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Guide to Credit Counseling: 7 Key Questions to Ask

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Guide to Credit Counseling: 7 Key Questions to Ask

It’s no secret that financial education is sorely lacking in the U.S. However, this does not mean that you can’t seek financial education from reputable sources. If you have little to no knowledge on the topic of personal finance and are struggling with your finances, then you may consider credit counseling.

Credit counseling can involve a variety of services including educational materials and real-world application to your finances. Credit counselors can help you to set a budget and advise you on how to manage debt and your money in general.

According to the Federal Trade Commission (FTC), reputable credit counseling organizations have certified counselors who are trained in consumer credit, money and debt management, and budgeting. Credit counselors will work with you to come up with an individualized plan to address the money issues you are facing.

Seeking credit counseling is typically voluntary but can be required when filing for bankruptcy. In this guide, we’ll answer some key questions you might have about credit counseling and whether it’s right for you.

How Do You Find a Credit Counselor?

Before settling on a credit counseling organization, do your homework to make sure they are not only reputable but will also be the most helpful for your particular financial circumstances. Check with your state’s attorney general and the consumer protection agency present in your state to see if there have been any complaints filed.

When looking for a good credit counseling agency, first ask about what information or educational materials they provide for free. Organizations that charge for information are typically more interested in their bottom line than helping you. Also, ask about the types of services they offer. Limited services can be a red flag. The fewer services they offer, the fewer solutions they may provide you.

You do not want to be pushed into a debt management plan simply because that is their top service. And make sure you understand the organization’s fee system, not only how much services will cost but also how employees are paid. If employees make more based on the number of services you receive, look for another credit counseling organization.

MagnifyMoney has come up with a list of some of the best credit counseling options, which are a great place to start. If you are looking for credit counseling as a pre-bankruptcy measure, the U.S. Trustee Program has a list of approved credit counseling agencies that can provide pre-bankruptcy counseling.

How Much Does Credit Counseling Cost?

Credit counseling can involve both start-up and monthly maintenance costs. The Department of Justice has said that $50 per month is a reasonable fee. Further, the National Foundation for Credit Counseling (NFCC) has suggested that a start-up fee should not exceed $75 and monthly maintenance fees should not be more than $50 per month.

Credit counseling agencies may offer fee waivers or fee reductions, depending on your income levels. Where credit counseling is required, the DOJ requires that if the household income is less than 150% of the poverty line, then the client is entitled to a fee waiver or reduction. While the poverty line varies depending on household size, it ranges from $11,880 for a single person family household to $24,300 for a family of four.

Other regulations, such as when fees can be collected and circumstances that would warrant fee reduction or waiver, may also be set forth by your state.

How Long Does Credit Counseling Last?

While the length of your credit counseling session depends on the complexity of your financial problems, sessions typically last 60 minutes. After the initial session, credit counselors will then follow up to ensure you understand the actions you needed to take and that you have been able to get started on the plan they developed. Another session may be necessary if you see a significant change to your financial situation.

What Do You Accomplish with Credit Counseling?

According to the NFCC, reputable counseling involves three things. First, a review of a client’s current financial situation. You cannot move forward unless you know where you are starting. Second, an analysis of the factors that contributed to the financial situation. You don’t want bad habits to undermine your progress. Lastly, a plan to address the situation without incurring negative amortization of debt. This gives you a place to start in improving your financial situation.

What Is the Difference Between Credit Counseling and Debt Management Programs?

A debt management plan is just one solution a credit counselor may recommend based on your financial situation. Having a debt management plan is not the same as credit counseling.

A debt management plan involves the credit counseling organization acting as an intermediary between you and your creditors. Each month you will deposit an agreed upon amount of money to your credit counseling agency, which will, in turn, apply it to your debts. The credit counseling agency works with your creditors to determine how the amount will be applied each month as well as negotiates interest rates and any fee waivers. It’s important to call your creditors directly to check whether they are open to negotiating interest rates or offering waivers for fees. In some cases, a credit counseling firm may promise to negotiate those things for you but be stonewalled when they discover a creditor isn’t even open to the discussion.

Before agreeing to a debt management plan, make sure you understand any fees associated with the debt management plan and any choices you might be giving up. For example, some debt management plans may have you agree to give up opening up new lines of credit for a specified period of time. Remember that a debt management plan is just one of many solutions a credit counselor may advise you to consider.

How Does Credit Counseling Impact Your Credit Score?

Not directly. While the fact you are in credit counseling may show up on a credit report, that fact does not affect your score. The actions you take as a result of credit counseling can impact your score. For example, if you don’t choose a reputable credit counseling agency, the agency may submit the payment on your behalf late to your creditors, which can damage your credit score. So even though you submitted your payment on time to the credit counseling agency, it is possible that the credit counseling agency will issue a late payment on your behalf. This is why it is important to make sure you use a reputable credit counseling agency.

Who Should Consider Credit Counseling and When?

While credit counseling is sometimes required, like in instances of bankruptcy, you always have an ability to seek credit counseling. Bankruptcy attorney Julie Franklin, based in Boston, Mass., explains, “For bankruptcy purposes, there are two course requirements — a debtor must complete the first credit counseling course prior to filing and obtain a certificate that is filed with the court in their initial bankruptcy petition documents. Post bankruptcy filing, the debtor is required to take a second course, and upon completion, the certificate that is issued must be filed with the court in order for the debtor to obtain an order of discharge.”

Anyone struggling with personal finance should consider credit counseling as a viable option so long as they use a reputable credit counseling agency. Franklin also notes that “the first credit counseling course is a tool for debtors as it compels the individual taking the course to closely examine the household assets, income, liabilities, and spending habits to determine if there’s a way to ‘save’ the debtor from having to file bankruptcy.” If you are considering bankruptcy, you will have to attend some credit counseling anyway, but it could also help you to avoid filing for bankruptcy.

Voluntary credit counseling might not help if you are already being sued to have a debt collected. However, you may be able to negotiate terms with the debt collector that result in a withdrawal of the suit if you agree to enroll in credit counseling and possibly a debt management program. Not all creditors will agree to such terms, but it is possible.

Liz Stapleton
Liz Stapleton |

Liz Stapleton is a writer at MagnifyMoney. You can email Liz here

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5 Reasons It Is So Difficult to Keep Your New Year’s Resolutions

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5 Reasons It Is So Difficult to Keep Your New Year’s Resolutions

Most of us start the year with high hopes for the health of our bodies, minds, careers, and — of course—bank accounts. But you probably don’t need a statistician to tell you that when it comes to keeping your New Year’s resolutions, the odds are stacked against you.

A popular study published in the University of Scranton’s Journal of Clinical Psychology found that while nearly half of Americans usually make resolutions, just 8% are successful in keeping them, and about one-quarter report that they fail to meet their goals year after year.

[Are you ready to become debt-free in 2017? MagnifyMoney has created a FREE online guide to help you get out of debt.] 

Why do these plans fall apart so easily? We talked to two certified financial planners to find out what held people back from sticking to their self-improvement plans in years past — and what can be done to overcome these obstacles in 2017.

No. 1: Your resolutions are unrealistic or unclear.

Vague, lofty goals like “lose weight” or “save money” can do more harm than good; undefined targets can leave you overwhelmed and discouraged when you don’t immediately succeed. That’s why resolutions should start small, according to Kristen Euretig, certified financial planner and founder of Brooklyn Plans in Brooklyn, N.Y., a company specializing in helping today’s women with their finances. “Take into account a realistic but ambitious goal that can be achieved in a year and would be forward momentum toward an even larger goal,” says Euretig. “Buying a house may be too much to tackle in a year, but saving the first 10% of a down payment could be a realistic starting point that would also be quite an accomplishment.”

Another trick to keep you from getting overwhelmed? Be as specific as possible. Euretig recommends breaking up big resolutions into defined subgoals with set deadlines. Rather than resolving to pay off student debt, says Euretig, start by figuring out if your payment plan is working to your advantage. That way, you’ll better understand the time and effort required to reach your goal and appreciate any incremental progress along the way.

No. 2: Your resolutions don’t align with your needs or lifestyle.

Ever find yourself rationalizing your way out of a behavioral change? Maybe you can’t go to the gym today because you have important errands to run, or you neglect that book on your nightstand because there is a movie on Netflix you’ve been meaning to watch. Your reasons may be legitimate, but using them as a means of abandoning your self-improvement plan is detrimental to you in the long term.

Melissa Ellis, certified financial planner at Sapphire Wealth Planning in Overland Park, Kan., knows that a thorough understanding of your current behaviors and lifestyle can help you anticipate the setbacks you will face throughout the year and think up solutions that will keep you on track when challenges arise. If your goal is to max out your Roth IRA, Ellis notes, you need to make sure you have the discretionary income to make it happen; if you know at the start of the year that you’ll have to cut back somewhere else in your budget (like your take-out habit) to find the extra money, you’re more likely to stick to the plan.

No. 3: You sacrifice your future well-being for your present happiness.

Most of us treat our future self as a different person. Unfortunately, it’s often a person we don’t seem to care much about. This phenomenon — our willingness to sacrifice our future well-being for immediate gratification — is called myopia temporal discounting. It’s one reason why many people continually put off diets, start saving for retirement later than they should, or rack up credit card debt for items or experiences they can’t afford. In fact, credit cards are the ultimate trap for people who like to live in the present vs. think about the future.

“It’s easier to put off the intangible, because it’s not an immediate need,” says Ellis. Try connecting with your future self by visualizing what you would like your life to look like at age 40, 60, or 75, and think about what steps, however small, you can take today to make that vision a reality.

The Time Personality Quiz - Be Well Versed In Your Financial Future

You should know your financial personality — that is, how you perceive time and how that perception impacts your financial  habits — before you make any financial resolutions. The better you understand your strengths and weaknesses, the more likely you will be to succeed.

Take the Time Personality quiz here > 

No. 4: You don’t hold yourself accountable.

Can you remember what your resolutions for last year were? It typically only takes about three weeks for most of us to get back into our old routines and forget all our intentions for the new year, especially if you don’t have a time frame for achieving the goal or a way to measure your progress.

“The best way to stick to resolutions is to make them real and to hold yourself accountable,” says Euretig. “Write goals down. Make a vision board. Put a picture of the vision board as the wallpaper of your phone. Share your resolutions with an accountability partner who you can check in with along the way or with your social media community.” Setting aside time each week or each month to check in with yourself about your success will help you remember the resolutions throughout the year. If you need an extra boost, tap a friend or family member who can help remind you to stay on track or, even better, join you on the journey.

No. 5: You forget to reward yourself.

It’s easy to lose motivation as the year goes on and you settle into old routines. Any sense of urgency goes away, and you can end up putting off behavioral changes indefinitely until it’s January again.

That’s why Ellis recommends rewarding yourself throughout the year if you are successfully sticking to your resolution. If you meet your goals of, say, paying off a department store credit card, maybe buy yourself a pair of shoes — but be sure to do it in cash, so you’re not buying something you can’t afford and racking up more debt. “It’s something concrete you can look at to remind you that you have made a change,” Ellis says.

Whether your goals are about money, your career, relationships, or fitness, it’s important to remember that good things typically don’t come easily. Taking time to set the right goals, define an execution plan, and regularly track your progress will make sticking to your resolutions a little less painful — and a lot more likely to happen.

Are you ready to become debt-free in 2017? MagnifyMoney has created a FREE online guide to help you get out of debt.

Adrianna Gregory
Adrianna Gregory |

Adrianna Gregory is a writer at MagnifyMoney. You can email Adrianna here

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Americans with Holiday Debt Added $1,003 on Average This Year

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With the holiday season drawing to a close, some Americans are going to find themselves nursing a pretty serious debt hangover.

In our second annual holiday debt survey, MagnifyMoney found consumers who took on debt this holiday season will kick off the New Year with an average of $1,003 worth of new debt. That is up from $986 in 2015, for a year-over-year increase of 1.7%.

Our survey consisted of a national sample of 552 Americans who reported they added debt during the holidays.

Here are key findings:

Most people who went into debt didn’t plan on it

Racking up credit card debt isn’t exactly a problem in and of itself, so long as you have the cash on hand to pay it off quickly. But in our survey, we found the vast majority — 65.2% — of consumers who took on debt did so unexpectedly this year, and didn’t budget for the extra expenses.

It’s easy to imagine scenarios in which people might spend more than they can afford over the holidays. Last-minute gifts, family emergencies, and, for some, fewer work hours, can all add up to a hefty credit card bill if not planned for in advance.

Most people will be paying off their debt for 4 months or more

Less than one-quarter of those surveyed said they can pay off their debt within one month. Nearly half (46%) predict they’ll need four months or more to pay off their holiday debt, or will only make the minimum monthly payments.

Nearly 12% of respondents said they only plan on making minimum monthly payments, which can extend repayment for years.

Even a seemingly meager amount of debt can quickly balloon over time if it isn’t paid off aggressively. We can illustrate this using the MagnifyMoney Credit Card Payoff Calculator.

A person carrying an average debt load of $1,003 who makes one $25 minimum payment per month would need 58 months (4.8 years) to pay off their debt. That calculation assumes an average APR of 16%.

On top of paying off their principal balance of $1,003, over that time they would pay an additional $442 worth of interest for a grand total of $1,445.

Credit cards were the most common form of debt

For another year, credit cards reign as the most popular source of holiday debt. In fact, even more consumers reported using credit cards for holiday debt this year than in 2015 — 59.9% vs. 52%.

Unfortunately, the number of consumers who turned to payday loans this year increased, from 6% in 2015 to 7.1% in 2016. Payday and title loans are hands down the most costly options for people who find themselves in need of cash.

We did find one bright spot, however. This year, the rate of consumers who said they used store credit cards fell dramatically, from 30% in 2015 to 17.1% in 2016. Store credit cards can often come with painfully high interest rates and other gotchas like dreaded deferred interest policies.

Shoppers are stuck with higher rates this year

This year, half of survey respondents (50%) said their debt carries an APR of 10% and above. Among those, 34.7% have APRs between 10-19% and 16% carry APRs above 20%.

The rate of people who are stuck with 20% or higher APRs rose significantly year over year, from 9% in 2015 to 16% this year.

But most people won’t bother to get a lower rate

Despite the fact that almost half of respondents expect to take 4 months or more to pay off their debt, a mere 13% of respondents said they plan to shop around to find a better rate with a different bank or loan. That’s even worse than last year, when 22% of respondents said they would shop around for a better rate.

The most cited reason for not wanting to shop around is not wanting to deal with another bank, noted by 20.9% of respondents this year.

Using the MagnifyMoney credit card payoff calculator, we found a consumer with $1,003 in debt at a 16% rate making minimum payments would shave over a year off debt repayment and save over $400 in interest payments by finding a 0% balance transfer.

Millennials were most likely to go into debt over the holidays

Among all age groups, people ages 24-35 were most likely to say they went into debt this holiday season with a rate of 14.3%. With the exception of 45-54-year-olds, the likelihood of going into debt decreased with age. Seniors were least likely to say they went into debt, with a rate of 7.6%.

How to free yourself from holiday debt:

In preparation for the new year, MagnifyMoney released the 2nd edition of its free 45 page Debt Free Forever eBook – that you can download to prepare your action plan, tailored to whether your situation calls for a quick switch to a lower rate, or more significant debt payoff advice.

Key tips for beating the debt cycle include:

  1. Understand where your money actually went. The best way to fix your spending problem is to understand where the money has actually gone. And there are great apps, like LevelMoney or Mint, which can help you understand where your money has gone over the last 3 months. We particularly like LevelMoney, because it splits your expenditure into fixed, recurring expenses and variable expenses.
  2. Review your credit report from all three reporting agencies. You need to know what is on your credit report in order to build a good credit score. You can download your report for free at AnnualCreditReport.com for all three bureaus.
  3. Understand your credit score and put together a plan to improve your score during 2017. People with the best scores never charge more than 10% of their available credit and pay their bills on time every month. Not only is that good for your score, but it is good for your wallet. And you can now get your official FICO score for free in a number of places. Otherwise, you can get your VantageScore at sites like CreditKarma.
  4. If you have a good credit score, your debt can probably be refinanced. Mortgages, student loans, auto loans and credit cards (with a balance transfer or personal loan) can all be refinanced. Find ways to lock in much lower interest rates now before rates go up to help you pay off your debt faster. But avoid extending the term to get a lower payment. The biggest trap people fall into with refinancing is that they lower their rate and extend their term, like taking a 30 year refinance on a mortgage that’s set to be paid off in 15 years. By doing this, you might end up paying more money in the long run. Second, be careful before you refinance federal student loans, because you give up valuable protection.
  5. Paying off the debt with the highest interest rate first will save you the most money (the debt ‘avalanche’ method), but a recent study shows you’re more likely to stick to paying off your debt if you pay the debt with the smallest balance in full first (the debt ‘snowball’ method), even if it doesn’t have the highest interest rate. That’s because small ‘wins’ help build momentum to keep you motivated.
  6. Automate all of your payments. Data has consistently shown that automating decisions greatly increases the likelihood of achieving your goals. To build that emergency fund, set up automatic transfers from your checking to your savings account. (Even better, get a higher interest rate online account and keep it completely separate from your checking account). To build your retirement savings, automate your 401(k) or IRA contributions. And to pay your credit card bill, automate your monthly payments.
  7. ‘Net worth’ is not just a concept for the rich, and you need to focus on your net worth now. Net worth is a simple concept: it is what you own minus what you owe. Building wealth and being financially responsible means you are building your net worth. A good salary doesn’t help your net worth if you’re spending it all on your car and clothes and not saving each year. Focus on the right number: building your net worth.

Before you consider a balance transfer:

If you need to buy yourself more time while you trim expenses and work on paying down your debt, a balance transfer can be a useful tool, but one that can backfire if you’re not disciplined. A balance transfer is simply a process where you transfer the balance from one or more credit cards onto a single new credit card with a different rate.

You can use our balance transfer calculator to estimate whether getting a balance transfer credit card will help you save money and pay off your debt faster.

If it will help, you’ll first need to check your credit score to see where you stand since you’ll be applying for another credit card. Balance transfer offers typically require a credit score of 680 or higher to be approved.

You can check your FICO score for free using Discover’s free FICO Score Card which is even available to non-customers who don’t use Discover products, or use another free source.

It’s also important to do the math before signing up for a new credit card. Be honest about how much you can afford to pay each month to determine how much a balance transfer will save you in the long run.

And keep these tips in mind:

  • Many balance transfer offers have fees of 3% or more. While that can be worth it for large balances, make sure you compare the fee versus what you will save in interest and when you think you’ll pay off the debt.
  • On most cards, balance transfer offers are only valid if you complete the transfer within the first 60 days.
  • One month before your rate expires, look for another offer because when the 0% period expires, the interest rate will rise significantly.
  • Don’t spend on the new card. Unless the 0% offer extends to purchases, you will be charged interest on your spending and rack up more debt.

2016 Post-Holiday Debt Survey Questions

Methodology: MagnifyMoney surveyed 552 U.S. adults who reported they added debt over the holidays via Google Consumer Surveys from December 26 – 27.

Average Debt Among Shoppers Who Said They Went into Debt Over the Holidays

2016: $1,003

2015: $986

Did you go into debt this holiday season?

Age 25-34: 14.3%
Age 35-44: 10.9%
Age 45-54: 12.5%
Age 55-64: 8.5%
Age 65+: 7.6%


If you went into debt, did you plan to go into debt this holiday season?

Yes: 34.8%

No: 65.2%

How much debt did you take on over the holidays?

$0-999: 62.1%

$1,000-1,999: 19.7%

$2,000-2,999: 6.6%

$3,000-3,999: 2.8%

$4,000-4,999: 0.7%

$5,000-5,999: 1.5%

$6,000+: 6.3%

Where did your holiday debt come from?

Credit cards: 59.9%

Store cards: 17.1%

Personal loan: 8.9%

Payday / title loan: 7.1%

Home equity loan: 5.3%

When will you pay the debt off?

I’m only making minimum payments: 11.8%
1 month: 23.9%
2 months: 13.8%
3 months: 16.2%
4 months: 7.4%
5 months+: 27.0%

Will you try to consolidate your debt or shop around for a good balance transfer rate?

Yes: 13.1%
No – Don’t want to deal with another bank: 20.9%
No – Too many traps: 16.0%
No – Rate is already low: 26.3%
No: – Don’t know enough about it: 11.0%
No – Wouldn’t qualify: 12.6%


How stressed are you about your holiday debt?

Stressed: 29.7%

Not Stressed: 70.3%

What interest rate are you paying on your debt?

Less than 9%: 41.7%

10-19%: 34.7%

20-29%: 16.0%

 

Mandi Woodruff
Mandi Woodruff |

Mandi Woodruff is a writer at MagnifyMoney. You can email Mandi at mandi@magnifymoney.com

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Research Proves This is The Best Method to Pay Down Debt

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Research Proves This is The Best Method to Pay Down Debt

If you’re struggling to pay off several debts at once, a group of researchers may have found the best strategy for success.

In the study, which was highlighted in the Harvard Business Review in December, researchers found people who concentrated on paying off just one of several debts before moving on to the others repaid their debt 15% faster than people who consolidated their debts and tackled them all at once.

The researchers, who hailed from Boston University, University of Alberta, University of Manitoba, and Georgetown University, collected anonymous data from more than 6,000 HelloWallet users over 36 months. HelloWallet is an online financial program that allows employees to make financial goals and track their spending and debt payments.

By analyzing the methods HelloWallet users used to pay off their debt — focusing on one small debt at a time or paying all debts at once — the researchers could tell which method worked best.

“Our research suggests that people are more motivated to get out of debt not only by concentrating on one account but also by beginning with the smallest,” Boston University professor Remi Trudel, co-author of the report, told the HBR.

If this strategy sounds familiar, it should. It’s exactly how the popular “debt snowball” strategy works. In this method, the key lies in building momentum early on by achieving small “wins,” paying off tiny debts first and working your way up to larger debts.

When you pay off your first  $200 account balance, you’re more likely to be excited to tackle the credit card with $500 on it, then the card with a $1,500 balance, and so on. Likewise, by focusing on smaller debts, consumers are doing the crucial work of building good financial habits at an early stage. Once those habits become ingrained in their financial picture, they are more likely to keep them up, even as they take on larger debts.

If anything, Havard’s research simply supports why the snowball method is so popular — it really works.

Of course, if you are a fan of the other popular debt payoff methods like the debt avalanche or debt consolidation, this doesn’t necessarily mean you’re on a path to failure. If you have the option to consolidate all of your debts into one single loan at a lower rate (for example, by taking advantage of a balance transfer), math is on your side. By consolidating your debts at a lower interest rate, you will spend less money on interest over time.

However, if your high interest debts also happen to be the largest of your debt balances, you run the risk of getting discouraged early on and losing momentum because it will take so much more time to pay them off. If you are not confident that you’ll be motivated to pay off one large debt balance, you might be better off — as the Harvard study shows — working on your smallest debt first, even if it means paying more interest in the long run.

If you’re still interested in exploring different debt paydown methods, here’s a quick recap of the debt snowball vs. debt avalanche.

The snowball

When you snowball debt, you order all of your debts by balance and prioritize paying off the account with the lowest amount first. The method was made popular by Dave Ramsey and is the approach many use when tackling debt. The hope is that paying off lower balance loans will motivate you to pay off the remainder of the debt.

The avalanche

Mathematicians would likely argue in favor of the debt avalanche method. The avalanche approach has you order your debt by interest rate in order of the balance. Then, you prioritize paying off the account balance with the highest interest rate and attack the rest of your debt that way. The argument for this method is that it saves you money in the long run since you can avoid paying the most interest and will likely address the principal of your debt faster.

If your account with the highest interest rate is also your highest or one of your highest accounts by amount, the “avalanche” could have the opposite effect of the snowball method. It can be difficult to stay motivated if you don’t feel as if you are making much progress, and you could be discouraged early on.

Brittney Laryea
Brittney Laryea |

Brittney Laryea is a writer at MagnifyMoney. You can email Brittney at brittney@magnifymoney.com

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How to Get Out of a Payday Loan

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How to Get Out of a Payday Loan

The payday loan trap begins innocently enough. You’re low on cash, you’ve maxed out your credit cards, and none of your family or friends can loan you the money. Borrowing $250 from a payday lender seems like a logical solution. As long as the $250 plus a $37.50 fee is paid at the end of the two-week term – the time your next paycheck comes due – you’ll be debt free. No harm, no foul.

Before you know it, you run out of money again and can’t repay the loan two weeks later. So you pay a fee to extend the loan for another 14 days. When the next term is up, you can have the lender cash your check or draw from your account for the initial amount of $250 plus the $37.50 fee, or you can pay to extend, yet again, with another fee payment.

This plot replays itself over and over again for months on end. After a year, you will have paid $975 to borrow $250. Effectively, you borrowed money with an annual percentage rate (APR) of 390%.

“It’s important to note that payday loans are structured intentionally to make it very difficult to walk away from,” says Diane Standaert, executive vice president and director of state policy at the Center for Responsible Lending. “The lender takes direct access to a borrower’s bank account in order to establish the loan, either through a check or direct access to their online account. This leverage creates a business model that makes it nearly impossible to walk away.”

This is the payday loan debt trap, but it can get worse. In this guide, we’ll explain how to get out from under a payday loan and avoid falling into the trap again.

How to Get Out of the Payday Loan Trap

There are several strategies to get out of the vicious payday loan cycle, and the strategy you choose to implement will largely depend on your financial situation.

To free up funds to pay back your loan, you’ll have to cut expenses where you can. Start by creating a budget and look at costs that are easy to cut like restaurants and other discretionary spending such as shopping trips and travel.

Next, move to some medium-cost necessities like the cable, internet, and cellphone bill or auto and rental insurance premiums. Call these companies and negotiate with them to lower costs or see if you qualify for a discount.

If you’re still having a difficult time coming up with the extra cash to pay down your loans, look to some larger expenses like your car payment and rent. It may be in your best interest to sell your car and find a more affordable mode of transportation or a less-expensive car. Consider moving or getting a roommate to reduce the cost of rent.

Finding extra money in your budget will allow you to put more income toward the debt you have acquired and catch up on your payday loans.

Work with your lenders

While you create a budget, go to your payday lender and ask if they can provide you with an extended payment plan (EPP). EPPs give the borrower more time to pay off a loan without added fees and interest and without getting turned over to a collections agency, as long as the borrower doesn’t default on the EPP.

If your lender doesn’t offer an extended payment plan, you may want to turn to any other entities you owe money to. If you have non-payday loan debt, like credit card debt, auto loans, student loans, and the like, talk to the lenders of these debts to see if they can help restructuring your debt.

Restructuring means your lender could extend the term of the loan to reduce the cost of monthly payments, or reduce the frequency of payments being made. For some student loans, you may be allowed to make income-based repayments. By reducing other required monthly payments, you will be able to put more money toward paying down your payday loans. Note that restructuring could impact your credit score, but will not be as costly as bankruptcy.

Other lenders who might be able to help

Whether you choose to work with a credit counselor or tackle the payday loan repayment on your own, another option is to seek alternative lenders who may be able to assist with getting you out of the payday lending debt cycle.

Alternative Lender #1: Friends and Family Financing

Receiving a small loan from your family is a popular option suggested on the credit website message boards. This can help you make a one-time payment to the payday lender and close your payday loan once and for all. After which, you can pay back your family in small payments made up of the fees you would have otherwise been paying to the payday lender. Typically, friends and family won’t charge you added fees or interest, so this is the most preferred and affordable route for a borrower who is strapped for cash.

Alternative Lender #2: Faith-Based Organizations and Military Relief

If you are a military servicemember or veteran or a have a religious affiliation, your participation could open up short-term lending and relief opportunities.

A few faith-based lenders have cropped up around the U.S. that are primarily focused on helping borrowers refinance their payday loans and get out of the payday lending debt cycle. One example is Exodus Lending, a nonprofit organization in Minnesota that pays off their clients’ payday loans in exchange for their clients’ paying Exodus for the loan balance over the course of 12 months without interest or additional fees.

Military service members also have protections and emergency relief assistance through various veterans organizations.

Alternative Lender #3: Personal Loans

Find cheaper funding with a personal loan through your local credit union or our personal loan database.

With a 600+ credit score, you may be able to secure a personal loan with an average APR between 6% and 36%, a range considerably lower than the 400% to 700% APRs that come with payday lending. Use the funds you receive through your personal loan to pay off all outstanding payday loans and close the door to payday lending for good.

Then make the minimum monthly loan payment for your new personal loan on time and in full.

Once you’ve built your credit above the 600 threshold, visit your local credit union to apply for a personal loan.

Continue to improve your credit score with responsible personal loan and credit card repayments. Over time, your score will improve yet again. Once your score is over 700, you will be eligible for even more affordable personal loans with APRs as low as 4%.

Are there times it makes sense to walk away?

There are times when bankruptcy is the best option to relieve debts you are not able to pay back. If you choose to go this route, you will be required to obtain a pre-bankruptcy credit counselor before you file.

It’s important to find a government-approved credit counselor through the U.S. Trustee Program (USTP) to ensure a reasonable counseling rate – a fee of less than or equal to $50 is considered reasonable. USTP-approved agencies are required to inform clients that services are available for free or at a reduced rate, based on the client’s ability to pay, prior to the exchange of any information and the counseling session.

A credit counselor will help evaluate your personal financial situation, create a personal budget plan, and look into alternatives to filing for bankruptcy, like restructuring debt or negotiating with your payday lender. After all options have been exhausted, your counselor can help you explore your options for bankruptcy.

Many borrowers have been told that bankruptcy is irrelevant for payday lending. They also fear that they could be arrested if they fail to make payments. This is a common myth spread by debt collectors for payday lenders. These threats are illegal, and if they happen to you, make sure to contact your state attorney general and the Consumer Financial Protection Bureau.

Low credit ratings and the absence of access to a bank account can lead to exceedingly expensive financial products. A Vanderbilt University Law School study found evidence that access to payday loans increases personal bankruptcy rates, doubling Chapter 13 bankruptcy filings for first-time payday loan applicants within two years.

How payday loans can lead to bankruptcy

Most payday loans are secured by getting access to a borrower’s online checking account or by receiving a signed check from the borrower for the amount of the loan plus the loan borrowing fee.

When borrowers fail to make their payment upon the loan due date, and don’t pay the extension fee, the lender can withdraw the amount due through the borrower’s online account or cash the signed check.

If the borrower doesn’t have enough funds in their account to cover the amount rendered, their check will bounce and they will incur a bounced check fee and a returned check, which impacts the borrower’s credit report and credit rating. With a record of bounced checks, the bank can go as far as shutting down the borrower’s bank account and make it difficult for the borrower to obtain any new accounts.

What are your rights with a lender?

To begin the fight against payday loans, we must review the borrower’s rights when they enter the loan agreement, understand how lenders get away with hemorrhaging money from borrowers, and what legislation is doing about it.

Payday lending isn’t legal in every state. Fifteen states and the District of Columbia (see the map above) have effectively capped payday loan interest rates at 36% APR. Residents of the remaining states without APR caps stay unprotected against the harm of the inescapable payday lending debt cycle.

According to the Consumer Financial Protection Bureau (CFPB), payday lenders are not required by federal law to offer borrowers the lowest rates available. This is because lenders charge a fixed-fee price. Some states, as Standaert mentioned, cap these fees such that the annual rate for a two-week loan doesn’t exceed the enforced rate cap.

Although lenders are not legally bound to offer the lowest rates available, federal law requires payday lenders to disclose the cost of the loan in terms of an annual APR, so the borrower will see on the website or on their contract that the interest rate is 300% or more, according to Standaert.

“Though, disclosures of the price alone do not alleviate the concerns about the predatory structures of this product,” says Standaert. “Payday loans are marketed as a quick fix to a financial emergency, but payday lenders know that their business model is built on keeping people trapped in debt they can’t repay.”

Fees versus interest

It’s important to note the language lenders use in how they structure these financial products. Payday lenders are able to charge excessive amounts in “interest” because in reality, they aren’t charging interest, they’re charging a fee.

If your payday loan were treated as a loan with a designated payback period, interest rate, and amortization schedule, then for every payment you made over the course of time you borrowed the money, a portion of your $37.50 would go to pay down your $250 loan balance.

In the case of payday loans, every payment you make to extend the loan is purely a fee-based payment, or interest-only payment with a 100% principal payment at the end of the term.

What legislation has done and will do

“A rate cap, such as what the fifteen states and D.C. have enforced, is the strongest protection they can enact on the state level. There is activity at the federal level as well,” says Standaert.

“The CFPB, has been working for the past several years to rein in the harms of the payday lending debt trap,” adds Standaert. “While the CFPB doesn’t have authority to enforce a rate cap, their strongest role is to establish rules that enforce payday lenders to assess whether the loan is affordable in light of a borrower’s income and expenses prior to issuing a loan.”

“While states have the ability to address cost, the CFPB can address the harmful nature of these loans,” says Standaert. “Restricting the predatory business practice of payday lending can allow better financial products to come to the forefront for borrowers who need financial relief.”

Standaert said that the Center for Responsible Lending and other organizations dedicated to fair financial products for consumers have seen overwhelming support for the CFPB and states to crack down on payday loans.

“Seventy-five percent of voters in South Dakota went to the ballot box this November and voted to reduce the cost of payday lending from 500% to 36%,” says Standaert. “This was the first time voters have reached a conclusion of this sort.”

Who to contact if your lender is being unfair

Standaert suggests that borrowers should file complaints with their state attorney general and the CFPB at consumerfinance.gov/complaint.

“Whether the cost is too high, they have issues with how their bank account is being treated, or they have experienced unfair debt collection tactics, the CFPB accepts complaints for people from all around the country struggling with payday loans for all kinds of reasons,” says Standaert.

Tess Wicks
Tess Wicks |

Tess Wicks is a writer at MagnifyMoney. You can email Tess here

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Pay Down My Debt

Live Richer Challenge: 5 Rules to Boost Your Credit Score

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Improving a low credit score can feel like an overwhelming task. But you only need to follow these five simple rules to improve your credit score.

Rule 1: Keep your utilization rate low

Utilization is the amount of your credit limit you spend each month. For example, if you have a $500 credit limit and spend $50 in a month, you’re utilization will be 10%. Your utilization is part of what determines your credit score.

Your goal should be to never exceed 20% of your total credit limit across all of your cards. That means if you have three credit cards with a total available limit of $5,000, you should never carry more than a combined total of $1,000 across the three cards. The lower your utilization rate, the better your score will be.

We recommend you make one small purchase a month to keep your utilization low and help increase your credit score at a faster rate.

Rule 2: Pay in full and on time each month

Being late on your payments has a huge, negative impact on your credit score.

There is also no advantage to only paying the minimum amount due on your card. That will only result in your paying more interest and does nothing to help your credit score. So just save yourself money and pay your entire bill. The easiest way to prove you’re responsible is to only charge what you can afford. Never use your credit card to buy an item you won’t be able to pay off on time and in full each month.

Rule 3: Eliminate lingering debt

If you’re already in debt you can’t afford to pay off, make sure you continue to pay at least the minimum due on time each month. Paying on time is the number one way to boost your credit score.

Then, get to work chipping away at that debt until it’s gone. Two of the most popular strategies to eliminate debt are the debt snowball and the debt avalanche.

Balance transfer: A balance transfer or personal loan can help you consolidate your debt and reduce your interest rate. If you trust yourself to open a new credit card but not spend on it, consider a balance transfer. You may be able to cut your rate with a long 0% intro annual percentage rate (APR). You need to have a good credit score, and you might not get approved for the full amount that you want to transfer.

Personal loan: Consider applying for a personal loan and using the money from the loan to pay off your credit card debt. Personal loan companies have interest rates that start as low as 4.25%, and they approve people with credit scores as low as 550.

Use our simple comparison tool to find personal loan offers. Then, easily see if you prequalify for a loan without dinging your credit in the process.

After you pay off your credit cards with the proceeds on the loan, do not build up your debt again. Instead, just make one purchase each month and pay it off in full.

Once you pay off your cards, resist the urge to close them. Closing your cards will not only lower your utilization but also remove history which damages your score in the “length of history” category.

Rule 4: Resist temptation

You’ll start to get credit card offers as you begin to build your credit history and improve your score. Beware of any offers, especially for cashback cards, while your score is below 650. These cards typically provide little value and can smack you with high interest rates if you fail to follow Rule 3 above.

Not sure if an offer is a good deal? Try checking it out on our cashback reward cards page. Our MagnifyMoney Transparency Score will let you know if it’s the real deal.

Once you get your credit score above 680, the good credit card offers will start rolling in. You can have your pick of the top-tier reward credit cards and start using your regular spending to get cashback or rack up points for travel.

Rule 5: Protect your score

Once you’ve achieved a higher credit score, be sure to protect it by following these simple steps:

  • Charge a small amount to the card each month and pay it off in full.
  • Aim to carry a balance that is no more than 20% of your available credit limit.
  • Sign up for a credit monitoring service such as Credit Karma, Discover’s credit scorecard, or another service that lets you check your report monthly, for free. You can also get a free annual credit report from all three bureaus at AnnualCreditReport.com.
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College Students and Recent Grads, Pay Down My Debt, Reviews

CommonBond Student Loan Refinance Loan Review

Editorial Disclaimer: The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

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CommonBond Grad Student Loan Refinance Loan Review

Updated February 9, 2017

CommonBond was founded by three Wharton MBAs who felt the sting of student loans after they graduated. The founders decided to provide a better solution for graduates, as they thought the student loan system was broken and in need of reform. As a result, they strive to make the refinance (and borrowing) process as simple and straightforward for graduates as possible.

CommonBond* began by servicing students from just one school, and has rapidly expanded. Today, CommonBond loans are available to graduates of over 2,000 schools nationwide. Although the business started servicing only students with graduate degrees, today CommonBond is also available to refinance undergraduate degrees as well.

CommonBond is one of the top four lenders identified by MagnifyMoney to refinance student loans.

As you might be able to tell by the name, CommonBond thinks of its community as family. There is a network of alumni and professionals within the community that want to help borrowers. This alone sets it apart from other lenders, as members often meet for events.

While these are all great things, we know you’re more interested in how CommonBond might be able to help you make your student loans more affordable. Let’s take a look at what terms and rates they offer, eligibility requirements, and how they compare against other lenders.

Refinance Terms Offered

CommonBond offers low variable and fixed rate loans. Variable rates range from 2.62% – 6.54% APR, and fixed rates range from 3.37% – 6.74% APR.

Note that these rates take a 0.25% auto pay discount into consideration.

There is no maximum loan amount. CommonBond will lend what you can afford to repay. CommonBond offers fixed and variable rates with terms of 5, 10, 15, and 20 years.

The hybrid loan is only offered on a 10 year term – the first 5 years will have a fixed rate, and the 5 years after that will have a variable rate.

CommonBond has a great chart listing repayment examples based off of borrowing $10,000, which can be found on its rates and terms page.

To pull an example from that, if you borrow $10,000 at a fixed 4.74% APR on a 10 year term, your monthly payment will be $104.80. The total amount you will pay over the 10 year period will be $12,575.90.

The Pros and Cons

CommonBond is available to graduates of 2,000 universities. While that is a very long list, not all colleges and universities are included.

One pro to consider is the hybrid loan option available. It might seem a little confusing at first – why would someone want a variable rate down the road?

If you’re confident you’ll be able to make extra payments on your loan and pay it off before the 5 years are up, you might be better off going with the hybrid option (if you can get a better interest rate on it).

This is because you’ll end up paying less over the life of the loan with a lower interest rate. If you were offered a 10 year loan with a fixed rate of 6.49% APR, and a hybrid loan with a beginning rate of 5.64%, the hybrid option would be the better deal if you’re intent on paying it off quickly.

What You Need to Qualify

CommonBond doesn’t list many eligibility requirements on its website, aside from the following:

  • You must be a U.S. citizen or permanent resident
  • You must have graduated

CommonBond doesn’t specify a minimum credit score needed, but based on the requirements of other lenders, we recommend having a score of 660+, though you should be aiming for 700+. The good news is CommonBond lets you apply with a cosigner in case your credit isn’t good enough.

Documents and Information Needed to Apply

CommonBond’s application process is very simple – it says it takes as little as 2 minutes to complete. Initially, you’ll be asked for basic information such as your name, address, and school.

Once you complete this part, CommonBond will perform a soft credit pull to estimate your rates and terms.

If you want to move forward with the rates and terms offered, you’ll be required to submit documentation and a hard credit inquiry will be conducted. CommonBond lists the following as required:

  • Pay stubs or tax returns (proof of employment)
  • Diploma or transcript (proof of graduation)
  • Student loan bank statement
  • ID, utility bills, lease agreement (proof of residency)

CommonBond also notes it can take up to 5 business days to verify documents submitted, so the loan doesn’t happen instantaneously.

Once your documents are approved, you electronically sign for the loan, and CommonBond will begin the process of paying off your previous lenders. It notes this can take up to two weeks from the time the loan is accepted.

Who Benefits the Most from Refinancing Student Loans with CommonBond?

Borrowers who are looking to refinance a large amount of student loan debt will benefit the most from refinancing with them.

Common Bond

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Keeping an Eye on the Fine Print

CommonBond does not have a prepayment penalty, and there are no origination fees nor application fees associated with refinancing.

As with other lenders, there is a late payment fee. This is 5% of the unpaid amount of the payment due, or $10, whichever is less.

If a payment fails to go through, you’ll be charged a $15 fee.

It’s also noted that failure to make payments may result in the loss of the 0.25% interest rate deduction from auto pay.

Transparency Score

Getting in touch with a representative is simple and there is a chat and call option right on the homepage. Some lenders have this hidden at the bottom, or they don’t offer a chat option at all.

CommonBond also lets borrowers know they can shop around within a 30 day period to lessen the impact on their credit.

It does not list its late fees on its website, unlike other lenders. However, after making a chat inquiry, the question was answered promptly.

CommonBond does offer a cosigner release and is ranked with a A+ transparency score.

Alternative Student Loan Refinancing Lenders

The student loan refinancing market continues to get more competitive, and it makes sense to shop around for the best deal.

One of the market leaders is SoFi. It’s always worth taking a look to see if SoFi* offers a better interest rate.

The two lenders are very similar – CommonBond offers “CommonBridge,” a service that helps you find a new job in the event you lose yours. SoFi offers a similar service called Unemployment Protection.

SoFi’s variable rates are currently 2.615% – 6.54% APR with autopay, and its fixed rates are currently 3.35% – 6.74% APR, which is in line with what CommonBond is offering.

SoFi also doesn’t have a limit on how much you can refinance with them.

SoFi logo

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Another lender to consider is Earnest. There is no maximum loan amount, and Earnest has a very slick application process. Interest rates start as low as 2.61% (variable) and 3.35% (fixed).

Earnest Credit Card

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Lastly, you could check out LendKey. It offers student loan refinancing through credit unions and community banks, but only offers variable rates in most states and fixed rates in a select few. The maximum amount to refinance with an undergraduate degree is $125,000, and the maximum amount to refinance with a graduate degree is $175,000.

All three of these options provide forbearance in case of economic hardship and offer similar loan options (5, 10, 15 year terms).

Lendkey

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Don’t Forget to Shop Around

As CommonBond initially conducts a soft pull on your credit, you’re free to continue to shop around for the best rates if you’re not happy with the rates it can provide. As the lender states on its website, if you apply for loans within a 30 day period, your credit won’t be affected as much.

Since CommonBond does have strict underwriting criteria, you should continue to shop around and don’t be discouraged if you are not approved. The market continues to get more competitive, and a number of good options are out there.

Customize Your Student Loan Offers with MagnifyMoney Comparison Tool

 

*We’ll receive a referral fee if you click on offers with this symbol. This does not impact our rankings or recommendations. You can learn more about how our site is financed here.

 

Erin Millard
Erin Millard |

Erin Millard is a writer at MagnifyMoney. You can email Erin at erinm@magnifymoney.com

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Featured, Pay Down My Debt

Debt Snowball Vs Debt Avalanche — Which Strategy Works Best?

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The typical American household carries $15,762 of credit card debt. With the average credit card interest rate hovering around 13.35% today, that means households could easily spend more than $2,000 each year on credit card interest alone.

As more and more interest accrues, paying off what might have once been a relatively small amount of debt can easily start to feel like an impossible feat.

That’s why getting out of debt — especially when you have several different types of debt to deal with — requires a strategy.

Two of the most popular debt payoff strategies out there are the “debt snowball” and the “debt avalanche.” The snowball method has been popularized by personal finance celebrities like Dave Ramsey. By comparison, the debt avalanche is lesser known.

But which method actually works best? We did the math to find out.

Debt Snowball

Senior man playing with snow

First, list your debt from the smallest balance to the largest balance. Your goal is to eliminate the smallest debt first. You accomplish that by making only the minimum payment required on all your other debts. Then, take every extra dollar you have and put it toward the smallest debt. Once it’s paid off, you will throw everything into the next largest debt, plus an additional amount that is equal to whatever the previous debt’s minimum required payment was.

As you move from one debt to the next, you are creating an even bigger “snowball” to tackle your larger debts. That’s because you’re not only paying however much you can afford to set aside each month. You’re also adding to that amount when you add in the minimum required payments for each card that you pay off.

Why it works:

The snowball has two advantages. First, it provides you with a clear plan. Second, you build a lot of positive momentum by achieving wins early on, which will help you keep going. A recent study found most people do better with this approach because of the positive reinforcement of quick wins.

Debt Avalanche

Debt Avalanche - Man Skiing In Winter

To create a debt avalanche plan, list your credit card debt from the highest interest rate to the lowest. Pay the minimum due on all debt except the card with the highest interest rate. Put all extra money toward the most expensive debt until it is eliminated. Once that debt is paid off, take whatever you were paying on that bill and apply it to the next debt on your list, plus the minimum required payment from the debt you just paid off.

Why it works:

By dealing with debt that has the highest interest rates first, you can get out of debt faster and actually save more money on interest in the long run. It can feel more challenging than the snowball method, because you might be facing larger debt balances to start with. But the payoff is how much you’ll save on interest charges.

MagnifyMoney created a calculator that can easily help you see the difference between the snowball and avalanche methods.

Imagine you have three credit cards and can afford to pay $500 a month toward your debt:

  • $2,000 on a credit union credit card with a 6% interest rate
  • $6,000 on a credit card with a 19% interest rate
  • $8,000 on a store card with a 28% interest rate

Using the MagnifyMoney calculator, you see you could save $1,301 by using the avalanche method instead of the snowball method. And that is not surprising: by eliminating high interest rate debt first, you will end up paying less interest overall. You would also be out of debt faster.

The bottom line:

Both strategies will work, but you should pick the one that best fits your personality. If you easily feel overwhelmed by debt and feel like quitting, you should probably try the snowball method. You’ll get early “wins” and feel lots of motivation to keep going. If you’re more disciplined, the debt avalanche strategy might be your best fit.

Nick Clements
Nick Clements |

Nick Clements is a writer at MagnifyMoney. You can email Nick at nick@magnifymoney.com

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Pay Down My Debt, Personal Loans, Reviews

Best Egg Personal Loan Review

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Best Egg Personal Loan Review

Updated October 5, 2016

Best Egg is a personal loan company trying to make the borrowing process fast and simple for people looking to refinance credit cards or who need funds for personal use. In this review, we will examine the costs and loan application process for applying for a loan through Best Egg. We encourage everyone to shop around for the best rate, and you can find the best personal loans here.

Overview

Best Egg offers unsecured personal loans. These are installment loans with a fixed monthly payment for the life of the loan, but like a credit card, are not secured with property such as a car or home. Meaning you don’t have to provide collateral in order to receive a loan.

Best Egg offers loans up to $35,000 with up to a 5 year term. Your interest rate is determined by your credit history and can range from 5.99%-29.99% with an origination fee ranging from 0.99%-5.99%.

Best Egg loans are originated through Cross River Bank, which is located in New Jersey. You do not need to be a New Jersey resident to apply for a Best Egg loan.

Pros

The best features of Best Egg are the simple terms and competitive interest rates for borrowers with a strong, positive credit history. Beyond the interest charge and origination fee, there are virtually no fees with Best Egg.

The company charges $15 for a late payment and $15 for a returned payment, which is lower than the typical $25 fee. There are no application fees and the origination fee is deducted from your starting loan proceeds, so there is no out-of-pocket cost to get started. However, this does mean you need to factor in the origination fee when you request the amount you need for a loan.

There are no pre-payment fees, so if you are able to make extra payments or pay off your entire balance early, you will not be charged any additional fees.

Cons

Best Egg only offers payback periods of 3 years or 5 years. If you want a shorter loan payback period than 2 years or a longer payback period than 5 years, Best Egg will not meet your needs.

As a borrower, your interest rate is based on your credit score and is locked in at the time of origination. While some borrowers may qualify for a 5.99% interest rate and 1% origination fee, Best Egg does not disclose the requirements to qualify for its best rates.

Even at 1%, the origination fee is certainly a negative considering other personal loans like SoFi offer no origination fee and no pre-payment penalty.

The highest interest rates are nearly 30% with a 6% origination fee. These rates are comparable to the worst credit card interest rates and may not offer you any benefit compared to using a credit card, which has no origination fee.

At the worst interest rates, this is still much better than typical payday loans or auto title loans, but you may have lower cost options available including lending platforms like Avant.

What Do I Need to Qualify?

Best Egg loans are approved based on your credit history. If you qualify, you are assigned a letter grade which corresponds to an interest rate between 5.99% and 29.99%. Current rates are available here.

The application process requires giving your email, and Best Egg uses a “soft pull” on your credit report to determine whether you qualify and find out your interest rate. A soft pull does not impact your credit score.

When you apply, you will need your Social Security number and current contact information handy for the application process, which is typical for any loan application.

Who is this Best For?

If you have credit card debt with a high interest rate, refinancing with Best Egg could save you a lot of money on interest over the life your debt. If you can lower your interest rate and set a fixed payback period compared to the open ended time frame on a revolving credit account, you could easily save thousands of dollars.

The site suggests using loan proceeds to help pay for a move, vacation, home improvement, debt consolidation, home purchase, or vehicle purchase. This product may save you money compared to credit cards, but it is a best practice to avoid debt where possible, particularly for optional luxury purchases like a vacation.

What About the Fine Print?

One of the biggest benefits of using Best Egg compared to competitors is that loans with Best Egg do not come with a mountain of fine print. There is almost no fine print actually.

You do not pay unless you get a loan and the only fees you will encounter are the origination fee and from late payments and rejected payments from your bank account. That is really it. There is no catch.

Unless you’re in Massachusetts, then the fine print states that your minimum loan amount is $6,000.

Screen Shot 2015-05-22 at 2.09.38 PM

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Alternatives

SoFi

One alternative for your personal loan needs is SoFi. SoFi charges no origination fee, no pre-payment penalty fees and offers larger loans up to $100,000. SoFi also offers longer loan terms with a 3, 5, and 7 year option.

SoFi offers fixed rates between 5.49% – 14.24% and variable rates between 4.99% – 11.14%. Although SoFi does not use FICO, you do need to be a prime or super-prime borrower. That means you must be current on all of your obligations. And if you ever filed for bankruptcy, you will not be approved.

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LendingClub

LendingClub is a social peer-to-peer lending site where your loan is funded by a large group of investors who each contribute to your loan. A $3,000 loan could be funded by as many as 120 individual investors.

LendingClub loans assign a letter grade which corresponds to an interest rate, similar to Best Egg. Interest rates are similar, ranging from 5.99% to 35.89%. The largest loan available on LendingClub is $40,000.

If you are unhappy with your interest rate at Best Egg, it could be worth applying at LendingClub to see how your rate comes in. Depending on your history, your rate may be better or worse than Best Egg. Just be aware: LendingClub is not available in Iowa or West Virginia.

LendingClub

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Always Shop Around

It doesn’t hurt your score to see your offer with Best Egg, but there are other personal loan providers who also offer a soft pull. Don’t just take the first offer you receive. You should always be shopping around for the best possible rate, especially because lenders offering a soft pull don’t harm your credit score.

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 *We’ll receive a referral fee if you click on offers with this symbol. This does not impact our rankings or recommendations. You can learn more about how our site is financed here.

Eric Rosenberg |

Eric Rosenberg is a writer at MagnifyMoney. You can email Eric at eric@magnifymoney.com

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What Happens When My Debt Gets Sold?

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Overdue Notice bill debt

When you take out a loan or make a purchase with your credit card, you have a legal obligation to repay the money. However, there are many reasons why you might not be able to make a payment. Perhaps you lost your job, or you have other more pressing debts to pay.

Whatever the cause, if you don’t make a payment, you could be charged a late payment fee in addition to the accruing interest. If you continue not making payments, the original creditor might turn to a debt collection agency that will actively try to contact you and get you to repay the money. The agency could be a department within the creditor’s company, or it might be a third-party agency that is hired to collect your payment on the company’s behalf. Eventually, if the company doesn’t receive any money, it might sell the right to collect your debt to an outside debt collection agency.

You Now Owe the Collection Agency the Money

Once the debt buyer purchases your debt, the firm has a legal right to collect money from you. But why does this happen? Often the original creditor doesn’t feel that it’s worth the time to continue trying to collect the money from you, and they sell the account at a discount — sometimes just pennies on the dollar. The agency that buys the debt, often in large batches along with others’ debts, can make money even if it only collects a small portion of what you owe – although, of course, it will be happy to take the full amount.

You’ll See a New Account on Your Credit Reports

The three major credit-reporting bureaus, Equifax, TransUnion, and Experian, track and record activity related to your loans and credit accounts. When a collection agency buys your debt, the transfer of the debt’s ownership gets reported to bureaus. The bureaus will open a new account with the collection agency’s name and the amount owed on your credit report. The original creditor’s account’s status might change to something similar to “charged off,” “transferred,” or “paid.”

Rod Griffin, director of public education at Experian, says there could be a note on the account saying the debt was “sold to” or “transferred to” and the collection agency’s name. Likewise, the collection agency’s account on your credit report may have a note saying the debt was transferred or bought from the creditor.

In some cases, your debt could be sold from one collection agency to another. “[Experian’s] policy is that you only have one collection agency that can collect on that debt,” says Griffin. While the original creditor’s account remains on your report, the first collection agency might fall off and be replaced by the new collection agency. If it doesn’t, Griffin says you can file a dispute to get the first collection agency removed. Similarly, double-check the original account and report an error if it has an “open” account status.

The Derogatory Marks Fall Off Your Credit Reports at the Same Time

Many derogatory marks, including a collection account, can remain on your credit reports for up to seven years and 180 days from the date your debt is declared delinquent. Some people worry that when their debt is bought and transferred, the clock gets reset, but luckily that’s not the case.

The timeline is determined by the original date of delinquency, and by law, debt collection agencies must report the original delinquency date to the credit-reporting agencies. The date will stick with the debt, even if it transfers hands several times over.

Griffin says you might hear about other dates, the most recent update date or the reported date, for example. While those could change if you’re in contact with the collection agency, that won’t extend the time for a deletion. After seven years and 180 days, sometimes sooner, the original account and related collection accounts will be taken off your credit reports. They will no longer impact your credit score, although you might still be legally obliged to repay the money.

Consider Paying Off a Collection Account to Help Your Credit Score

FICO Score 9 and VantageScore 3.0, the most recent versions of FICO’s and VantageScore’s basic credit-scoring systems, ignore paid collection accounts when calculating a credit score. This is in contrast to previous scoring models that considered a collection account, even a paid one, a negative mark and adjusted your score accordingly. Most lenders rely on the previous credit-scoring models when screening applications, but it’s worth keeping the change in mind if you’re concerned about your credit score.

When you have an account that was sent or sold to a collection agency and is nearing the seven-year mark, it might make sense to wait and let the account drop off your reports. However, if you’re looking for a way to quickly improve your credit score, paying off a collection account could be an option.

Bottom Line

If you fall behind on your debt payments, your creditor might sell your past-due account to a debt collection agency. The transfer gets recorded on your credit reports, and you’ll now owe the agency money. Having an account sent or sold to collections can negatively impact your credit score. Although you might be able to improve your score by repaying the debt, you could need to wait up to seven years and 180 days from your first missed payment for the account and subsequent negative marks to fall off your credit reports.

Louis DeNicola
Louis DeNicola |

Louis DeNicola is a writer at MagnifyMoney. You can email Louis at louis@magnifymoney.com

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