Archives For Consumer Debt

A front page article in this Sunday’s NY Times was about pension advances.

I don’t know about you but, when I hear the term “advance” a red flag appears. I automatically see a high interest loan.

Being true to their “painting everyone as a victim” ways, the article detailed an advance taken by a Mr. Govan. He took out a $10,000 advance and agreed to pay $353 per month for SIXTY months. Then, he did the math AFTERWARDS and figured out the interest rate was around 36%. Now he’s upset.

I’m not sure what prevented him from the doing the math before he took out the advance.

Is a 36% interest rate ridiculous?

Hell yes it is. But, that’s not the point. The point: he should have done the math first. Unless the company lied to him (always a possibility), he has no one to blame but himself. He agreed to the terms. Now he’s screwed.

Let me let people in on a secret: lenders are not your friends! They are out to make money. The sooner you realize this, the better off you will be.

Yes, this is very dated. It’s also very serious (I wish we took these things as seriously today).

I love “The Three Cs”:

• Character
• Capacity
• Capital

Finally, I love this quote:

“The wise buyer makes certain he’s getting good value for his money and always reads the fine print to make sure he understand all the terms of the contract before he signs it.”

It would have been hard for the real estate bubble to form had borrowers followed that one tip.

From 12 Debt Myths That Trip Up Consumers:

1. Once you marry, you’re responsible for your spouse’s debt.

2. Credit cards from your favorite retailers are a good deal.

3. You’re too rich for federal student loans.

4. Dutifully paying off your mortgage each month will do wonders for your credit score.

5. Money from a family member makes an easy down payment on a home.

6. Today’s tight lending criteria apply to auto loans too.

7. If you agree to separate your debt in a divorce, it’s separate.

8. A high income and credit score means you’ll be pitched the lowest interest rates on credit cards.

9. If you’ve looked up your credit score, you know your credit score.

10. A late credit-card payment will damage your credit.

11. All mortgage and home-equity interest is deductible.

12. Buying a home with cash is the best option, if you have the money. The author mentions the mortgage interest deduction, which does reduce the cost of the mortgage. I look at the opportunity cost than the interest deduction. Forking over $150,000+ for a house means you no longer have that $150,000 for something else like investing.

When is it ok to carry a balance on your credit cards or use consumer loans?

Inquiring minds want to know. I don’t carry any credit card balances, but have been keeping a fairly large HELOC (i.e. Home Equity Line Of Credit) mostly as “dry powder” to be used in case of emergency or in case an investment opportunity requires having ready cash at hand. It’s partially drawn because we also use it to fund cash flow swings for a family business. The interest rate equates to the Prime Rate, which is 3.25% right now and the portion of the interest applicable to the business is deductible as a business expense. I figure we’d have to pay considerably more interest on a commercial loan, and would have to provide personal guaranties on a commercial loan anyhow. So the HELOC makes for a very cost-effective way to fund the business. In terms of the hazards of borrowing against property (i.e. you could lose your home or property if you default), our loan to value (including the 1st mortgage) would be less than 30%, even if the HELOC were fully drawn, so I believe we’re being prudent.

We have not used the HELOC for personal consumer purchases like cars, boats, etc., because, as a matter of policy, we don’t use debt for living expenses or personal purchases. We don’t carry credit card balances or other consumer debt of any kind, and maintain over 18 months of living expenses in cash in an “emergency account”.

Does that sound a wee bit paranoid to you? Well, in my early adulthood, I endured a sudden and unexpected period of unemployment, which also happened to coincide with large credit card balances on top of a crushing amount of student loans (can you say levered to the hilt and living way beyond your means by age 25….). It was a tough lesson on the temptations of debt and the powerful forces compelling us to spend ourselves into oblivion. And it also drove home the need to be prepared for the unexpected – I realized then and there that there really was no such thing as job security and there never would be in my future.

Well, I eventually got back on my feet, and paid off all of my credit cards and student loans in full – a point of pride. It wasn’t easy, sometimes it was quite painful, and it took a few years, but lesson learned, and fortunately learned early enough, well before my peak earning years, that I could recover strongly from it.

So, to the question at hand, here are some things I regret having carried credit card balances or loans for:

  • Stupidly large bar tabs resulting only from 25 year old me needing to act like a big shot, booze it up, and buy everybody drinks.
  • Costly dinners and recreation, partaken because that’s just what young urban professionals do in NYC when they’re young and it seems as if tomorrow will never come.
  • Expensive toys, clothing and other status markers in order to feel more confidant (i.e. less insecure) and keep up with the Jones. Had to hock the home entertainment system, the Rolex, etc. to pay the bills. In my older age, I’ve become decidedly more downscale.

And here are some things I do not regret for one second having borrowed to finance:

  • The best college education money (i.e. scholarships and loans, lots of loans) can buy.
  • An engagement ring; and subsequently, a honeymoon. Happy wife = happy life.
  • Christmas gifts for family (within reason); In my early adult years, I always received far more than I’d given; It would have been wrong of me to show up empty-handed.
  • A sizable loan to my mom (the funds for which I in turn had to borrow from a bank) to help her buy into a higher early retirement benefit.
  • My first real vacation as an adult – wife and I still talk about it. It was a formative and bonding experience.
  • Start-up capital for our first business venture. Basically, an act of [informed] faith. Fully repaid from business cash flow in 2 years just as the projections had shown.
  • First real estate purchase. Most people need a mortgage to buy that first home. Having toured over 100 properties we knew the market inside and out, and tripled our equity the moment the ink on the contract was dry.

How about you? What does your list of debt regrets vs. no-regrets look like?

This is good but he misses one point. I’m not sure if it’s true of all 401(k) plans but interest on a 401(k) loan usually is paid into the 401(k) account. In other words, the interest is your money. It’s as if you borrowed from the Bank of You. Also, some companies do allow contributions while paying back a loan.

I agree with everything else he says.

NOTE: Notice there are no links to sign up for the credit card. That’s because I don’t hawk credit cards here at AFM.

Received a GM Rewards Card offer in the mail today. This particular card offers 0% APR on purchases and balance transfers for 15 months (3% balance transfer fee with a $15 minimum) and 5% cash back on purchases. They make it a point to say that there is no cap on that 5%. Sounds pretty good.


There’s a catch (there’s always a catch, isn’t there?).

Although there is no limit on how much you can earn from the 5% cash back, there are lots of restrictions on how you can apply it towards a vehicle purchase.

For instance, the cashback balance can be used with other discounts EXCEPT any of the following:

• GM Employee Purchase Program; QRD
• GM Dealership Empoloyee Purchase Program
• GM Enhanced Dealership Employee Purchase Program
• GM Supplier Discount Program
• the Credit Union Member Discount from GM

In addition, there is a cap on how much you can apply towards a purchase:

For 2012 models (these amounts are subject to change), you can redeem:

• up to $1,000 on the Chevrolet Cruze or Buick Verano; and
• up to $1,500 on the Chevrolet Silverado or Cadillac CTS; and
• up to $2,000 on the GMC Yukon, and
• up to $3,000 on the Chevrolet Corvette or Cadillac Escalade

I suppose it’s better than nothing but I’m pretty sure we would do better using the supplier discount.

From today’s WSJ:

Household borrowing through credit cards, car loans, student loans and other installment debt—which excludes mortgages—rose at a seasonally adjusted 9.3% annual rate in December, following a 9.9% rise in November, the Fed said Tuesday. That was the biggest two-month surge since late 2001, when auto makers rolled out zero-percent financing after the Sept. 11 terrorist attacks.

The title of the article is Auto and Student Loans Drive Borrowing Surge.

Mr. [Troy] Davig said the latest data offer a glimmer of hope that the long process of household debt-reduction, called deleveraging, is in a late stage. That process has slowed the recovery as Americans worked to pay down debts rather than spend money on goods and services. “That’s starting to come to an end,” he said.

To be sure, household debt-reduction isn’t over. The McKinsey Global Institute reported last month that American households have wiped out $584 billion in debt since the end of 2008, mainly through defaults, but also through payments. Still, some $254 billion worth of mortgages is headed toward foreclosure, and household deleveraging likely won’t be complete until mid-2013, the report states.

Consumer spending makes up roughly 70% of our nation’s GDP. So, promoting frugality is a no-no. Paying down debt is frowned upon. Long-term, this is not a good thing.

Related: The History of the GDP and Consumer Spending