October 3, 2008

Bailing Ourselves Out, Part 2: Loans

Today the House of Representatives votes on the $700 billion bailout. Whether or not they approve it today, odds are good that the government (and thus the taxpayers) will be on the hook for that money. This post is my second in a series discussing ways for ordinary Americans to address and repair some of the basic causes of the current financial crisis.

Part 2: Make your loan payments in full and on time.

You may be looking at the above sentence and wondering if you've read it correctly. After all, who doesn't make their loan payments in full and on time? The answer is, quite a few people. Mortgaged houses are being abandoned by owners who simply stop making payments and mail the keys to the bank. Car loans, student loans, and credit cards have all seen an increase in payment delinquencies recently. So, what's going on?

It's true that some adjustable-rate mortgages shifted to new rates with monthly payments so high, the homeowners simply couldn't afford to pay them. But that isn't the whole story. All over this country, people have gotten in over their heads in debt, be it measured in swollen credit card balances, expensive cars, or houses they really couldn't afford. There is some blame to be directed at bad lending practices for this. At the same time, the consumer also has to take some responsibility. We're the ones who sign up for the credit cards, walk into the car dealerships, and agree to make the offer on the house. But now it's time to really look at the mess we've created.

Paying late, missing payments or making partial payments on mortgages, cars, credit cards, consumer and student loans can all badly affect your credit. If you find yourself with more bills than you can afford to pay, look seriously at other spending that you can cut down to cover the gap. Do you really need premium cable? Or a new cell phone every year? How about that morning coffee at Starbucks? Most budgets have some fat that you can cut.

Consolidation might also help you by cutting down on the number of payments you're making. If you are juggling balances on multiple credit cards, keep making your minimum payments and target one particular card for elimination. You could choose the one with the highest interest rate, or smallest credit limit. Using balance transfers, move the balance from that card onto one or more of the others. Then close the target card. (Closing a credit card account does have a negative impact on your credit report, but so does missing scheduled payments.) If you have multiple student loans, you may be able to get a consolidation loan that allows you to combine them all into a single loan with one interest rate and payment. Several lenders have stopped offering these recently, so call yours or check their website to see if they offer consolidations.

Lastly, a word on mortgages. If you can afford to make your mortgage payments, and you are not planning on moving or selling your house within the next 2-5 years, stay put!!! There have been a lot of alarming news items about homeowners being "underwater" on their mortgages -- that is, they currently owe more on the mortgage than they would be able to sell the house for in the current market. It is partly this concern that is causing some people to sell their houses at a loss, or walk away from them. But unless you need to sell your house right now, or fairly soon, what you can get for it in the current market does not matter. In fact, if you're planning to live in your house for another ten or twenty years, the current real estate value means little. In the last year or two, home prices have been heading down. For four or five years previously, they were increasing. The real estate market has ups and downs like any market. And the longer you hold your property, the more likely you are to see the value go up.

We've seen several large banks disappear during this crisis, partly because they could not meet their obligations. Take a good, hard look at your finances and make sure you can meet yours. And before taking on any new loans or credit cards, think long and hard about whether you really need to make that purchase right now. We've developed a bad habit in this country -- mortgaging our futures.

No comments: