitched to consumers as a way to “pay off their debts.” They contend that you’ll save thousands in interest payments on your high-interest consumer debts, and they’re right. The problem is that home equity loans are nothing more than a Band-Aid solution. You’re simply moving your debt from credit cards, car loans, and other lines of credit onto your home equity line of credit. You’re not paying off any debt or making something magical happen to eliminate your debt. The debt’s still there, as are the over-spending habits that got you into debt in the first place.

It gets even worse since before if you couldn’t pay your debt, the credit card collectors could just yell and scream at you. It wouldn’t be a fun process, but at least you’d keep your house! If you don’t pay your home equity loan debt, they can foreclose on your home and take it from you.
After most people get a home equity loan and move their debts onto it, they go out and charge up their credit cards and other credit lines again because they were paid off, have zero balances, and still had their nasty over-spending habits. A year later, they have huge credit card balances again, but this time they can’t move it onto a home equity loan.

Home equity loans are not a solution for people who have a lot of debt. There are certainly some instances when home equity loans might make sense to help you along the way as part of your crusade to completely get out of debt, but most people don’t treat them that way. When they get a home equity loan, they feel that they’ve done something to take care of their debt and that the problem really isn’t there anymore, but that’s just not the case.

As today’s economic landscape becomes more unstable, many individuals are wondering how they should save for their retirement. As they watch their home values shrink and dozens around them losing their jobs, many individuals are concerned about their financial future and being able to be comfortable during their retirement.

Retirement planning is just as important in a weak economic landscape as it is in a strong economic landscape. The clock is still ticking toward your retirement date and every day that you are not saving money for your retirement is another day that you are not earning interest on your savings.

How Important Is Saving For Retirement?

Some individuals believe that saving for retirement should be placed on the back burner when an economic downturn occurs, with more of the money going to shore up the household finances. If the family has no other options to be able to pay their bills, then more money may need to be diverted from retirement savings into the household budget.

Diverting retirement savings to household finances should be an absolute last resort. The first thing that individuals should do when facing an economic hardship is to see if there are any unnecessary expenses that they can cut from their monthly budget in order to save more money, such as a high cell phone bill, eating at restaurants, or extra cable channels. Many individuals find that they have a lot more money left in their pockets once these expenses are removed.

Don’t Crack Your Nest Egg

The money that you have already saved for your retirement should remain untouched, even if you must reduce the percentage of your paycheck that is going into your retirement savings. It is much more difficult to replace the funds that are taken out of the retirement account than it is to resist touching the account and finding other means to come up with the money that is needed.

Money that is removed from a retirement savings account is no longer earning interest for the account holder, which means that over time, the individual will earn less interest on their retirement savings, even if they return the money to the retirement account within the next two years. The loss of interest that would have been earned on the account if the money had not been touched will be significant and can never be replaced, even if the total amount of the money taken is replaced at a later date.

In an economic downturn, saving money for your retirement is still important to secure your financial future. You may have to go without the extra items that you enjoyed while the economy was booming, but that is much better than not being able to pay your bills or purchase groceries in retirement because you have depleted your retirement savings.

Money Under Thirty provides us with our weekly personal finance fix, and includes some outstanding blog posts as usual.  My favorites include:

• Destroy Debt offers some pointers for spending less to free up available income.
• My Buddy Tisha Kulak over at American Consumer News gives us how to Deal with the Demise of Floating Check Times.
•  A Dollar a Day asks are you ready for a disaster?
• No Debt Plan writes 10 Steps to Avoid Becoming a Millionaire

Texas Hold’em poker is one of the in things to do for young people right now. Thousands of college students play home games with their friends for relatively low amounts of money and even more gamble their savings away through online gambling, despite it’s illegality in the United States. Fortunately, there’s now a way to win money by playing online poker or online blackjack in the United States without having to skirt the law.

The relatively new service, called the National League of Poker, has moved from 30,000 users just over a year ago to 150,000 users today. The service is completely advertiser supported so you never have to put down a dime to win money. Even if the payouts are lower than what you’d find on some of the online casinos which are illegal in the United States, it’s a lot better deal than handing over your credit card number to some shady company in Gibraltar.

The way the service works is that you’ll be given a certain amount of points to play in each day. These points can be used to pay for tournament buy-ins. Players who place high in each tournament will be awarded more playing points, and the top 1000 players will qualify for the champion’s tournament each week in which they can win some money. There are also a number of tournaments that anyone can get into that will pay real money throughout the week.

If you’re not terribly concerned about the gambling aspect of having poker or online bingo games and just want to have some fun and maybe win some money here and there, the National League of Poker is a great way to play poker online. If you’re looking for online blackjack or other games, you’ll haev to look elsewhere, but you’ll get a lot better play out of your opponents because they are actually working for some sort of prize as opposed to those who play on the free services such as Yahoo in which player’s actions are often extremely erratic and not a true poker-playing experience.

There are also other great online games in the united states such as online bingo.

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. Many payday lenders are even putting their businesses for sale. 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.