Should You Go For Car Loan Refinancing?

 

A car loan refinancing is the process of replacing your current auto loan with a new one from a different lender. Doing so can help you in several ways. It can give you better repayment terms like better rates and loan tenure. You get better benefits, features and terms with a car loan refinancing.

Why should you go for car loan refinancing?

There are several benefits of getting this facility.

It lowers your interest rate: If you do find a suitable refinancing loan with a lower interest rate than what your current loan is giving you, then go for it. With a lower interest, you save more money over time. And, as they say, more money saved is more money earned. All you need to do is to pay off the loan you have at hand and then talk to the new lender. Remember though that prepayment charges for the old loan is lower than the refinancing’s benefit. You may also want to think about refinancing your car loan in case your credit score has improved since the last time you took a loan. If so, you can be eligible for a loan with better interest rates.

It modifies your loan tenure: When you get an auto loan refinancing, you can modify the tenure. This helps you in bringing down your monthly EMI payments. For instance, if you increase the tenure, you can pay over a longer time safely and this brings down what you pay each month. However, this means you’ll be paying more money in the long term. You can reduce your loan tenure. However, here the EMIs shall be higher even though you will be able to pay off the loan faster.

To change the agreement of a co-signer: On refinancing a loan, you can add or remove a co-signer. If your current co-signer does not want to give the lender a loan guarantee, you can remove their financial responsibility.

To change the auto loan terms: If you weren’t happy with the terms of your loan last time, you can use a car loan refinancing to change the terms now. If you get a better auto loan, you can choose to refinance the loan to get all the features.

Things you need to remember before taking a loan refinancing

There are a few things to know about before taking the step of getting a loan refinancing.

Prepayment charges: To get a loan refinancing, you’ll need to prepay the current loan, and in most cases that involves a prepayment penalty. This can range between 1% to 3% of the loan.

Your car’s depreciating value: In case you buy a new car, and think of refinancing the car loan. The value of your car slightly comes down and new lenders may not want to refinance cars and automobiles that are too old. Even if you do get a deal, it may not be a good one.

Reliability of the lender: Getting a trustworthy lender is very important. Don’t go for a refinancing just because of lower interest rates.

Additional fees and charges: If you choose to go for a refinancing, you’ll have to apply for a new loan from another bank. This involves giving some processing fees and additional charges. You’ll need to determine how much these shall be and if these are ok with you, or not.

30 Day Rule of Savings - Buying on an impulse

This is a comparatively new concept which is fast becoming popular among those who have a strong desire to save money. As you rethink the things in life, which are those things the buying of which you regret? Most probably, there are at least some of these things. According to the 30 day rule, you commit to saving money for at least 30 days before making any purchase, other than what is absolutely necessary of course. It actually saves you from making big purchases that you can come to regret later.

According to those who have tried out this rule, you can easily save up money by the end of 30 days. Additionally, you’ll have created the habit of saving, which is going to help you out long term. For instance, before making any unnecessary purchase, you’ll think about it and not buy it on a whim and regret it later. You’ll value your money and not let emotions take you for a rough ride. Yes, the 30 day rule for saving money is only a concept, but it is a powerful one at that. Many have benefited from it by following it for 30 days, and even beyond. How about you?

Buying on an impulse
Buying on an impulse means you buy on the spur of the moment. You get little time to think about your would-be decision, or maybe you want the thing so much you buy it anyway without giving it much thought. Impulse buying, according to research, stems from spontaneous or random emotions or feelings which you have at the time of buying something. These are triggered by either seeing a certain product.

For instance, you see a bag of potato chips and immediately remember its spicy taste and crunchy bites. This is pretty much the same for items like art, clothing, jewelry, cars and pretty much everything. Did you know that 80% of all purchases are done on an impulse?

Did you know that most of such decisions lead to some form of financial hardship? Additionally, such decisions give rise to family problems, relationship issues, an increased feeling of guilt and of disappointment.

The 30-day rule helps you to avoid all of these.

Here’s what you have to do- A step by step guide
When you feel like buying something on a whim, stop yourself. Put it away and delay the decision.

After removing the item or temptation, note the item in a notebook. This should include the name and nature of the product, where you found it, the date, and the price.

Make it a commitment of thinking over the purchase for 30 days. Determine if it is a need or a want. Give your reasons for deciding so.

Till the 30 days are up, put the money you’d have spent on the item into an interest-giving account.

After 30 days, think whether you still want to make the purchase or not. If you want to, remove the amount from the savings account. However, do remember that you won’t earn any interest on that amount. Additionally, there may be penalties and limitations on withdrawals. If you don't want to buy, leave the money in the account and let it earn you more interest!

This is a simple yet powerful concept. It breaks bad habits, builds wealth and also saves you money!

What is Revolving Credit? - How does revolving credit work?

There are so many expenses when you are running a business. From paying bills to replenishing your stocks to making payroll, it takes so much out of your profits that it ultimately leaves you wondering- where has all the money gone?

Sometimes, your business may need extra cash to pull through tough times. The good thing is that this is possible without having to take a loan.

When you use revolving credit, your business can get money till a predetermined amount or limit. This is called a credit limit, much like a credit card’s limit. A revolving credit is much more flexible as a borrowing option than a normal loan. Here you can take out as much money you want whenever you want, within certain limits of course.

How does revolving credit work?

Just like your own personal credit card, a revolving credit enables you to spend within a certain limit. This limit is agreed upon beforehand by you and your lender. The amount you can get depends on the state and health of your business, your credit history and your monthly revenue.

When you repay the loan, the money you have available tops up again, which means you can use the money again. This is why it is called “revolving.”  

What can you use revolving credit for?

While revolving credit is useful for planning for your future, or for the future of your business during any crisis, it is still not completely easy to deal with a crisis. Revolving credit enables you to run your business as normal without having to worry about multiple loans or one credit after another.

For instance, your company’s work becomes stalled by broken equipment or a big tax bill. This makes it hard for you to buy from suppliers, give salaries, and etc. Revolving credit gives you a safety net for unexpected times. During such times, with revolving credit therefore, you’ll be able to bounce back and tide over the problem. As a result, your business flourishes continuously.

What is the difference between a line of credit and a credit card?

The primary difference here is that business credit cards are mostly unsecured. These don’t require you to give any collateral but that also means you’ll have to give more fees and higher interest rates.

To get a secure credit line, you’ll need to give some collateral. This minimizes risk for the lender, which increases your chances of getting the loan, especially if it is a large amount of money. If you are unable to repay the loan, the lender takes over your collateral assets legally.

Not all lines of credit are revolving in nature. Some may be one-time. A revolving line of credit helps you in getting the same amount after loan repayment. It saves you from having to apply again and again.

Effect of Clearing Debt on Your Credit Score

When you repay your debt, you can expect to see a higher credit score.

A higher credit score increases your chances of getting credit cards, loans and new lines of credit. These can come with better terms like lower interest.

However, do you know how long you’ll have to wait before seeing an increase in your credit score? If you don’t, don’t worry. In this article, we’ll tell you everything you need to know about it. We’ll tell you how long it takes and tell you the factors which influence the increase of your credit score. We’ll also tell you the types of debt you can have.

When does your credit score improve after debt repayment?

Of course, you’ll want debt repayment to have an immediate positive impact on your credit score, but that’s not how it works. Even if you have repaid your loan completely, your score won’t increase till your lender reports the repayment.

How long can this take? It can take a couple of months or a couple of billing cycles. Lenders usually report activity per month to credit bureaus or credit reporting agencies.

Which factors influence your credit score?

To really understand how your credit score changes after you pay off a loan, you need to know the elements which comprise the score.

The factors influencing your credit score are:

• Payment history: 35%
• Amounts owed: 30%
• Length of credit history: 15%
• New credit: 10%
• Credit mix: 10%
  

Which of these affect your credit score, from most to least?

• Amounts owed: Extremely influential
• Credit mix: Highly influential
• Payment history: Moderately influential
• Length of credit history: Less influential
• New credit: Less influential
  

When you pay off debts, your credit utilization shall get a big positive boost. As you may know, you need to keep credit utilization ratio below 30%. This gets boosted when you pay off credit cards or repay loans. In turn it raises your credit score. Your credit history decreases each time you repay and then close an account. That hurts your credit score.

Special Features of Secured Credit Cards - Secured Credit Cards

Banks offer secured credit cards against fixed deposits as collateral. These cards are usually aimed at those who cannot avail regular credit cards due to reasons like low or no credit score, unserviceable location, inadequate income, job profile or employer’s profile.

Let’s take a look at some of the crucial features of secured credit cards

Relaxed eligibility criteria

As secured credit cards are issued against collateral in the form of fixed deposits, it reduces the credit risk of banks. In case a credit card holder fails to repay his card bill, the bank has the liberty to liquidate fixed deposits to recover outstanding dues.

Owing to this risk-free attribute, banks do not factor the applicant’s credit score, income, employment profile, unserviceable location, etc, as they do while evaluating applications for regular credit cards.

Helps in building credit score

Just like regular credit cards, transactions made through secured credit cards are reported to the credit bureaus. The credit bureaus then factor in this data while calculating credit scores. Thus, secured credit cards can be a very good tool for building or improving credit score for those having low or nil credit score, thereby, improving their eligibility for availing loans and secured credit cards in the near future.

Credit limit decided against the value of fixed deposit

Banks set credit limits of secured credit cards against the fixed deposit value used as collateral. Depending on the risk appetite of the bank, the credit limit of the secured credit card usually ranges between 80-90% of the fixed deposit value offered as collateral.

Fixed deposit used as collateral continues to earn interest

The fixed deposits used as collateral to avail secured credit cards continue to earn interest till their maturity. In this sense, availing a secured credit card is the same as opting for a loan against FD or a loan against securities wherein the borrower continues to generate returns from his securities offered as collateral.

Provide higher capital efficiency to their holders

Ability to leverage fixed deposits through secured cards also leads to higher capital efficiency for cardholders if they repay their credit card bills on time.

Cardholders can easily access credit through their secured credit card to meet their short-term financial mismatches without closing their FDs prematurely. Most banks penalise premature withdrawal of FDs by charging a penal interest rate of up to 1%. This penal rate is then subtracted from the effective rate of interest of the fixed deposit, which is usually the lower of the original booked card rate and the card rate of the period for which the FD has been in effect.

Thus, secured credit cards offer sanctioned credit line to their users and save them from incurring opportunity costs involved in premature FD withdrawal. This feature can especially be helpful for those facing frequent but very short-term cash flow mismatches.

Withdrawal from fixed deposit not allowed till card closure

As the pledged fixed deposit is lien marked by banks, secured credit card users cannot close their fixed deposit account till the card is closed or reaches its expiry. Thus, those looking to opt for secured credit cards should consider submitting only those FDs as collateral without which they can easily manage till the expiry of their secured card.

Avoid using fixed deposits earmarked for emergency funds or short-term financial goals as collateral for availing secured credit cards.

Broad features similar to regular credit cards

Just like regular credit cards, secured credit cards offer reward points, vouchers, discounts, etc on transactions made through them. Also, they offer interest free period on credit card transactions and levy finance charges on non-payment of the credit card bill by the due date.

However, the diversity and consumer choice offered by card issuers in the case of secured credit cards are not the same as regular credit cards. In the case of regular credit cards, card issuers offer numerous card types, such as fuel, travel, shopping, premium, and reward cards for targeting specific consumer requirements. In the case of secured cards, most of the issuers offer just one or two variants. This deprives secured cardholders of the freedom to select their card on the basis of their spending pattern and lifestyle.

What is the 20/10 Rule? - Diverging from the 20/10 Rule

If you find yourself constantly on the verge of overspending with your credit cards, consider using the 20/10 rule to keep your spending in check. The 20/10 rule is a simple guideline for keeping your debts at a manageable level.

What is the 20/10 Rule?

The first part refers to your overall debt. Excluding mortgage debt, you should keep your borrowing total below 20% of your annual after-tax income. This includes credit cards and debts such as student loans, as well as car loans and any similar installment debt.

Mortgage debt is excluded for two reasons. A mortgage debt has some positive aspects, allowing you to build equity in an appreciating asset as compared to buying depreciating or disposable assets. On a more practical level, the sheer size and long-term aspect of a mortgage relative to other debts generally swamps the other types of debt you are trying to analyze.

The second part of the 20/10 rule relates to monthly payments and cash flow. Your goal is to keep your payments on all the loans and credit cards to no more than 10% of your monthly after-tax income. Again, mortgage payments are excluded, along with rent (since it is just another form of monthly housing payment).

In practical terms, if you have a large mortgage payment or live in a high-rent area, you may have to adjust the rule. If you are spending up to half of your net income on housing – not an unfamiliar situation for some who are underemployed – you probably cannot afford to extend your credit to 20% of your net income.

Diverging from the 20/10 Rule

You are just one surprise expense away from a debt spiral and need to focus instead on saving to build an emergency fund. If you do have an emergency fund, you can consider loosening your credit somewhat – just use common sense.

This illustrates a point about the 20/10 rule – it is a general guideline that makes general assumptions, such as starting with some degree of initial financial stability, stable regular income, and proportionate housing expenses. Your situation may require a different strategy.

Keeping your debt at 20% of your income, without a regular income, is somewhere between difficult and impossible.

For example, if you are recently unemployed, have suffered a pay cut, or have an unpredictable income, keeping your debt at 20% of your income is somewhere between difficult and impossible. You do not need a general guideline – you need a more detailed plan to guide your debt strategy until you get to a more stable place financially.

Student loan debt can also skew this equation, because of the massive increase in size, which can approach that of a modest mortgage. Defaulting on student loan debt also carries significant penalties, and limited options for discharge. Creditors can repossess your house for partial recovery, but they cannot repossess your education… yet. (Let’s hope that no agency is researching that.)

You may run into an unavoidable expense, such as an uncovered medical bill, that throws you over the 20/10 level. In that case, you need to evaluate the situation and make your plan to get back slowly to the 20/10 mark – unless your situation requires cuts that are more drastic.

What Should You Do?

In summary, there may be times where you should bend the 20/10 rule. If you are in a difficult financial situation, you will have to cut spending even further and focus more on reducing your high interest debt. However, for most borrowers, the 20/10 guideline provides an excellent rule of thumb to keep from overextending credit – or at least make you think hard about certain purchases before you whip out your credit card.

Credit Report Freeze - What is a Credit Freeze?

Data breaches are more common than you think. MNCs like Facebook and Target have problems with data breaches and hacking of private information.

Credit information can include driver’s license, credit card details, date of birth, social security number, email ID, phone numbers and more. In the hands of hackers, this information can be problematic. It is understandable that the average person wants to be more cautious about sharing their private information online.

You can freeze your credit but before you do that, there are a few things you should know.

What is a Credit Freeze?

In case of a data breach, a credit freeze is highly recommended. When you freeze your credit, you prevent anyone who tries to steal your information by opening an unauthorized account in your name. By freezing the credit, you lock down your credit information and thus prevent any misuse and theft. People who wish to try to steal it won’t be able to.

Here’s an example:

Let’s say that you are looking for a loan or a credit card. You apply for them at a bank. The bank will now decide whether or not to give you the loan or the credit card depending on your credit report. You will have to show the bank your credit report, but you can choose to “freeze” the information. You can call your credit reporting agency to freeze your details. On doing this, only the bank can see your details and information, no one else.

However, even after freezing, it shall be accessible to you and your current creditors.

• You can access your credit information and still get your free credit reports.
• Your current creditors and your debt collectors can access the information too.
• Your credit score won’t be affected by a Credit Freeze.
  

How to freeze your credit?

To do that, you’ll need to call your credit bureaus separately. Tell them about your intention and follow their processes, which may be different from one bureau to another. You may need to share all the necessary details in order for them to find and lock such information. Once the bureaus have frozen your credit, you’re set. No one can access it without your explicit permission and authorization to the credit bureaus.

Pros of a credit freeze

• It can prevent identity theft
• It is free
• You can lift a freeze temporarily in case you need to get the information checked by a credit bureau
  

Cons of a credit freeze

• It can be time-consuming since you need to contact and follow the process of all credit bureaus separately
• Credit freeze can offset your other priorities, for instance when you apply for loans or credit cards. In such cases, you’ll need to lift the freeze temporarily, which still delays the application process
• Credit freeze won’t help you when a hacker already has stolen your information, or if it has happened in the past
  

Credit freeze can be a good option if you want to protect your data from a data breach or from online fraudsters. However, the process can be long. Consider that before taking the decision.