Why a Debt Consolidation With Lending Club Can Make Sense

lending-club-my-personal-finance-journeyThe following is a post by MPFJ staff writer, Kevin Mercadante, who is a freelance professional personal finance blogger for hire, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry.

There’s been growing interest in borrowing through peer-to-peer (P2P) lending platforms in recent years. Lending Club, as the largest P2P lender, gets most of the attention. The amount of coverage the platform gets may not be an exaggeration, either. A debt consolidation with Lending Club can make sense – and a lot of sense at that.

It’s not always about getting a better interest rate. Lending Club claims that it’s borrowers reduce their interest rates by an average of 35% when consolidating debt or paying off high interest credit cards. But it’s not absolutely certain that this is true in all cases. After all, loan rate APRs on the platform range from 5.99% to 35.27%, so not everyone is necessarily getting a better rate on every loan.

Is it worth doing a debt consolidation with Lending Club, even if you aren’t getting a significantly lower interest rate?

Very often, the answer is yes, and here are the reasons why.

High Loan Amounts

If you have a large amount of debt to consolidate, Lending Club may be a better loan source since they make loans that are larger than what are typically available from other sources. Lending Club’s current maximum loan amount for personal loans is $40,000.

Unless you have a house that you can pledge as collateral for a home equity line of credit (HELOC), it is unlikely that you will be able to get a bank loan for nearly that much money.

And while credit card companies will periodically provide you with an opportunity to consolidate debt through a credit line – often with a 0% introductory rate – those credit lines rarely exceed $10,000.

If you have substantially more than $10,000 in credit card debt, neither a bank HELOC nor a credit card company credit line are likely to provide an opportunity to consolidate all of your debt.

But $40,000 borrowed through Lending Club will almost certainly enable you to consolidate several high interest rate credit cards, and maybe even a high interest rate car loan.

Loans Are Unsecured

Not only is $40,000 a very generous amount of money to borrow, but with Lending Club it’s also a completely unsecured line of credit. That means you don’t have to pledge important assets, like a house, a vehicle, business assets or a bank account in order to get the loan.

Try doing that with a bank loan that’s half that size!

Converting Revolving Debt to an Installment Loan

All loans taken through Lending Club are installment loans, for terms ranging from 24 months to 60 months. Both your interest rate and your monthly payment are fixed for the life of the loan, and the balance will be paid in full at the end of the term. At that point, you’ll be completely debt-free!

If you have a lot of revolving debt, converting it into an installment loan is the best way to make it finally go away. After all, revolving debt is set up that way precisely to keep you in debt forever. It’s the very definition of the word “revolving” – you keep circling around, always coming back to the same place. The entire arrangement is an intentional Catch-22.

But an installment loan can get you out of that debt trap.

You Can Apply Anonymously

It can be uncomfortable to sit through a face-to-face loan application with a bank. Not only does the banker know your name (and your face), but also the intimate details of your financial situation.

But if you apply for a loan through Lending Club, the entire process is done online – from the comfort of your home – and no one who invests in your loan ever actually knows who you are.

That will be a much more satisfactory situation for people who are deep in debt, and see themselves as somehow “impaired” as a result. It’s an embarrassment-free application process.

Near-Immediate Credit Score Improvement

Your credit utilization ratio represents 30% of your credit score calculation, and ranks second only to payment history (35%) as a factor in computing your score. Your credit utilization ratio can actually improve quickly after doing a debt consolidation loan.

Your credit utilization ratio is the amount of credit you have outstanding, divided by the total amount of credit you have available. For example, if you have $10,000 in outstanding debt, and credit lines totaling $20,000, your credit utilization ratio is 50% ($10,000 divided by $20,000).

Generally speaking, a ratio of 30% or less is considered to be a positive factor. As you exceed this level, the negative effect on your credit score increases. At 80% or more, the ratio indicates increased potential for loan default, and has a very negative effect. This is a situation where you can have a fair credit score even if you have an excellent payment history.

When you do a debt consolidation, you are moving debt from several credit lines onto a single loan. The amount of debt that you owe is the same, but the amount of your credit lines has increased by the amount of the debt consolidation loan.

If you have available credit $30,000, and you owe $20,000, your credit utilization ratio is 67%. That’s probably having a negative effect on your credit score.

But if you secure a debt consolidation loan through Lending Club for $20,000 to consolidate your credit card debt, your total available credit expands the $50,000. Your credit utilization ratio then drops from 67% to 40% ($20,000 divided by $50,000).

In addition, if the $20,000 original debt was spread across five different credit lines, you will now have just a single credit line with a balance due. That means that you will have substantially reduced the number of credit lines with outstanding balances. That’s another positive factor in your FICO score calculation.

All of this will have a positive effect on your credit score. Though there will be a negative affect as a result of having a brand-new loan (no payment history) it will soon be offset by the lower credit utilization ratio and by the smaller number of credit lines with outstanding balances.

In this way, the debt consolidation loan improves your credit score, in addition to making your debt more manageable.

If you are carrying an uncomfortable level of debt, check out Lending Club and see if a debt consolidation loan can help your situation.

How about you all? Have you tried any debt consolidation loans with Lending Club or elsewhere? What has been your experience?

Share your experiences by commenting below!

****Photo courtesy https://www.flickr.com/photos/lendingmemo/9526218147/sizes/q/

Why You Should Live on Less Before you Start Earning More

piggy-bank-frugal-my-personal-finance-journeyThe following post is by MPFJ staff writer, Chonce. You can read more articles by Chonce over at her personal blog, My Debt Epiphany. Enjoy! 

Should you spend less or earn more? This is a common question with a tough answer. While the answer heavily depends on who you are and what your financial situation and preferences are like, I’ve always been in favor of spending less and adopting a frugal lifestyle before you start to earn more. It’s one of the best ways to improve your finances quickly and truly get what you want out of life.

To fully understand the concept of spending less over earning more, you have to understand the benefits of earning more and how they are only sustainable after you’ve committed to living on less.

So why live on less when you can just work on earning more money right away?

Adopting a Frugal Mindset and Lifestyle Forces you To Work with What you Have

Living on less helps you prioritize your wants over your needs since there is a limited amount of money to go around. When you start living frugally and cutting your expenses, all of the sudden, budgeting becomes more of a necessity as you learn to strategically spend and save your money and make do with what you have.

When you have more money to spend, it’s easy to not take your budget seriously and splurge on items that you don’t truly need.

Back when I was in college and taking care of my son, I’d be happy if I earned $10,000 per year annually. While I definitely wanted to earn more money, I learned how to make ends meet so we could live comfortably and prioritize what our main expenses were, and which ones we didn’t need.

To help get through my low earning years, I gave up a lot of non-necessities and losing out on those expenses never made me any less happier. It actually gave me a relief because I didn’t have much to worry about each month.

Living on Less Motivates you to Learn More about Personal Finance

If you really think about it, why do most people turn to personal finance websites and resources? Often times, it’s because they want to learn more about how to manage the money they have, increase their income, get out of debt, or grow their money.

If your financial situation is perfect and you’re earning plenty of money, what motivation do you have to increase your knowledge about personal finance?

What piqued my interest in learning more about how to manage my money was having student loan debt and a low entry-level salary of $28,000 per year when I obtained my first job out of college. Today, I’m so thankful for my student loan debt because without it, I never would have started reading about personal finance nor started my own blog to document my journey out of debt.

Learning more about personal finance can educate and empower you to improve your habits and manage your money better but it all starts with living on less.

When you Should Work Toward Earning More

I’m definitely not against earning more. I just believe it’s crucial to understand that frugality can be a choice and not just a necessity. If you don’t have a lot of money, it’s obvious that you’re going to be interested in adopting a frugal lifestyle. But once you experience the benefits of frugality, it’s not hard to realize that you can choose to live frugally to optimize your income even when you do start earning more.

Ever since I graduated college a few years ago, my income has consistently doubled each year. While I’m so grateful to have the opportunity to increase my income, I realize that I could very easily be tempted to increase my spending and fall into lifestyle inflation as well.

Lifestyle inflation involves spending more just because you have more to spend. If you get a raise or start side hustling, it’s easy to want to treat yourself with the extra income you bring in and purchase something you feel you’ve always wanted. There is often no value behind this method of increased spending though and the extra purchases you make probably won’t help improve your life in the grand scheme of things.

If you spend everything you earn, you’ll never ever get ahead. This is why it’s best to start improving your finances by lowering your expenses and making ends meet with the income you have first. Then, when you start to earn more money you can use the additional income to go toward major goals like paying off debt, building your retirement fund, or saving up for a down payment on a house.

You’ll know that you’re ready to start earning more when:

  • You’ve lowered your living expenses as much as you possibly could
  • You’ve embraced frugality and gotten creative with making ends meet
  • You’ve educated yourself about personal finance and determined how you will make the most of an income increase
  • You know how to manage your money properly to avoid lifestyle inflation
  • You want to earn more money to help meet your financial goals and work toward stability, not because you believe more money will make you happy

Once you’ve mastered the art of living well on less, you’ll know that you don’t actually need the extra money to live when you start to earn more and you can use it for other purposes.

How about you all? When it comes to spending less and earning more, do you favor one concept over the other? Do you use both strategies to improve your finances?

Share your experiences by commenting below!

***Photo courtesy https://www.flickr.com/photos/bradipo/4333249778/

Top Resources for Aspiring Investors

The following is a guest post by Ben Barlow. Enjoy! 

Whether you’re a novice trader or someone with a rich history of trading, it still remains a very difficult way to make money. Markets are difficult to predict and move quickly, meaning that you need to act fast when executing trades, spotting patterns before anyone else. As such, you need all the help you can get. Luckily, a number of tools are available. Here, we take a look at the top resources for aspiring traders.

  • News Sites – Get to Know the Market

It may sound a little boring, but the best way to improve your trades is to read, read, read. Markets fluctuate based on world events so, by logic, the more you know about world events the easier it will be to make informed trades.

Start by continually reading reputable sites such as the BBC, which is widely used for technical analysis. When you have a good grip on the geo-political situation, expand your reading further to include more complex financial sites, such as the Financial Times. Here, going online is far better than buying a broadsheet, as the information is more up to date.

  • Trading Calculators – Know the Rate Information

When you’re calculating your trades, it’s important to know exactly what’s at stake. A simple forex rate calculator like the one available from FXPro can provide you with all the information you require to execute a trade.

All you have to do is input your appropriate currency, account currency, leverage and position size. Once you’ve hit enter, you’ll have all the information you need to trade with. A good calculator should even be able to factor in the fees.

Calculators can be used to work out how much margin is needed to open a position, or you can use a profit calculator to see how much you stand to make from a trade. It’s simple and only takes a few clicks – there’s no need for pen and paper ever again.

  • Apps – Trade on the Move

In the 21st century, there’s absolutely no reason why you shouldn’t be monitoring your trades on the move. The markets move so quickly and with every second you’re away from the screen, you’re risking your profits.

To ensure you have all bases covered – even if you have stop-losses – ensure that you download as many trading apps as possible. Thanks to free public Wi-Fi and fast 4G networks, you should have no problems accessing them.

To conclude, tools are essential when you’re trading and they can prove a great help. Let us know about any of your favourites.

Why an IRA is the Best Use of Your Tax Refund

tax-money-my-personal-finance-journeyThe following is a post by MPFJ staff writer, Kevin Mercadante, who is a freelance professional personal finance blogger for hire, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry.

The 2015 tax season came to an end on April 18, or at least for those who do not need to file for an extension. Now comes the blessed tax refund process. And with that, comes decision time – will you spend the money on something that you need or want right now, or will you invest the refund to improve your long-term financial picture?

It’s a more important question than most of us think. According to the IRS, the average federal income tax refund for the 2014 tax year was $3,120. While that isn’t the kind of money that could change your life today, it could have a major positive impact if you handle it as part of a long-term strategy.

Investing your tax refund in an IRA could represent just such a strategy. Here are five reasons why an IRA is the best use of your tax refund.

Turning “Found Money” into a Long-term Asset

If you choose to spend your tax refund immediately, you can certainly get a “short-term high”. It could be spent on a much desired vacation, a room full of furniture, or even used as the down payment on a new car.

As exciting as those options would be, every one of them would have zero value after a few years, including a new car (since cars depreciate all the way down to near zero). But if you choose to invest the money, it will become a long-term asset, and part of your financial portfolio for potentially the rest of your life.

While it’s always fun to spend money in the short run, it’s your ability to invest for the long term that ultimately determines your financial future. Investing your tax refund in an IRA will turn a temporary windfall into a permanent asset.

Making a Contribution While You Have the Money to do it

We all have good intentions when it comes to saving and investing money. But sometimes reality gets in the way, and the planned savings strategy never happens. If you always desire to invest for the future, but never seem to have the cash to do it, receiving your tax refund is the best time to make it happen. The money will be available, and all you have to do is transfer it into an IRA account.

One of the big advantages of depositing a tax refund into an IRA is that it represents a way to kickstart your savings and investment plan. With your tax refund safely squirreled away in an IRA account, you may then have the motivation to continue funding it, all the way up to the maximum contribution of $5,500.

Converting a Windfall into a Perpetual Cash Flow

We’ve all heard the term the gift that keeps on giving, and that’s basically what an investment plan does. You are investing cash now, to create more cash later. That is a form of creating a perpetual cash flow.

In the case of making an IRA contribution with your income tax refund, if that amount of the refund is the IRS average of $3,120, and you invest it in your IRA at 8%, the account will provide you with cash flow of $250 over the first 12 months. And because of compounding of interest, future cash flow amounts will be higher in each succeeding year.

We can think of using your tax refund to fund an IRA as a way of converting cash into a cash flow. Millionaires learn that strategy early in life, and that’s largely how they become millionaires.

Getting a Jump Start on Early Retirement

It doesn’t matter how young you are, almost everybody thinks about and dreams about early retirement. Putting your income tax refund into an IRA each year could make that dream a reality in your life.

Let’s say that you are 25 years old, and for the next 30 years you commit to moving your annual tax refund – averaging $3,120 per year – into an IRA, instead of spending it now. At an average annual rate of return of 8%, your contributions will grow to $366,230 by the time you’re 55 years old.

Even if you are not making a serious effort to retire early, accumulating that kind of money well before traditional retirement age could create the opportunity to do just that. The accumulation of large amounts of money has a way of turning dreams into reality.

For what it’s worth, if you continue with the same pattern of investing your tax refunds each year until age 65, you will have $837,495 for the effort. That kind of IRA could make retirement a reality in your life, even if you have no other retirement savings available at the time.

Setting Up Another Tax Deduction for Next Year

Earlier we talked about using the cash from your income tax refund to create a cash flow; but you can also use it to create another tax deduction. If you are eligible to make a tax-deductible IRA contribution, then the amount of the tax refund going into your IRA will create a new deduction for the current tax year.

If you are in the 25% tax bracket for federal tax purposes, and say, 7% for your state, depositing a $3,120 tax refund into an IRA can reduce your tax bill by $998 (32% X $3,120). That’s like getting a 32% return on your tax refund just for putting it in the right place. Or using your tax refund from this year to build an even bigger refund next year.

How about you all? Can you think of a better place to put your 2015 income tax refund? What do you have planned for your refund?

Share your experiences by commenting below!

***Photo courtesy https://www.flickr.com/photos/pictures-of-money/16687016624/sizes/q/

Money Tips for High School Grads

high-school-grad-my-personal-finance-journeyThe following post is by MPFJ staff writer, Laurie Blank.  Laurie is a wife, mother to 4 and homesteader who blogs about personal finance, self-sufficiency and life in general over at The Frugal Farmer. Part witty, part introspective and part silly, her goal in blogging is to help others find their way to financial freedom and to a simpler, more peaceful life.

Graduating from high school often means taking that first step into adulthood and independence, and it’s the perfect time for graduates to learn how to handle the increase in income that will likely be coming their way.

When I was a teen, personal money management tips simply weren’t taught to the majority of kids. According to this Fox Business article, a full 83% of teens surveyed in today’s world also admit they know very little about money management.

I know that for me and my husband, our lack of education on how to manage money led to oodles of debt. Neither of us were taught anything about managing money, and that lack of knowledge led to many financial mistakes that cost us tens of thousands of dollars (in interest paid) and tremendous stress to boot.

As such, we’ve committed to teaching our kids the money tips we think will best benefit them as they enter the world of adulthood and independence. Here are the 7 money tips we’ll be teaching our kids by the time they graduate from high school.

Create Financial Goals

Many people mismanage their money simply because they haven’t determined what they want from it. When you create financial goals, you give your money a purpose, which helps you to avoid spending it on instant gratification items such as unlimited drive-thru runs and an excess of electronic gadgets.

Think now about what you want out of life from a financial standpoint, and write down a list of specific financial goals for yourself. Avoid blanket statements such as “I want to be rich”, and instead make measurable goals such as “I want to have $1 million in savings by the time I’m 40”. Then make a solid plan to achieve those goals.

By creating financial goals for yourself, you determine ahead of time how you want to make your money work for you.

Live Below Your Means

In simple terms, what this means is that you refuse to spend all of your money each payday. Decide on a portion that you can spend that will allow you to pay the bills and to achieve your financial goals, and leave the rest in the bank.

Automate Your Savings

As soon as you start earning a regular paycheck, set up a system – either through your bank or through your employer if it’s available – where a certain percentage or dollar amount of your paycheck goes directly into a savings account.

By developing the habit of automating your savings, you will easily grow a healthy savings account that can be the source of a home down payment, a plush emergency fund or an early retirement fund.

Start Retirement Investing Early

If you end up getting a job that offers a 401(k) plan, sign up early and start investing for your retirement years right away. If your job doesn’t offer a retirement plan, begin saving for retirement on your own by opening an IRA.

For young people, retirement investing often seems pointless as the retirement years seem so very far away. However, those early years of retirement investing will give you the advantage of compound interest in a big way, ensuring that you are set for a lush lifestyle during retirement should you want it.

Avoid Getting Caught up with the Joneses

The further along you get in your working years, the more you’ll see many of your peers spending money on the “big things” in life such as homes, cars, vacations and expensive clothing.

The thing that your parents and grandparents likely know from experience is that keeping up with the Joneses is like running on a hamster wheel – you work your tail off and never get anywhere.

Be sure that when you’re making purchasing decisions that you make them based on what’s best for you and your financial goals, and not based on gaining the approval of others.

Look for Money Mentors

If there are people in your life that manage money well, ask them if they would be interested in sharing their financial wisdom with you. Having a money mentor will help you to avoid many of life’s financial pitfalls and will allow you the benefit of learning from someone else’s money mistakes instead of having to learn from making your own.

Wait 72 Hours Before Making a Large Purchase

When considering a large purchase (anything over $100 is a good starting point), make a decision to wait 72 hours to see if that item is something that you truly want. Establishing this habit will help ensure you don’t blow big wads of money and then end up suffering with buyer’s remorse.

Earning an income is hard work no matter what type of job you have. By managing the money you’ve worked so hard to make in a smart manner, you’ll put yourself in a financial position down the road where you can have more choices about what you want to do in life.

How about you all? What is your best money tip for high school graduates?

Share your experiences by commenting below!

***Photo courtesy https://pixabay.com/en/girl-graduate-young-female-410175/