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What is “Good Debt” vs. “Bad Debt” and what makes them different? Millions of Americans each day use debt, which can be defined as money borrowed from one party to another, to pay for a wide range of products and services. Whether you have a car loan, a home mortgage, or a credit card – you have participated in taking on debt in exchange for immediate cash flow. We’ll take you through the various types of debt, and together explore a platform for decision making when it comes to debt.
Good Debt or Bad Debt?
If you are like millions of Americans, the list of different types of debt is reminiscent of a personal experience – or an ongoing issue that you are currently battling. Don’t worry – you are not alone. While most debt feels like a burden or obligation, some types of debt provide a chance to either build credit or provide purchasing power that you wouldn’t have otherwise. So, let’s take a look at what might be considered “Good Debt” or “Bad Debt” so you can prioritize your financial decisions and possible payment plans for your current debt.
To keep it simple, let’s define “Good Debt” as any type of debt that helps build your income or overall net worth. You’re probably thinking, wait – are you telling me there is debt that can allow me to improve my income and my net worth? The answer is, YES – but it has both its pros and cons. Let’s take a quick look at what many would consider to be “Good Debt” and why this would be the case.
Home Mortgage – Many would consider a mortgage to be at the top of the list for “Good Debt.” Not only does this debt provide you the purchasing power to get into a home, it is often an asset that appreciates over time. Said another way, by securing debt for a home you have the opportunity to see the value of your home rise over time and become a positive growth asset.
Student Loan – While this type of debt is debatable among Americans, it continues to be considered an opportunity to experience higher-education and grow your earning power. Have you ever heard of the term “The more you learn, the more you earn?” This is typically the case for those who secure a degree. There are many options for higher education, whether you choose a trade school, community college, or a state university. If you keep an eye on where you go to school, the overall cost, and where you plan to secure post-graduation work – a student loan can be a great decision.
Small Business Loan – This type of loan can have significant upside, but an equal amount of risk. As noted prior, many businesses have trouble surviving in their first couple of years – so the risk and reward need to be weighed appropriately. If a small business owner has the ability to secure a loan, which is hard to come by, and successfully run a profitable business – the original debt secured to run the business can mostly be considered good debt.
The bottom line is this – if you secure debt that can potentially lower your income and net worth, it can be considered “Bad Debt.” Many items we purchase in our life immediately depreciate after purchase, like clothes and other consumables, and the vehicles we drive each and every day. While many of these types of debts are necessary to acquire, the best bet is to limit your exposure to these expenses and maximize your potential with appreciating assets. Easier said than done, right?
Car Loan – While a vehicle is essential, it is even more important to secure a reliable manufacturer and a healthy vehicle report. The smart play is to be vigilant in your approach to purchasing a vehicle so you don’t overextend yourself with your preferred mode of transportation.
Credit Cards – Credit Card companies have made it unbelievably easy for Americans to charge an expense with ease and speed. Since most consumers know exactly what their limit is, the spending control as a behavior is tough to manage. Carrying a balance month-to-month accumulates with high-interest rates and compounds with late fees if a minimum payment is not made. It is very easy to over-utilize the all-important credit utilization rate, and in turn damage your credit score – which is one of the main health indicators for lenders.
Late Utility and Cell Phone Bills – This expense should be an obvious “Bad Debt” flag, but many people still put off payments on these bills month after month. At the end of the day, a timely payment to a utility bill or cell phone company can improve your credit score and your borrowing ability. If you sacrifice your timely payments to these companies, you can find yourself quickly in a bind with collection agencies and lower credit worthiness in the eyes of many lenders. Stick to an on-time payment and find other areas in your financial life to negotiate when the rubber meets the road.
If managed correctly, both “Good Debt” and “Bad Debt” can be utilized to provide you the lifestyle that suits YOU. According to the Consumer Financial Bureau, if you keep your debt-to-income ratio under 43%, you put yourself in a good position to show lenders that you have the ability to pay off a loan. As a good practice, keep paying your bills and debt obligations in a timely manner, and allow yourself the ability to improve your credit score over time. When considering future financial decisions, take a moment to evaluate if your new debt will provide you with greater income and net worth. Even the best “Good Debt” choices can work against your financial situation, so take care in your decision-making process, and keep these borrowing basics in mind.
Good Debt vs. Bad Debt
zap August 31st, 2018
Posted In: 1FFC Blog, Education Articles
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Through the course of life, there are times you may need additional money beyond your expected monthly take-home pay. The reality is – life costs money. Even the best planners can find themselves in a position where they need extra funds. Whether you’re trying to cover an unexpected expense, planning to consolidate debt, or preparing for a major purchase – a personal loan might be a good solution for you. Before you apply for a personal loan, here are eight questions to consider:
1. What is a Personal Loan?
A personal loan is money borrowed for personal reasons. Personal loans are often used to consolidate debt, fund home improvement projects, cover medical expenses, or simply pay for a major purchase or vacation. Personal loans are often borrowed from a consumer finance organization, and provided in a lump sum payment. This personal loan is typically repaid at a fixed interest rate over a set period of time.
2. Are there different types of Personal Loans?
Yes. Personal loans can be either “secured or unsecured” and vary depending on your ability to meet specific credit criteria. Secured debt is a loan that is guaranteed by collateral, and collateral is an asset that the lender an take if the borrower defaults. Collateral can include personal vehicles, jewelry, or other personal property. Unsecured debt is a loan guaranteed without an asset serving as collateral. To break it down even further, it depends on your annual income, credit score, existing debt, and the availability of credit (among other factors).
3. How are my Finances?
Before making a financial decision, many people check in with their current financial health. If you know your full financial story, it allows you and a potential lender to put together the right plan for your finances – and figure out the amount of money you may need for a loan. Take a close look at your overall annual income and expenses. You’ll also want to know your overall debt, because this will also be considered when applying for a loan.
4. What is my Credit Score?
A credit score is used by lenders (and other financial institutions) to determine whether or not to offer you a loan. A higher number is a better number and is calculated on a range of 300 – 850. Before securing a loan, there are many resources available that provide a free annual credit report. There are three major reporting groups that often offer free credit reporting: Experian, Equifax, and Transunion. Not only can you receive your score, but you will then have a better understanding of what factors are impacting your score.
5. What is an Interest Rate?
An interest rate is the amount charged, as a percentage of the loan principal, by the lender to the borrower for use of the asset. This is basically a rental charge (interest rate) to the borrower for the use the of the money (personal loan). If you take out a personal loan, you will most likely pay both the principal and interest back to the lender, in addition to any other fees that might be associated with the loan. A lender will often charge a lower interest rate for lower-risk borrowers, and a higher interest rate for higher-risk borrowers – which can be determined by your annual income, credit score, existing debt, and the availability of credit (among other factors).
6. Will a Personal Loan Help My Credit Score?
It depends on the lender, and whether or not they are reporting to a major credit reporting bureau. (Please note, customers who choose 1st Franklin Financial Corporation will have their information reported to a major credit reporting bureau.) If the lender is reporting to a credit bureau, and you pay off your loan according to the provided terms, you will definitely have a chance to boost your score with on-time payments throughout the life of the loan. It’s important to note that this can have the reverse effect to your score if you don’t pay on-time, which is usually within 30 days of your monthly due date. If you happen to be swapping credit card debt for a personal loan, this can reduce your credit utilization, (which measures the amount of your credit limit that’s being used) which in turn could boost your overall credit score as well.
7. How much should I borrow?
The minimum and maximum borrowing limits are set by each lender and the amount of your personal loan limit depends on your creditworthiness. (This goes back to our questions above for “How are my Finances” and “What is My Credit Score?”) When you work with a lender it’s important to secure an amount you feel absolutely confident you can repay – so you limit the risk of overextending yourself.
8. How long will it take to pay off my loan?
Before taking out a personal loan, you’ll want to know the term of your loan. The term is defined as the amount of time or how long your loan will last with successful, regular payments. Loans are either “short-term or long-term,” from as little as one year, or as long as 30 years. The repayment of the principal and interest are due at the end of this time-frame. The “loan term” is important because it plays a part in determining your monthly payment and interest costs associated with your loan.
These are the 8 questions that should assist you in beginning your personal loan journey. As a reminder, be sure to get a full look at your current financial situation so you can make the best possible decision for your financial future. In the end, a personal loan has the incredible potential to build your overall credit worthiness and most importantly – secure the funds you need when you need them most.
zap August 27th, 2018
Attaining and maintaining financial strength and stability begins with a complete understanding of your income and expenses. The easiest way to achieve that is by creating a budget. A budget will help you increase your cash flow, reduce or eliminate your debt, create/maintain a savings plan and set a timeframe for achieving your financial goals.
Creating a budget is easy. Sticking to it is another matter. So be realistic when establishing your budget and be sure to include the entire family in the process so everyone is on board. As you set up short- and long-term goals, also set up incentives for meeting those goals. Sticking to a budget is easier when a reward is in sight.
To develop a smart and accurate budget, you need to identify all your numbers. Specifically:
Making smart choices
Meeting your financial goals requires you to make daily smart choices that support your long-term purpose. Begin by defining what expenses are necessities and which are luxuries. Be honest! If you are unable to meet your needs, you must first cut your expenses. If you are still unable to meet your needs, you must increase your income. A few other tips to help with meeting your daily budget:
zap January 29th, 2018
Identity theft is a growing crime which leaves behind long-lasting financial and emotional scars. While you can’t guarantee that you’ll never become a victim of identity theft, you can minimize your risk with a few simple steps.
Life throws us curveballs all the time. At one point, bad luck, poor choices or unfortunate circumstances may have landed your credit score on the lower end of the scale. While there are several credit scoring systems, the most popular is the FICO score which is used by the big three credit reporting agencies (Equifax, Experian and TransUnion). The FICO score ranges from 300 to 850, which is a perfect score.
The definition of a bad credit score will depend on the lender and the type of credit you’re seeking. For example, many home mortgage lenders consider anything below 620 as sub-prime while other lenders can consider 640 or 680 sub-prime. Sub-prime is defined as borrowers with tarnished or limited credit history who present more risk to lenders.
The impacts of bad credit extend far beyond what many people think of as the traditional consequences such as the inability to be approved for a credit card or purchase a home or car. Consumers with bad credit often find it difficult to:
Why the connection to employment? A survey by the Society for Human Resource Management found that six out of ten private employers check the credit histories of at least some of their job applicants, and 13 percent conduct them on all candidates to help prevent theft and get a sense of dependability of a candidate, among other reasons.
Borrowing even small amounts of money can present challenges since people with bad credit face limited options. Traditionally, banks have been the first choice for personal loans. However, if bad credit is an issue, the chances of approval are slim. Even without bad credit, securing loans for small dollar amounts is unlikely to happen since most banks won’t approve loans under $5,000 due to the lack of revenue generated by these small amounts.
So where does this leave consumers with borrowing needs of less than $5,000 who also have bad credit?
Installment loans are becoming an increasingly popular solution especially for those with bad credit. Installment loans help people with unexpected expenses or various life needs, such as:
Simply, an installment loan allows you to borrow once and then repay with regular, fixed payments (usually monthly payments that don’t increase or decrease) over a previously defined period of time. With good or bad credit, installment loans provide a fixed interest rate and a set monthly payment that is based on the loan balance, interest rate and time you have to repay the loan. This means that with each payment you make, you reduce your original loan amount while also paying interest costs. Home mortgages and auto loans are two common types of installment loans.
There is a difference in installment loans and payday loans. Unlike payday loans installment loans offer larger amounts of money and are also:
It is also notable that installment loans can be good for bad credit. Your FICO credit score is based on various factors of financial history:
In the heavily scrutinized financial market of today, it’s easy to find supporters and critics of installments loans. For bad-credit ridden consumers, advocates say installment loans are a better option since, unlike payday loans, there is no final balloon payment that can cause the borrower to incur even more debt. Also, since installment loans can actually improve credit scores, they automatically gain better standing in the eyes of many financial professionals and consumer advocates.
However, there are also plenty of critics of installment loans and the companies that offer them. Unfortunately, predatory lending isn’t new to the financial industry, which is one more reason borrowers must carefully evaluate and select the lending institutions they choose to work with.
With 279 loan offices in 6 states in the southeast, 1st Franklin Financial is a leading provider of installment loans for bad credit borrowers. Unlike the faceless online lending institutions, 1st Franklin Financial has a history of being active in the communities we serve (primarily rural areas), which allows us to know and help generations of families. In fact, since 1941 our goal has remained this: to serve the financial needs of our friends and neighbors with the respect and personal service they deserve. Respect says a lot, and it’s what has driven the creation of our installment loan programs.
A few of the differences you’ll notice with an installment loan from 1st Franklin Financial are:
While bad credit can make your financial life more difficult, 1st Franklin Financial makes the process of getting approved for an installment loan easy. Whether your have unexpected expenses or need a little extra help giving your family the Christmas you want them to have, we can help. When you’re ready to get started simply complete our online form and a local representative will contact you.
The countdown to the holidays is officially on! And while it’s the season of love and giving, it’s important to remember that holiday debt is the gift that keeps on taking – potentially all year long if you’re not careful.
Don’t let holiday spending take on a life of its own this year. With a little planning and dedication, you can create a joyous holiday season for your friends and family without the long-term, detrimental financial effects.
Santa can’t pull off Christmas without a list and neither should you. Creating a list of recipients will ensure you don’t forget anyone and will also keep you from tacking on extra names. Keep in mind everyone’s financial situation changes year-to-year, so even if you exchanged gifts with friends in the past, it may be less stressful for both of you to skip the exchange this year.
Once you have your list compiled, make notes about who you’d like to give store-bought gifts and who should receive homemade gifts such as baked goods.
Even the cost of holiday parties can add up. Make a list of events you plan on attending, what you’re contributing to each and the cost. When you factor in the cost of a holiday ham, platter of sweets or several snack trays, it can quickly add up. An list will also help you schedule your time and make sure you’re prepared – instead of rushing to the store at the last minute.
Now that you know who is on your gift list, here comes the most important part: defining what you can afford and setting an overall budget as well as an individual budget. Be sure to check out our Holiday Spending Worksheet for help creating a budget and list. If you’re unsure where to start on a budget, think about what you spent last year and see how your finances this year compare. Fight the urge to let your heart be bigger than your bank account.
Once you have an overall budget, prioritize your recipient list and set a limit for each person. Then, put that amount of cash in an envelope with that person’s name. A great perk of the envelope system is that to overspend for one person, you have to take money from another.
Using credit cards for holiday shopping can be tempting, but it’s vital to avoid charging gifts. When all you have to do is swipe a card, it’s easy to overspend. If the envelope system seems like too much trouble, just think about the bill you could get come January that might be double or even triple your budget!
Don’t have enough cash on-hand for holiday shopping? Rather than use credit cards, which could take years to pay off, think about an installment loan with a pre-set payoff period. With an installment loan you can purchase the gifts you want while reducing your post-holiday stress by knowing the exact amount of your payments each month and the exact payoff date.
Now that you know how much you have to spend, it’s time to get to work. There are lots of great deals to be found around the holidays if you take your time and know where to look. Shop store specials, the infamous Black Friday deals and bargain hunt online before going to the store. Many stores will price match any deal you find on the Internet. Even if you can’t find a store policy, it never hurts to ask.
Check daily deal sites like Groupon and LivingSocial for great deals and discounts on merchandise as well as services and events. For people on your list who are all about the experience, a gift card to the local spa or tickets to a concert, movie or theater production are great options. You can also check StubHub and other secondary ticket sites for deals.
Many stores offer coupons that can be printed from their website and brought to the store. If you buy online, there are plenty of coupon codes to be found for significant discounts.
Before you buy, double check the store’s return policy. Some items such as electronics, software and videos may not be returnable while other stores have limited return periods for any item. Check the fine print for gift cards too since some may have expiration dates.
As you research, keep in mind that the best gift may not be purchased from a store at all. You can use your talent as a gift to knit, sew, paint, sculpt, woodwork, etc. You could also spend some time in the kitchen making favorite goodies or a mid-week meal before the holidays.
Sometimes, your time is the best gift of all. Help your grandparents around the house, volunteer at the local soup kitchen with a friend or make coupon books for help a person might need later in the year.
The best deals might be found online and can also save you time and long lines. Purchase gifts from reputable sites using prepaid gift cards, debit cards or PayPal accounts—not credit cards! If you do make the rounds at the mall, remember to:
Lunch costs can add up quickly and so can those $4 coffee drinks. Eat before you shop and if you plan on being gone for a while, bring a snack and drink with you.
When you see one great deal after another – and it’s something you’d just love to have yourself – it’s tempting to add it to the pile. Instead, take a picture of the coveted item with your phone and save it as a gift idea for later.
You might see a great sweater your niece would love, but if you have already bought something for her either pass it by or return the other item first.
Remember that even the best laid plans needs to be altered sometimes. If regular bills are piling up and your previously defined holiday budget just isn’t realistic anymore, change your plan. Move some on your list to the handmade gift list or simply explain that you just don’t have the money this year to purchase gifts.
Once that last present has been opened and the checkbook has been balanced, take a look at how you did. Did you bust your budget? If so, where did you deviate from the plan? What lessons did you learn that can help you for next year? If you have outstanding debt, how will you pay it off? Remember that installment loans are a great way to take care of that debt in a short period of time.
Keep in mind that right after the holidays is the best time to purchase holiday greeting cards and holiday gift wrap for next year since they will cost you a fraction of the price.
A great way to make holiday shopping go even smoother next year is to start saving now. Putting just $20 a month into a special fund can help lessen the blow next winter.
Throughout the year, take notes if you hear a loved one comment about a gift they’d love or an event they would like to attend. This way you’ll be better prepared with ideas during the next holiday season—especially for those hard to buy for people.
The end of Summer means the end of carefree days for your kids and that dreaded dent in your wallet as you buy this year’s school supplies. Most school systems have experienced budget cuts over the last few years and parents are being asked to provide even more as part of their child’s school supply list. When families have more than one child, or an older child with more technology requirements, these requests can seriously impact their budget if not planned for properly.
With a little planning and some savvy shopping, you can save money this year on the necessities while making some spending room for extras in your budget. Follow these proven strategies to save money this year on all of your back to school supplies shopping.
Most counties will provide a list of the school supplies needed for each grade level to help ensure your child is prepared for this year’s lesson plan. Be careful not to pre-purchase too many school supplies before checking this list to keep from wasting money on items they can’t use or don’t need. Your child’s school website is often the first place to look for this list and is usually available for download. Many local retailers will also maintain these school supplies lists to help their customers make the right purchases when at the store.
It’s important to pay close attention to the list’s details about the type of items your student needs, their quantity, and any specific features that are required. Buying washable markers when the list states the need for permanent markers could create an issue down the line for your child. While tempting to buy only generic products for this list, teachers have had years of experience with both brand name and generic versions of certain items. If the list names a specific brand, like “XYZ brand” glue vs just glue, the teacher has a definite reason for this request and you should stick with it. Otherwise, buying generic items should be good enough when completing the rest of the list.
Involve your child in the back-to-school shopping process early to help set expectations and save money when buying school supplies. Review the supplies list together and assign a priority level to each item from your child’s view, including any one-off items they might ask for. Having this conversation and a pre-set budget will help you eliminate a lot of impulse buys and arguments once at the store.
Set expectations for some of your purchases if you plan to make use of items beyond the current school year. Buying a backpack with this year’s favorite superhero or princess can mean paying a premium now and almost guaranteeing that your child will not reuse it next year. Instead, assign a bit more of your budget toward these types of long-term school supplies to buy higher quality items so that next year’s budget can go further.
Local retailers know that back to school can mean a huge increase in foot traffic and purchases of other items beyond your school supplies list. Even non-traditional stores, like grocery stores and drugstores, will offer products below their actual cost to draw in customers during this shopping season. Starting as early as July, stores begin marking down items like paper, pencils, and markers that can mean big savings for you if you follow the sales. Sign up for your local retailer’s flyer mailing list to know when school supplies are available at a deep discount.
Shopping online has become second nature to many of us as we seek bargains and want to educate ourselves on the best options to buy.
Combining an online shopping strategy with your local back to school sales can help you save even more money through special offers, coupons, or rebates on items you are searching for. Sign up for your favorite store’s email list for access to discounts, free shipping, or other perks when completing your school supplies list. Some stores also provide coupons and offers through text messaging as another means of staying in touch with their customers. Both of these services can be unsubscribed from at any time while opening the gate to savings when you need it most.
Read and understand different retailers’ price-match guarantee policies to take advantage of the best prices available when shopping locally. These policies often allow you to take advantage of their deals even if there isn’t a physical location in your area. This means that a special on notebooks at a big box store or a deal on laptops at a technology store can still be redeemed at your local retailers when you show a physical ad or online deal in person. Price matching can also be used to save time by purchasing all of your school supplies at one location without traveling from store to store finding the best deals.
Learn more about price-match guarantee policies and how you can take advantage this year.
Convenience has become a big factor in how people make their purchase decisions, but often that means paying a premium on some items in return for one-stop shopping. Unfortunately, saving money usually requires you to travel from store to store, trying to take advantage of their extra-special offers that are meant to get you in the door while purchasing those other must-haves on you list. Many big box retail stores understand the power of convenience and offer a “price match guarantee” incentive that still allows their customers to take advantage of these types of deals without the hassle of driving all over town. Participating stores will either match their competitor’s exact deal to keep from losing the sale or even refund the difference in purchase price if a deal is found after you have already made a purchase.
While each retail store has slightly different requirements, the majority agree that the product being price-matched must be an identical, in-stock product of the same brand, model number, and aesthetic features (ex: color, weight, etc.) to qualify. Simply bring in the entire printed ad, or pull out your smartphone for online offers, to confirm that your item meets these minimum requirements. This means that it still makes sense to find all the best deals at each store while removing the hassle of traveling all over town.
More importantly, most price match policies do not require that a competitor actually be located near you to participate. Now finding that super deal online from a competitor can mean big savings at your local retailer even if there isn’t a physical location in your town. There are some stores that do require a competitor to sell the price-matched item both through a physical store and their online presence. Other retailers will only price-match against other online retailers that they specifically list. The list of competitors that meet one or both of these criteria are still very large though, so everyone should be able to take advantage of most price match policies.
Price match guarantees are eligible on most anything you would want to buy but retail vendors do have some conditions that must be met.
Price match guarantees will generally not be honored during traditional sales periods, like Black Friday or Cyber Monday, or on items that competitors have listed as “clearance” or limited-quantity offers. These types of super-specials are meant to appeal to the convenience factor and encourage you to make all your purchases while you are already there. Retailers know that these items are often “loss-leaders”, or items sold below their actual value for short-term effect, and cannot compete with that price-level on the long term. Limited stock items, purchases that need a coupon, or purchases that require signing-up for another type of service are also usually excluded.
The best way to make sure you always get the best price for the items you need is to understand the rules. Find out what stores in your area offer price match guarantees by asking the service desk. You can also add the term “price match” to your searches online to pull up a list of each stores policies. A little research around each store’s limitations while preparing your shopping checklist can help you maximize your savings of both time and money.