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How Do Savings Bonds Work?

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Savings bonds are a popular savings vehicle for conservative investors, as they are backed by the full faith and credit of the U.S. government. With savings bonds, you are paid a fixed interest rate on the principal paid for the bond.

Just like other savings vehicles, though, savings bonds have their own benefits and drawbacks. This article covers what you need to know about savings bonds to help you determine if they are right for you — from which types there are to how to buy them.

What are savings bonds?

Similar to municipal bonds, savings bonds are a way for the government to raise money for debt by promising to pay back principal and interest to bondholders at a later date. The government backs the repayment of the bonds, making them low risk for investors.

Savings bonds can be issued for face values as small as $50 and purchase amounts as low as $25.

How do savings bonds work?

Savings bonds work by paying a fixed interest rate on the principal paid for the bond. Depending on the type of savings bond you buy, you may be guaranteed to redeem the bond for double the amount paid.

There are three important features of savings bonds that you should know about before buying:

Savings bonds are usually tax-deferred: The interest earned on a savings bond (except for the Series HH bond) does not need to be reported as it’s earned, although taxpayers can report it annually if they wish. It is permissible to report the interest earned only when the savings bond is redeemed, at which time you will be issued a 1099-INT for tax reporting. If the savings bond isn’t redeemed by year 30, however, the earnings must be reported.

Savings bonds may be tax-exempt: Series EE and I savings bonds are not subject to state or local taxes. In addition, if savings bonds are used for certain qualified higher education expenses and you were at least 24 years old on the first day within the month the bonds were purchased, then the interest earned may be federally tax-exempt.

Survivorship: When purchasing a savings bond, the bondholder can name a survivor who will have the ability to cash in the bond or have the bond reissued once the bondholder passes away. When no survivor is named, or when the survivor passes away before the bondholder, the bond will generally become part of the deceased bondholder’s estate.

Which types of savings bonds are there?

Once you have decided to buy a savings bond, there are two types to choose from: Series EE and Series I.

  • Series EE Savings Bonds: Sold only electronically through treasurydirect.gov, Series EE bonds have a fixed rate of return. If not redeemed until year 20, bondholders will receive twice the purchase price of the bond.
  • Series I Savings Bonds: Unlike EE bonds, Series I bonds have both a fixed interest rate and an inflation rate, and they are not guaranteed to double in value by year 20. The inflation rate is calculated twice per year based on the consumer price index for all urban consumers (CPI-U). With this savings bond, the bond rate will change every six months. However, it does have a fixed rate component that stays fixed throughout the life of the bond, acting as a floor to protect against negative inflation.

There may be some individuals who have what’s called an HH bond, purchased before September 2004. In the past, these were issued in exchange for the no-longer-offered Series E bonds as well as Series EE bonds. Series HH bonds are no longer available for new purchases, but those who are still holding them can cash them in at their local bank.

While old Series E bonds would have passed their last interest-earning deadline, there may be some old HH bonds that are still earning interest, including the last issues from 1998, which will earn interest for a total of 20 years. If you think you may have one of these bonds but have lost the certificate, you can use Fiscal Service Form 1048 to reclaim it.

Where can you buy savings bonds?

Depending on the bond you want, there may be a few places you can buy savings bonds, such as on treasurydirect.gov, at your bank and through your tax return. However, savings bonds are not traded and there is no secondary market for them.

How to buy Series EE bonds: These bonds are only sold electronically (paper EE bonds are no longer distributed), and they can only be bought online. Purchasers can buy up to $10,000 in EE bonds each year.

How to buy Series I bonds: These bonds can be purchased in paper or electronically. In addition to buying them online, they may be bought at some banks, and taxpayers can choose to have their tax refund used to purchase them by using IRS Form 8888. You can buy up to $10,000 electronic I bonds per Social Security number per year and up to $5,000 in paper bonds through a tax refund.

How do you cash in savings bonds?

The way you redeem your savings bond will often depend on whether you have a paper bond or an electronic bond. In many cases, you can simply take a paper bond to your local bank to cash it in.

Electronic bonds, however, will generally be redeemed online through the treasury website. Note that the amount you’re redeeming may be an issue when it comes to electronic bonds, as there are minimum redemption amounts and minimum remaining balances required on partial redemptions.

“When you redeem a savings bond, it’s best to redeem earlier in the month,” said Ken Tumin, founder of DepositAccounts.com. “You’ll still get credit for the whole month.”

Note that neither EE nor I bonds can be cashed in within the first 12 months after purchase. If they are cashed in within five years of issuance, the final three months of interest is withheld. For example, if you cash in an EE or I bond 48 months after issue, you will receive only 45 months’ of interest.

Are savings bonds a good investment?

Like any investment or savings vehicle, there are both pros and cons associated with savings bonds, as outlined in the table below:

Pros and Cons of Savings Bonds

Pros

Cons

  • Generally a safe investment, as they offer protection of the principal
  • Can be a good way for young people to learn about investing
  • Typically have lower interest rates
  • Do not usually produce significant returns

Without looking at an individual’s entire portfolio, it’s impossible to say whether savings bonds are a good investment. They are a guaranteed investment, and a safe one, but their low interest rate might not be what every investor needs.

“The question is whether what you’re getting in rate of return keeps up with the rate of inflation,” said Alexander Lowry, executive director of the master of science in financial analysis program at Gordon College in Wenham, Mass. “There are different types of people savings bonds might be good for.”

One example that Lowry provided was giving a savings bond as a bar mitzvah gift to a young person who’s still learning about investing. But when it comes to someone in their 30s or in their peak earning years, Lowry suggests that savings bonds are not an ideal place to put all your money for the long term.

“People should focus on what their investing objective is. For example, is [your objective] the return on your investment or the return of your investment,” said Lowry. In other words, while they may not offer a significant return, savings bonds do offer protection of principal, which may be more important to some savers than the return they earn on their principal. Those who are more concerned about return might want to look at more aggressive investments.

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Earnest personal loans: Pros and cons

Pros:

Cons:

  • Low fixed APR: Starts at 5.99% for 36-month loans
  • Fee-free: No origination fee, late payment or prepayment penalty means your loan is more affordable
  • Forbearance options: Qualifying borrowers can temporarily pause payments
  • Comprehensive underwriting process: Earnest takes your future earning potential and savings habits into account
  • Benefits to servicemembers: Potential military service deferment and servicemembers’ interest rate cap
  • Higher rates for longer terms: 60-month loans have a 7.24%% minimum APR
  • Minimum credit score of 650: As the lowest acceptable score, these are likely to be given the highest interest rates
  • Slow loan funding: Loan underwriting takes five to 10 days, and funding can take another two business days
  • Higher minimum borrowing limit in California: You’ll have to borrow a minimum $10,000 if you’re a California resident
  • Not available in all states: Alabama, Delaware, Kentucky, Nevada and Rhode Island residents won’t qualify for an Earnest personal loan

How your Earnest loan can be used

Earnest personal loans can be used for many expenses, including:

  • Credit card consolidation
  • Home improvements
  • Tuition and education expenses for unaccredited institutions
  • Rental security deposit
  • Moving costs
  • Engagement ring purchase
  • Weddings or honeymoons
  • Vacations
  • Medical expenses

Earnest personal loans cannot be used for:

  • Tuition at an accredited institution
  • As business capital to start a business or pay current business expenses
  • To buy or invest in real estate

Who qualifies

Standard requirements

  • Be 18 years of age or older
  • Have proof of regular income
  • Be a U.S. citizen, have a 10-year green card or a two-year green card with Form I-751 approval or acceptance
  • Be a resident of Washington D.C., or any of the 45 states they service (Alabama, Delaware, Kentucky, Nevada or Rhode Island residents don’t qualify)

Financial requirements

  • A minimum credit score of 650
  • History of on-time payments
  • Bank account balances with a history of rising
  • Adequate savings to cover two months of expenses
  • No large amounts of non-mortgage, non-student debt
  • No open collection accounts
  • No bankruptcies in the past three years

How Earnest compares to competitors

LightStream

APR

3.99%
To
19.99%*

with AutoPay

Credit Req.

Not specified

Terms

24 to 144*

months

Origination Fee

No origination fee

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on LendingTree’s secure website

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LightStream is the online lending division of SunTrust Bank.... Read More


*Your loan terms, including APR, may differ based on loan purpose, amount, term length, and your credit profile. Excellent credit is required to qualify for lowest rates. Rate is quoted with AutoPay discount. AutoPay discount is only available prior to loan funding. Rates without AutoPay are 0.50% points higher. Subject to credit approval. Conditions and limitations apply. Advertised rates and terms are subject to change without notice. Payment example: Monthly payments for a $10,000 loan at 3.99% APR with a term of 3 years would result in 36 monthly payments of $295.20.

With a starting APR of 3.99% (with autopay) and a high of 19.99%, LightStream offers more affordable terms than Earnest. Lightstream, which is also an online lender, also beats out its competitor with larger loan amounts and a greater variety of terms.

However, Earnest has a more comprehensive underwriting process. LightStream defines excellent credit as having at least five years of credit history, in addition to a robust credit score. Earnest, meanwhile, looks deeper into borrowers’ potential, so a limited credit history won’t necessarily keep you from qualifying for a loan. This can be especially helpful to recent college graduates.

SoFi

APR

5.99%
To
20.69%*

Credit Req.

680

Minimum Credit Score

Terms

24 to 84

months

Origination Fee

No origination fee

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on LendingTree’s secure website

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SoFi offers some of the best rates and terms on the market. ... Read More


Fixed rates from 5.99% APR to 20.69% APR (with AutoPay). SoFi rate ranges are current as of January 19, 2021 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. See APR examples and terms. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.

SoFi versus Earnest is a tight race. Both online lenders offer no origination, prepayment or late payment fees. SoFi’s APRs cap out at 20.69% — which is higher than Earnest’s maximum by a few percentage points — through the lender offers a higher maximum borrowing limit and more flexible repayment terms.

SoFi also offers a unique borrow protection program: unemployment protection. Borrowers in good standing who lose their jobs through no fault of their own may have their personal loan payments suspended, as well as receive job placement assistance.

How to apply for an Earnest personal loan

With Earnest, online personal loan applications require a few steps:

  1. Complete and submit an online application. Be prepared to send requested tax documents, bank information and employment and income verifications. Upon receipt of your application, Earnest will send you a confirmation email.
  2. Submit additional requested documentation. If Earnest needs any additional tax, income or other documents, you will be notified by email. You can sign in to your Earnest account to upload the requested documents.
  3. Wait for a loan decision. The underwriting process can take five to 10 business days. Applicants will receive loan decisions via email.
  4. Approve or deny your loan offer. After receiving the loan decision, applicants have seven calendar days to review the terms and approve (or turn down) the loan offer. Loans are funded within one to two business days after acceptance.

FAQ on Earnest

Earnest is an online lender that strives to deliver a fast and personalized low-cost lending solution. The company uses an algorithm to identify qualified borrowers and relies on data, software and online applications to reduce costs and rates.

In addition to personal loans, borrowers can get Earnest student loans and student loan refinancing, including for Parent Plus loans.

As part of the underwriting process, Earnest needs to review bank account transactions and balances. Earnest uses bank account information to verify identity and reduce fraud.

Most applications for both large and small personal loans are underwritten within five to 10 business days. After a loan is approved, borrowers have seven calendar days to review and accept the offer.

Loans are funded within two business days of signing the acceptance.

Earnest offers both autopay and manual pay options. This means borrowers may be able to send checks, wire funds, or set up electronic transfers for payments.

Earnest customer service is available from Monday through Friday from 8 a.m. to 5 p.m. Pacific time. A customer service representative can be reached via the Earnest contact phone number or through a form on the website.

Once a personal loan has been approved and is being serviced, borrowers need to contact System & Services Technology by phone. The company is available from 7 a.m. to 10 p.m. Central time Monday through Friday and from 8 a.m to 12 p.m. Central on Saturdays.

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Pay Down My Debt

Debt Settlement: How It Works, FAQs And More

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It may not have been previewed, commissioned or otherwise endorsed by any of our network partners.

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Household debt statistics ebb and flow over the years, but debt never completely goes away. As of January 2020, 41.2% of U.S. households have credit card debt. The average among American households carrying a balance is $9,333.

But whether you’re buried under credit card, medical or another type of debt, one option you might be considering is debt settlement. This form of debt relief can help you erase your unpaid balances – but it isn’t guaranteed and can mean costly consequences for both your credit and wallet.

What is debt settlement?

Debt settlement is the process of hiring a company to negotiate with your creditors to reduce or erase your balances. You may also do it yourself. (More on that below.)

When you hire a debt settlement company, you’ll be asked to deposit a certain amount of money in a savings or escrow account each month. (The account will belong to you.) As you build your savings, the debt settlement company will generally advise you to stay delinquent with your creditors. That means you’ll continue to accrue fees, such as for late payment on your debts – hurting your credit in the meantime.

Once your savings account accumulates a high enough balance, the debt settlement company will begin negotiating with your creditors to settle the debt. If your creditors agree to settle, the payoff amount will be taken out of the savings account.

Fees

Fees for debt settlement programs can be difficult to find on company websites. However, most consumers can expect fees to range from 15% to 25% of the total debt they enroll in the program. Fees are charged against successfully settled debts, but may also include fees for any third-party managed savings account that is part of the program.

Pros and cons of debt settlement

Is debt settlement a good idea

Pros

Cons

  • Can reduce your total balances due
  • Simplifies monthly bill payment
  • May help you avoid bankruptcy
  • Could take less time to finalize than Chapter 13
  • Fees can be costly
  • You generally need to be behind on payments and remain delinquent, accumulating late fees
  • Remaining behind on payments will negatively impact your credit
  • No guarantee that your creditors will accept the settlement offer
  • Canceled debt may be treated as taxable income

Working with a debt settlement company

  • Evaluate debt settlement companies. This starts by comparing the fees and claims of each company. Debt settlement can be risky as it isn’t guaranteed, so it’s critical to compare fees. Additionally, since there is no guarantee that a creditor will accept the settlement, it’s a good idea to review each company’s claims to ensure you’re dealing with one that sets reasonable expectations.Next, evaluate the company’s process as well as their terms to make sure you qualify. For any company you work with, you should retain control over the funds. Some companies begin making settlement agreements as soon as the funds build up, others wait.
  • Research debt settlement companies. After you’ve narrowed down your choices, check on the company’s compliance and other user experiences. You can visit the Better Business Bureau and ensure the companies are members of the American Fair Credit Council and the International Association of Professional Debt Arbitrators.
  • Establish agreement/account. Upon selecting a company to work with, visit their website to open an account. Be prepared to give your name, phone number, email address and the total amount of credit card debt.
  • Start saving money according to your plan. Once the company reviews your debt, they will propose a savings plan that you should follow. This will require you to make a single deposit into an account usually managed by a third party.
  • Saved funds are disbursed. When the company begins making settlement agreements, the funds will be distributed from the account, paying off both debts and settlement company fees.

How to settle debt on your own

1. Figure out which accounts are past due

If you’ve secured money through a loan, savings or inheritance and you want to leverage that to settle your debt, you don’t have to hire a debt settlement company. Instead, you can take care of it yourself or hire a lawyer to handle the negotiations.

For a debt settlement offer to be appealing to creditors, you likely need to be behind on payments. Rather than stopping payments on your current debt, make a list of the debts you are already behind on.

Next check the statute of limitations on that past-due debt. If you have debt that’s past the statute of limitations, then you can no longer be sued by the creditor to collect. If you decide to make a partial payment on debts that are past the statute of limitations, it might restart the clock on the statute.

2. Save money, and determine how much you can pay

Before contacting your creditors to make a settlement offer, determine what kind of lump sum or payment plan agreement you can stick to. The goal is not only to pay off the settled debts but to stay current with all your other bills and ensure you have enough of a cushion to deal with potential emergencies.

If you don’t have a lump sum of money to offer for debt settlement

3. Contact your creditors

Creditors need to agree to reduce your debt balance as part of your settlement offer. To find out which creditors are amenable to debt reduction, contact all those whose payments you’ve fallen behind on. Because you want everything documented, this contact should be made in writing, although you can call the company as well.

In some cases, this debt may have already been transferred to a collection agency. If that’s the case, verify which collection agency has taken the debt and contact them.

4. Write a debt settlement letter

Once you know which creditors are willing to settle, write a debt settlement letter spelling out the details of the agreement. This letter should include:

  • The account number
  • The reason you want to settle the debt
  • The current balance
  • The proposed settlement amount or restructured payment plan
  • The deadline for the settlement payment or starting date for the payment plan

Sample debt settlement letters

Alternatives to debt settlement

Debt management plans

Nonprofit credit counseling organizations often offer what’s called a debt management plan. This is a strategy in which the credit counseling agency works with creditors to reduce your interest rates and create payment plans that work with your budget. You then make a single monthly payment to the agency and have a payoff date within three to five years.

A debt management plan may come with a monthly fee as well as a setup fee. However, these fees may be worthwhile, as the credit counseling agency will work to have late fees and other kinds of fees waived on your debt.

Debt consolidation

If you don’t like the idea of keeping your debts unpaid for debt settlement, you can instead consider debt consolidation. You can accomplish this by either:

  • Working with a nonprofit credit counselor to create a debt management plan; or
  • Getting a personal loan, balance transfer card or equity loan to pay off all creditors, thus reducing your repayments to a single lender and due date.

Bankruptcy

Debt settlement is often chosen as a way to avoid bankruptcy, but in some situations, bankruptcy could be a better option.

  • With Chapter 13 bankruptcy, a three- to five-year payment plan can mean that your debts are settled and your secured assets protected with a court-approved payment plan and possibly lower debt balances.
  • With Chapter 7 bankruptcy, many unsecured debts can be discharged without payment, so you might save even more money. Since credit cards are unsecured debt, Chapter 7 can be a better choice than credit card debt settlement.

With either type of bankruptcy, collection actions are stopped, along with garnishments. This can provide a welcome relief to those being hounded by debt collectors.

FAQ: Debt settlement

A debt that’s been settled will show as such for up to seven years on your credit report. In addition, late payments of 30 days or more can remain on your credit report for up to seven years.

Because debt settlement generally requires you to remain past due on payments, it can have a detrimental effect on credit. Missing more than one payment, which is typical for debt settlement, can have an even greater impact.

Taking a settlement in and of itself is not necessarily a bad thing, although it will show up on your credit report. There can be tax consequences on the forgiven debt, so make sure you’re ready to pay those. Settlements also generally require you to be past due on payments, which also has a negative effect on your credit score.

Debt settlement companies often claim reductions of 30% to 70%. This does not include fees paid to the settlement company.

To qualify for debt settlement, a creditor generally must be enduring a financial hardship that has put them behind on payments. They must also meet the company’s debt balance requirements.

Debt settlement companies often claim to have an advantage with creditors by handling a large volume of customer debt through bulk negotiations. This could mean you have better odds of having your agreement accepted when you use one. However, you may save money by handling it on your own.

Avoid companies that charge in advance or that guarantee results. Check the Better Business Bureau for complaints and make sure the company is compliant with the Federal Trade Commission.

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