Financial Learning Center

The ability to borrow money is essential. Without access to loans, it would be next to impossible to buy a car, get a house or pay for a college education. The cost of these items is so high, that it would take years to save up to buy them.

The best part of getting a loan is that it allows you to enjoy the thing you are buying, before you fully pay for it. Which is truly an amazing idea!

The formal structure of lending goes back to ancient Rome where farmers would borrow money to plant crops and repay the loan upon harvest. Lenders would also reduce their risk through secured lending, where the borrower would put items up as collateral on the loan. This basic structure of lending still exists to this day.

Loans exist everywhere and are not always obvious. Mortgages, car loans and lines of credit are obvious. But credit cards, car leases, transit passes, many telephone contracts and gift cards are also types of loans.

Let’s go over a few things that you should know about loans.

Risk

When someone lends money, they expect that they’ll get that money back. Unfortunately this is not always the case. Borrowers sometimes don’t pay back their loans, thereby defaulting on them. So there are risks to lending money.

In order to protect themselves, lenders need to gauge how risky each loan will be. To do this they evaluate the borrower and try to figure out the odds of that borrower not paying back the loan . To do this they calculate something called a “default risk”.

So how do lenders calculate default risk? This is done through an analysis of a borrower’s credit history. They look at things like past bankruptcies, how often bills are paid late, how much credit is being used, how often the borrower is behind on payments and how long is their credit history is. All of these things are evaluated to calculate the default risk.

Secured vs. Unsecured Loans

But that’s not the only risk that lenders face. The loan itself can hold different levels of risk. For example, if a lender offers a loan, and the borrower posts something as collateral against the loan, these are considered less risky. This is because if a borrower defaults, the lender can keep the thing that was posted as collateral. So even on a default, the lender won’t lose all of their money. They’ll have an asset instead. This is called a “secured loan”. Mortgages are an example of secured loans.

On the other hand, if the borrower does not offer collateral, the lender only has the borrower’s word as a guarantee. This makes the loan much riskier. There is no asset to take upon default, so the lender has the potential to lose most, if not all of the loan. These are called “unsecured loans”. Credit cards are great examples of unsecured loans.

Revolving vs. installment credit

You should also know about different types of credit: Installment and revolving. Installment loans are the traditional form of lending, where you borrow money for a specific purpose, and have a fixed length of time to pay the loan back. This allows for clarity between the lender and the borrower by setting a point in the future where both the lender and borrower agree that loan will be entirely repaid. This is how mortgages are structured.

Revolving credit on the other hand, does not have a fixed number of payments or a set duration. The loan essentially allows the borrower to withdraw money, pay it back and borrow again, as many times as he requires. This is the how credit cards are structured.

The problem with revolving credit is its lack of clarity. Not only are the costs of the loan unclear, but without a set mechanism to pay the loan off, borrowers can get trapped in the loan. Without an end date or payment structure, there is little incentive to pay the loan off. If the outstanding balance of these loans is high, the interest payments can become quite substantial.

Paying for Risk

In order to insulate themselves from risk, lenders charge borrowers interest. If there is a low chance of default, lenders will offer a low interest rate. But if there is a high risk of default, they will ask for a high rate of interest on the loan. By charging a high rate of interest, lenders will be earning more money in interest to cover potential losses if the loan is not paid back.

So these are the things that are seen as higher risk and will result in higher interest rates: Poor credit scores, unsecured loans, revolving credit.

And the difference between the interest rates can be significant. So while the average 30-year mortgage rate for well-qualified borrowers in the US has not been over 10% in 25 years, and has been below 5% since 2010, you may see interest as high as 29% on a credit card,

So here are some basic tips:

• Start to practice good bill payment and credit use habits well before you look for a loan. It takes time to improve your credit score, so start early.
• Go to AnnualCreditReport.com. They give you free access to your credit reports at the three credit bureaus once a year. Make sure the reports are accurate. Errors in those reports can cost you when you look for a loan.
• Shop around for loans when you need them. Small differences in interest rates can add up a lot.
• Limit your use of unsecured loans. They cost a lot more than secured loans.
• Never, ever go to a payday lender. They are off the charts when it comes to interest rates, so avoid them at all cost.

Borrowing money can open your world to fantastic opportunities. Before you look for a loan, make sure you do all that you can to manage your finances, so that you can look as risk free as possible to a lender. And once you’re ready to borrow, shop around and do your homework. A little bit of work will save you a lot in the long run.

Debt can be a terrific thing. It can help you buy and enjoy things that are too expensive to buy outright. It is often the only way to make big purchases that would normally be out of reach, and pay for them over time. Enjoying things while you pay for them is an amazing idea, and one that has helped fuel modern economic prosperity.

But the burden of debt can also be debilitating. People can be so overwhelmed with debt that it affects their ability to pay for essentials. It can also be such a huge burden that it affects people’s mental well-being. In these cases, debt is far from a positive force, and is more like a curse.

So let’s talk about debt and focus on good debt and how to avoid the bad.

There are two things that define good debt. One is that it carries a low interest rate. The other is that it pays for something of value.

Mortgages

Let’s start with the best kind of debt. The best debt out there is a fixed rate mortgage. Interest rates on mortgages usually have the lowest rates of all debt. And when you pay off your mortgage, you’ll own a house, which (we all hope) will be worth at least what you paid for it. So you win with a low interest rate, and you win by buying a valuable asset. Just make sure that the payments are manageable.

Adjustable rate mortgages are a little less beneficial than fixed rate mortgages only because they are unpredictable. They may have lower current rates than fixed rate mortgages, but there is no way to tell what the rate will be in the future. If rates ratchet up, holders of adjustable rate mortgages could have trouble making their payments. Borrowers of adjustable rate mortgages need to make sure that they have enough spare income to cushion any possible future rate increases.

And avoid any exotic mortgages like interest only loans. They tease borrowers into signing with low initial payments then crush them with higher rates when the promotional period ends.

Car Loans

A small step down is a car loan. Car loan interest rates can sometimes be lower than mortgage rates. But, when you buy a car, it loses value very quickly. So the asset you buy will not be worth what you paid for it. But your car does retain some value, and if it comes with a low interest rate, it can still be considered good debt.

Also make sure you look at used cars. They can sometimes offer better value. Just make sure that if you finance a used car, don’t do it through small self-financed used car dealers. They can charge exorbitant interest rates.

Federal Student Loans

Federal student loans can also be considered to be good debt. Although you can’t actually put a price tag on what you gain from a college education, there is undeniable evidence that you will be significantly better off financially with a college education. Interest rates on federal undergraduate loans are usually quite low. So again, you get something of value at a low interest rate.

As a side note, some state and private loans can have severe restrictions with respect to repayment, rate reductions and forgiveness, so they can often fall into the bad debt category.

Home Equity Loans

Now we get into a grey area. Home equity loans. These are loans you take out against the value of your house. Right now they are only about 2 or 3 percentage points higher than fixed rate mortgages. But defining them as good or bad debt depends on what they are used for. Often times it is to renovate a house, which can add value to your home. Which is great. Other times it is used to consolidate higher interest debt. Which is also great. But a Discover Home Equity Loans survey found that the number one reason Millennials (30-34) take out a home equity loan is for… vacations! Ouch! We’d consider that bad debt.

Credit Cards

And at the bottom of the pile is credit card debt. Credit card debt comes with high interest, usually around 15% to 17% and usually pays for things that hold no intrinsic value (food, movie tickets, beer, shoes…). It makes little economic sense to carry credit card debt. Avoid carrying credit card debt if you can.

Payday Lenders

And at the bottom of the bottom are payday lenders. They charge exorbitant interest and fees, and their clients get stuck in never ending loops of short-term loans. Stay far, far away from these types of loans.

So if you are carrying debt, make a plan to pay down the highest interest debt first. You’ll have more money in your pocket each month that will no longer go to interest payments. Use this handy debt reduction calculator to make a debt reduction plan.

And make sure you shop around!! It’s crazy, but almost 50% of Americans don’t comparison shop for mortgages. Shop around for multiple quotes. It can save you a lot of money!

What is an APR? For some people the term APR can send a shiver down their spines… What’s so frightening?  APR stands for Annual Percentage Rate, and represents the cost of interest and fees charged by a lender on an outstanding loan. If you owe a lot on your credit card, APR is truly a frightening thing. The higher the APR, the bigger the chunk of money you will be sending to your lender every month.

Different kinds of loans will have different levels of APR. Generally, the riskier the loan, the higher the APR. So if you have a bad credit score, lenders will charge you higher rates because they consider you higher risk.

Lower rates apply to loans that are secured, or have assets attached to them. So car loans or mortgages often have low APRs, because if things go bad, your lender can always take back your home or car. But unsecured debt, like credit card debt, is much harder to collect if things go bad, because there is no asset attached to the loan. These types of loans have higher APRs.

But APR can be your friend too. When you are the lender, a high APR is terrific, because you’re the one getting the interest. Take your bank account for example. This is a basically a loan you make to your bank. They then take your deposit and lend your money out to others. For this right, your bank pays you interest, or an APR. Unfortunately, at this moment in time, because interest rates are so low, the APR your bank gives you will be extremely low.

One thing to be aware of is something called an APY, or Annual Percentage Yield. An APY takes the power of compounding into consideration. On bank accounts, compounding happens when you earn interest on the interest you’ve already earned. Compounding is the fuel on which finance runs. So if you get a 5% APR, which is given to you monthly, you will get compounding on the interest you already earned, kicking your 5% APR to an actual 5.11% APY earned. But be warned. If your bank quotes you an APY on your bank account, they are actually referring to the compounded return. The actual interest they will give you each month will be calculated using the lower APR! Sneaky!!

APRs can also vary. For adjustable rate mortgages, the APR can change year to year. These mortgages can be riskier for borrowers because there is a chance that rates can jump unexpectedly. At the moment, variable rates are lower than fixed rates, making them tempting… But things can change!

APRs on credit cards can also change, and usually in response to failed payments. These “penalty rates” can be as high as 29%. If this happens, know that your credit card company must lower your rates back down to the normal rate after 6 months of successful payments.

Finally, if you have multiple loans or lines of credit and you have extra cash, pay down your debt with the highest APR first. Generally anything over 6% or 7% interest is considered bad debt and should be paid off as fast as possible.

So now you know about APRs. The lower the better if you borrow, and the higher the better if you are the lender.

Student debt may be a difficult burden to bear, but it does help you buy better opportunities. College graduates on average make more money than people who do not finish college. So the money that is invested in a better education should pay off with a lifetime of higher earnings.

Here are some things to keep in mind when dealing with student loans, to make sure you don’t get into trouble.

1. Know all you can about your loans. For federal loans, go to the NSLDS. For private loans, check your paperwork. Make sure you know the lender, balance and repayment status of your loan. Also figure out the interest or APR on your loan and the length of your loan. The more you know, the better you will be able to handle any issues that come up.
2. Don’t forget about your lender. Make sure you tell them when you move or change your phone number. Open every piece of mail you get. Read every email. You don’t want to be out of touch, or miss an important letter and are ruled in default because you didn’t get a message. You need to have a good relationship with your lender so if payment becomes difficult you will be in a good position to negotiate with them.
3. Do some work to choose the best payment option. Federal loans, by default, have a 10-year term. But if you think that is too steep, you can choose a longer term, thereby lowering your monthly payments. But know that over the long run, extending your term will mean you will pay significantly more in interest. You can also change the term of the loan down the road if you need to. Go to this terrific US Department of Education site to see what different payment options are available for federal student loans. But as a rule of thumb, payments that are under 10% of your gross income (income before tax) should be usually manageable, so try to structure payments so that they are below that 10%.
4. Check out ways to reduce your payment burden. There are numerous programs to either forgive part of your loan, or reduce payments by tying them to your to your income. All federal loans are eligible for income based repayment plans. These are terrific ways to keep your loans manageable. Payments can be as low as 10% of your after tax income. There are also loan forgiveness plans available. Check out this site to see if you are eligible. If you have private loans, your lender is not obligated to give you relief, but you still can try to get them to make your payments manageable.
5. In emergencies, you can try to postpone payments. Called deferments or forbearance, you can postpone payments if you hit sudden emergencies like medical issues or unemployment. Be careful though. Even though your payments are postponed, your interest may not be, and the accrued interest can make your debt grow. If this is the case, try to arrange terms where you pay just the interest while payments are postponed, so the amount you owe does not grow. Private loans will also charge you fees to postpone payments, so make sure you use this option only in an emergency.
6. Make sure you know your grace period. All loans have a period of time after you finish school when you don’t have to start paying them. The grace period depends on the loan, so make sure you check with your lender.
7. As with all loans, pay the highest interest loan first, because they are the ones that cost you the most. So if you suddenly have extra money, like from a tax return or a gift, consider pre-paying your loans in order to pay down the principle. It will pay off in the long run. But make sure enclose a letter to your lender with your payment to tell them that you want the extra payment applied to your loan balance immediately. If you don’t, your lender, may just hold your payment and apply it against future payments, stealing away the huge benefit you get from paying down your principle.
8. Consolidating several loans into a single loan with a fixed interest can sometimes be beneficial. You’ll need to do some homework to see if you can get a better rate. For federal loans, go to StudentAid.gov to see the math. For private loans, there are numerous private debt consolidation options. Shop around. But you should never consolidate federal loans into a private loan. If you do, you’ll lose the great repayment options and borrower benefits that only come with Federal loans.
9. Use these great non-profit and government sites for more information:

• Consumer Financial Protection Bureau (CFPB)
• Federal Student Aid
• IBR Info
• Student Loan Borrower Assistance

Even with all these resources, college debt can be hard to manage, especially when you’re not earning much. Here are a few things you should know about what happens when things go wrong.

1. Most importantly, do not default on your student debt! If you default, a process will start that can ruin you financially. And there is no easy way out. It is almost impossible to declare bankruptcy on student debt. You MUST make a plan to pay it off.
2. The definition of default depends on the loan. On a private student loan, default generally happens after 120 days of non-payment. On a federal loan, it is after 360 days of non-payment. If you default, your lender can demand full payment from you or your cosigner.
3. If you default, your loan may be passed on to a collection agency and they may begin mailing you letters and calling you. Check out the Fair Debt Collection Practices Act(FDCPA) to see what steps you can take to prevent harassment from collectors
4. Notice of your default can be sent to credit bureaus, which will immediately impact your credit score, making it harder and more expensive to get a loan, and may even make it harder to get a job or a rent an apartment.
5. Once in default, lenders can start adding collection fees to the debt, which can raise the loan balance by 25% to 40%
6. Once in default, the lender can sue the borrower. If the lender wins a judgment against the borrower, the lender can obtain wage garnishment, which can be up to 25% of disposable income for private loans and up to 15% for federal loans. They can also seize assets (retirement accounts, bank accounts) or place a lien on a house, making it difficult to sell.
7. There is a statue of limitations on private student loans (but not federal). So the clock on collection may run out… But there are ways for private lenders to re-start the clock, so don’t count on this strategy.

Student debt is a good thing in that it can buy you better options in life. But take control of your student debt and make sure you keep it manageable so that you can fully take advantage of the benefits your education can bring.

There is a great quote attributed to Bob Hope that sums up banks quite nicely: “A bank is a place that will lend you money, if you can prove that you don’t need it”.

And it’s not too far from the truth. Banks are in the business of lending money, charging interest on that money, and making sure that they get the money back. So they look at every potential borrower and calculate the odds that they will get repaid. If you really, truly “need” the money (because you don’t have enough if it), that makes banks very nervous… Desperation is poison to a loan application…

So what happens if you have an unexpected expense? A medial bill, textbooks for the kids, summer camp, a trip for a family funeral... How do you pay for a one-off expense that you can’t cover with your paycheck? A bank is very unlikely to lend you money for something like that. They’d just see it as too risky.

So what do you do? If you don’t have family or friends to help out, you have to go to alternative sources. Usually, the first place to go is to a credit card. And if you don’t have a credit card, you go to payday lenders. Neither of these are great options because the interest and fees on these loans are so high. But often there is no alternative…

So let’s talk about these options. First of all, because these “loans” are unsecured (the lender has nothing tangible to seize, like a house or a car, if you don’t pay the debt), they are considered riskier. And people do default more frequently on credit card debt than on other types of debt. So interest rates are higher to protect the lender in case of default… So for credit cards, you’ll see interest rates range from a low of 10% to a high of 30%.

Payday lenders are a different story. There is something of a free-for-all in the industry. Many states regulate them and put caps on the interest they can charge, but other states let them run free. But no matter what, Payday lender charge extremely high fees. In states where there are interest rate caps, payday lenders instead charge “fees”.

Payday lenders claim that they have to charge such high fees because their default, or “charge off” rates are high. But when they submit information with the Securities and Exchange Commission, their 3.2% charge off rate is no higher than credit card rates. So payday borrowers are no riskier than people who use credit cards, but are charged higher rates than credit card borrowers. So it looks very much like payday lenders are taking advantage of people’s desperation to charge as much as possible.

So what do you do?

1. If you need to borrow for a one-off event, make sure you pay that off immediately. The danger of these high interest or high fee loans is that they can snowball.
2. Never roll-over your payday loan. Pay it off right away. Rolling over a loan will trigger higher fees that can become impossible to manage. Figure out a payment plan that will pay off the loan and stick to it.
3. Pay more than the minimum due on your credit card. If you pay the minimum, it may take a decade to pay of your debt, and you may end up paying more than double what you borrowed.
4. Try to get a consolidation loan. If your credit score is good, you may be able to get a personal consolidation loan that pools all your debt under one loan. It should have a significantly lower interest rate, and a payment plan that helps you pay the loan off. Just make sure you can handle the loan payments and stop dipping into your credit card for money!

Payday lenders are predatory. They take advantage of your desperation. So if you can, avoid them at all cost. Solving a temporary problem through a payday loan can become a rolling process of taking on more debt to pay for old debt. So stay away if you can.

In the meantime, try to keep your debt low and manageable so you don’t get into these situations.

Compounding is a terrific thing.  Einstein himself said, “Compound interest is the eighth wonder of the world. He who understands it, earns it… He who doesn’t, pays it.”

Compounding happens when you earn interest on the interest you’ve already earned. It means that each month, even if you do nothing, you will get a little bit extra in interest deposited in your savings account because interest is calculated on not only your deposit but also all of the previous interest you earned.

The additional earnings that compounding can give you is significant. Let’s look at an example. Take a $1,000 bond paying 4% interest. Without compounding that money doubles after 25 years. With compounding, the money doubles after 18 years. That’s seven years sooner! That’s a big difference!

A great way to see compounding in action is through the Rule of 72. This rule tells you low long it will take for your money to double. All you do is take 72 and divide it by the interest rate you’re getting.  The result will give you the number of years it will take to double your money. So at a 12% interest rate, with compounding your money will double in six years (72 divided by 12).  Super easy!

Now let’s consider compounding’s dark side. What happens when you’re the one who OWES the money? Interest is now no longer your friend. Interest is your enemy. It gets charged to you every month, and if you fall behind in your payments, compounding can quickly multiply your debt and make it unmanageable.

These situations are called debt spirals. They happen when interest builds up and compounds. If you can’t make basic payments and at least pay the interest charged on your loan, the size of your debt will grow.  Once the interest payments become unmanageable, the debt will balloon. Once this happens, the borrower is at the mercy of the lender, and the only options are restructuring the debt, or default…  

If high interest rates are an overwhelming benefit to savers, high interest rates are equally as destructive for borrowers. High compounding interest rates on loans are the scourge of modern economies. From credit card debt to payday loans, interest rates can be astronomically high. For example, using the rule of 72, a credit card debt at 30% will double your debt in less than two and a half years if left untouched!

Payday lenders are even worse. They actually hide their interest rates by calling them “fees”. But if you actually go and calculate them as an interest rate, they can hit triple digits, which only get worse if you roll your debt into new loans or miss payments.

So prioritize paying down your high interest debt. Make sure you always cover at least the interest you owe. Also make a plan to not only pay the interest, but pay down the principal as well. If you are paying a penalty rate on your credit card, your bank MUST lower it after 6 consecutive minimum payments. Avoid payday lenders at all cost! And if you have a loan with them, prioritize paying it off as fast as you can.

Don’t let high interest rate debt get out of control. Try to keep all of your debt payments (plus rent) below 36% of your pre tax income. Statistics show that once you cross the 36% threshold, it becomes much more difficult to pay your debt. And if you have a lot of high interest debt, look at consolidating it with a personal loan for debt consolidation.

So now you know about the good and bad of compounding. Make sure you take advantage of the good and limit the bad!

So you want to own a car? Terrific! Cars can open a world of possibilities, allowing you to travel for work or school, find cheaper housing or travel to less expensive shopping. You will no longer be limited to just your neighborhood looking for opportunities. You will now be able to drive to higher paying jobs or better schools or cheaper food options that are further away.

So how should you pay for your car? There are a lot of options out there, and it isn’t always clear which is the best.

But there are a couple of things you need to know right off the bat. First of all, a car is an asset. This means that it has a value that it keeps over time, and can be unlocked when you sell it. The money that you spend buying a car is not money wasted – but an investment, of sorts.

Now that you know that cars are assets, you should also know that they are actually not great assets. Good assets are ones that retain most of their value over time. Cars do not. They lose their value very quickly, so are actually not such a terrific investment.

But having said this, cars still hold some value. And they open other possibilities in life. And because they tend to be quite expensive, it is very important to make sure the best decisions are made about how to pay for them so that costs are minimized and value is maximized.

So there are two basic ways to finance a car: a lease or a loan. Each comes with its own benefits and weaknesses. Let’s go over them separately so that you are clear on the differences. Let’s start with a lease.

A lease is essentially a financial arrangement that allows for the use of a car for a set period of time, usually three years, after which the leaser (you) can either buy the car or give it back. During this time, you do not actually “own” the car. You are really just renting it from the company that is leasing the car to you.

The most important thing to understand about a lease is that person leasing the car needs to cover the cost of the car’s lost value. As we said earlier, a car loses value over time. This is called depreciation. So while you are driving it, the car depreciates in value and the company leasing you the car takes a financial hit from the lost value. That company needs to cover that loss. Which is where the money for your lease goes, to cover the depreciation that the car loses while you drive it.

This arrangement makes sense. The company loaning you the car gets to cover their loss and the person leasing the car gets to use a nice new car. Everybody wins.

But there’s a catch. Cars depreciate quickly. In fact, a huge chunk of the car’s value is lost in the first three years. In fact, on average 11% of a new car’s value vanishes the second it is driven off the lot. So a leaser, in effect, pays for a larger proportion a car’s value than they will really use.

And that’s not the only catch. Because the leasing company expects to recoup value from the car once it is returned, they want to make sure it comes back in good shape. So they limit the numbers of miles that can be driven and set limits on the wear and tear they expect to see. If those are exceeded, a penalty payment will be required.

And finally, there are hidden financial charges. The company leasing the car has tied up their own money to buy the car they are leasing out. They may have had to take out loans to buy that car. So there are financial charges that need to be covered and are rolled into the price of the lease.

But, even with all these costs, lease rates can be quite affordable. And this is the main attraction of leases. They tend to be cheaper than loans and require little or no down payment.

So let’s turn to car loans. Straight away we’ll say that what makes a lease attractive is what usually makes a loan unattractive: Price.

With a loan, you are buying an entire car. And this can be expensive and complicated. You need to get approved for that loan by a financial institution, you’ll have to pay interest on the loan and very often you will have to put down a big down payment.

This usually means that monthly payments for car loans will be higher than monthly lease payments, even for the same car.

But remember that a car is an investment, and unlike a lease, your money is paying for an entire car, which can be re-sold one day. This is what makes car loan payments higher. But this is also the benefit of a car loan: Once you pay for the car, it will have some value that you can unlock when you sell it.

So although loans may have higher monthly payments, over the long run, they are usually better deals financially.

So here are the things to do to maximize the financial benefit of getting a car loan.

1. Own the car for as long as you can. The longer you own your car, the better the economics are for buying a car with a loan.  And just to let you know, the average car on US roads these days is around six years old.
2. Keep the term of the loan short. The sooner you pay off the loan, the less interest you pay overall. Try to keep it at 5 years or less. The downside of this means that your monthly payments will be higher than with a longer-term loan. So while you try to keep your loan short, make sure you keep payments affordable.
3. Maintenance is your responsibility. Usually new cars come with warrantees that cover maintenance, which is a great way to cover things that may suddenly break. But remember that once those run out, you will have to pay to fix the car.
4. Used cars are usually much better deals. The biggest chunk of depreciation will have already come off a used car, so they will depreciate more slowly than a new car. And many automakers will sell “certified pre-owned” cars through their dealerships that come with extended warrantees, saving you maintenance costs.
5. Buy a good car! Buy a car that retains its value and avoid the ones that depreciate quickly. After five years, the average car holds 46.5% of its original value. But you can find carsthat hold 60% of their original value. That’s a big difference!

To help you make a decision, start with what you can afford to pay per month. Plug this number into this affordability calculator from Edmunds.com, and it will tell you what sticker price you can afford. It’s a great way to go about your car search.

In the end, the weight of the high monthly payments and the deposit requirements may be too much for some people, making car loans impractical;. For these people, the lower up-front cost of a lease may be the only viable option. If this is the case for you, make sure you get competitive lease offers to make sure you get the best deal.

But no matter what you choose to do make sure to do your research. There are terrific resources to get car quotes from Edmunds.com, Kelley Blue Book, NADA Guides or Cars.com. And make sure you know all you can about your potential car using these costing tools from Edmunds.com and Kelley Blue Book

And don’t forget, there are many services such as ride sharing, short term car rentals and trusty public transport – all of which may cost you significantly less than a new car if you don’t drive too far or too often. Look into them before you make the leap to buy.

If you’re finding that you can’t seem to dig out from under your debt, you’re not alone. There are trillions of dollars in mortgages, student debt and credit card debt in the US, so it’s not surprising that the burden of debt can be difficult to bear for many people.

Let’s start by trying to find out what a reasonable debt burden is. The most common measure of debt burden is called a ‘debt to income ratio’ (DTI). This is the percentage of your income that is used for debt payments. The generally accepted maximum ratio is having 36% of your income going to debt payments. Your mortgage alone should be no more than 28% of your gross income. Anything above these levels is considered a burden that could impact your quality of life.

DTI is easy to figure out. All you have to do is add up all of your monthly debt payments (student loans, car loans, mortgage and minimum credit card payment) and divide it by your monthly gross (before tax) income. That will give you your DTI. If you rent instead of holding a mortgage, you should include your rent in the calculation. Although this isn’t truly debt, it is a financial obligation that takes money out of your pocket. It won’t be a true DTI, but it will give you a fuller picture of your financial obligations

So what to do? If you have a mortgage and car payments which are putting you over that 36% threshold, there are only two things you can do: try to refinance your mortgage at a lower rate, or earn more money. Neither are easy options. But there are lots of web sites, like LendingTree, where you can price out new mortgages.

If you have credit card debt in the mix, there is definitely something you can do. If your credit card debt is pushing you over the 36% level, think about consolidating that debt. Credit card interest can range from 10% all the way to 30%. There are companies that will give you a debt consolidation loan that is structured with fixed monthly payments at a lower interest rate than you’re paying on your credit card. Just don’t rack charges back onto your card again!

If you are under that 36% DTI, and have credit card debt, think about increasing the amount you pay towards your credit card every month. If you are only paying the minimum, that amount is usually only interest and 1% of your balance. Just paying the minimum will mean years of payments and sometimes paying more than double your balance in interest. Minimum payments are not good enough. See how much you can add to your payment without hitting the 36% threshold.

Credit card debt is usually the highest interest debt you will hold. Paying that debt off first and fast will leave you more and more money in your pocket every month as your interest payments go down. Just make sure you don’t add more charges on to your credit card and end up where you started!

Debt can be hard to manage. But when you know what your debt level is, and build a strategy to reduce it, it’ll just be a matter of time before you see the light!

Debt can be a terrific thing. It can open doors to things that are normally out of reach financially. Homes, for example would be almost impossible to afford if you had to pay for them in cash. And the best part about debt is that by using debt, you can actually enjoy those awesome things while you’re paying for them! What a terrific idea.

But debt is not free. You’re borrowing someone else’s money after all, and you’ll have to pay them something for that privilege. And over time, that cost can be substantial. So it’s always a good idea to try and pay off your debt and limit the extra cost in interest payments you have to give to your lender.

The most critical component of debt is its interest rate. The interest rate is the amount of money your lender is charging you to borrow their money. The higher the interest rate, the more you are paying to borrow. It’s also important to note that debt with a high interest rate has a tendency to grow if it isn’t managed properly and can often balloon out of control.

So if you want to deal with your debt, the first thing to do it take stock of all the debt you have. The first thing to do is look at all of your debt and try to figure out the interest rate you are paying on each pool of debt. Better yet, look for the Annual Percentage Rate (APR). This rate reflects not only interest, but also other fees that you are charged on your debt. APR is a more accurate measure of how much your debt costs. Most lender statements will list the APR.

Next, order your debt from highest interest rate to lowest interest rates. You’ll notice that there is a wide range of APRs. They can go from low single digits for mortgages to mid double digits for credit card debt.

In dollar terms the cost difference can be significant. Let’s look at $1,000 of debt. If that $1,000 debt is credit card debt, it can cost you between to $130 to $300 in interest payments per year. If that $1,000 debt is in a mortgage, it will only cost you $40 in interest per year. That’s a big difference.

So here is the key to paying down your debt: Attack your high interest debt first. In the above example, you will see that if you can pay down the principle on your mortgage by $100 this year, it will save you $4 in interest payments next year (and every year after that). If you reduce the principle on your credit card by $100 instead, it will save you $13 to $30 in interest payments next year and every year after that.

As you can see, paying down the principle on your high interest debt is a more effective way of paying down debt and reducing the interest you owe. Remember that if you pay down more high interest debt first, you will reduce more of your future interest payments, and have more money in your pocket each month.

So here are the keys to paying off your debt:

1. Focus on your highest interest debt first
2. Pay more than just your interest, pay down your principle
3. Don’t add more debt to the loan you just paid down

So make sure you’re attacking the principle that you owe. If you only pay the interest you owe, you are not paying down your debt and your monthly payments will remain the same. Ignore the “minimum due” line on your statement. Look instead at the “interest charged” line in your credit card and pay as much above that as you can.

Most importantly, make sure you don’t add more debt than to what you just paid down. The key here is to figure out how much principle you just paid off and not add more than that. For example, if you just paid $500 on your credit card debt, of which $100 went to interest, you just paid down $400 of your principle. So in the next month, do not spend more than $400 on your credit, otherwise your principle will have actually gone up, and you’ll owe even more in interest!

The hardest payment is the first payment. Set yourself a goal of paying down your principle. In the above example, if you can pay $500 on your credit card and limit your spending to $300 per month, then will have paid down your principle by $100.

But the amazing thing about paying down debt is that, its benefits can accelerate. So in the above example, in the next month, you will only owe $98.75 in interest. So that same $500 payment will pay off $101.25 in principle. After a year, that same payment is paying almost $115 in principle. And in less than 5 years, you will have completely paid off an $8,000 debt and you will have the $100 in interest and $100 in extra principle in your pocket every month. That extra $200 in your pocket every month can be used to pay down other high interest debt or put into savings.

Again, the first payment is the hardest. If you can manage paying down your principle in that first month, you should be able to do it every month. Just stick to your plan and keep paying down your principle.

If you want to know how long it will take to pay off your credit card debt, you can use this calculator from CreditCards.com. If you want to sort out the benefits of paying down student loans, try this calculator from StudentLoans.org, or this calculator from Finaid.org.  For other installment loans try this calculator from CNN.

The benefits of paying down your debt quickly pay off with less money paid in interest and more money in your pocket. Win-win!

Owning a home is a great thing. It puts a roof over your head, protects your family and gives you roots in a community. It’s also a good financial move. A house is a terrific asset to own, and tends to hold its value over time. So the money you put into a house is not money wasted.

A house is an investment in the truest sense of the word. You put money in and if you buy in the right neighborhood, and you take care of your home, and if the economy around you booms, the value of your house should go up. This is the hope that every homeowner has; that their home will go up in value.

One of the drawbacks of investing in your home is that it is not a very liquid investment. When we say ‘not liquid’, we mean that it is very difficult, time consuming and expensive to convert your home into cash. A stock, on the other hand, is very liquid because you can buy and sell it in seconds, and at little cost. So it is the ease at which you can turn your investment into cash that makes it liquid.

But what if you want to renovate your home? Or have an unexpected medical expense? Wouldn’t it be great to unlock some of the value in your home and turn it into cash? It is possible, and it can be done either through a home equity loan or a home equity line of credit (HELOC).

Both of these financial instruments are essentially second mortgages on your home. As with a regular mortgage, these use your house as collateral on the loan. They allow you to unlock your home’s equity either as a lump sum (with the home equity loan), or draw it as it’s needed (through the line of credit).

The key word here is “equity”, and when a bank says that word, it refers to the value of the house that is paid for. And that is the big catch: The amount you owe on your house has to be lower than what your house is worth. So either your home has to have increased in value since you purchased it, or you need to have paid down your mortgage.

When you are looking to get cash out of your house, most banks require you to keep some equity in your house and will not let you borrow against all the equity available. This remaining equity can range from 10% to 20% of your home’s value, depending on the requirements of your lender.

So if your home is worth $500,000 and your outstanding mortgage is $400,000, you have 20% equity in your house ($100,000 in equity out of the $500,000 total value of the house). If a bank has a 10% equity requirement, it means they want you to keep 10% of the home’s equity in the house, and will only lend the other 10% of your home’s equity to you (which would be $50,000). If the bank requires 20% equity, then in this example, the bank will not offer you a loan at all.

The equity requirement means that you’ll be insulated (to some degree) from market fluctuations. With a 10% equity requirement, it means that your house value can drop up to 10% before you are “under water”, or owe more than your house is worth. The great recession showed how devastating it is to be under water, with millions of Americans simply walking away from their homes and their under water mortgages. So the equity requirement can help keep mortgages above water, and people in their homes.

So how do these loans work? Let’s start with home equity loans. These are structured like mortgages, where you get a lump sum, which have a fixed interest rate and you pay off over a fixed period of time. As with a mortgage, you use your house as collateral. So make sure you can pay back the loan, because if you default, your lender can take your home!

These loans are beneficial because they allow you to unlock some of the value of your home and pay it back in a fixed and predictable schedule. The downside to these loans is that you are charged interest on the full amount, even if you don’t end up using all of the funds.

Home equity lines of credit are structured differently than home equity loans. They are still loans that use your home as collateral. But they look and feel more like a credit card than a mortgage. Like a credit card, they have credit limit that you can use as you wish, and you are only charged interest on the amount you actually use. These loans also have a “draw period”, which is a set term during which you have the flexibility on how you use and pay the loan.

If you have expenses that are variable and short term, the flexibility of a home equity line of credit can be a terrific way of unlocking cash from your home for a short period of time.

But there are downsides to these lines of credit. As with credit cards, if you miss payments, the interest rate you are charged can soar. These penalty rates can be two or three times your initial interest rate. Interest rates on these loans are usually variable and reset during the period of the loan. So the cost of these loans is unpredictable, and can go up over time.

The biggest downside of these lines of credit comes when the draw term ends and the loan essentially closes. At this point you can no longer borrow from the line of credit and you must begin the “repayment period”. At this point you have to pay off the outstanding principal and interest. When this repayment period starts, payment requirements can often soar. If the borrower is not prepared for this event, they can be crushed by the burden of the higher payments.

It is essential that anyone considering a home equity line of credit understand all the moving parts of this type of loan. They are built to be used and repaid quickly. They should not be used like a credit card because there is a day of reckoning when the repayment period begins.

One more note to make about these loans. Because they borrow against the equity on your home, they have the same tax advantages as traditional mortgages. So if you qualify for a tax deduction for the interest you pay on a mortgage, you will probably also qualify for a tax deduction for the interest you pay on a home equity loan or line of credit on that same property.

And as a final note, be very careful of lenders advertising home equity loans that allow you to borrow up to 125% of your home’s value. These “No Equity Loans” are expensive and dangerous. The interest rates and fees associated with these loans are extremely high, and push borrowers deep into debt. Think twice before you consider taking out one of these loans.

In the end, home equity loans and home equity lines of credit offer terrific ways of turning some of your home’s equity into cash. Just make sure you know the all the details of the loan or line of credit before you agree to them.

The great economies of the world have been built on peer to peer lending. It’s what people have done for millennia: You take your money and lend it (with interest) to family, friends or the community, to create value for yourself and for them.

There are two different ways to think about this.

There are probably many in your circle of family and friends who may need money at some point in time. They will ask to borrow money from you, maybe with regular payments and fixed interest. But this is not putting your money to work.  This is helping your family & friends, and it’s a fraught process. If you’re in a position to gift money (i.e. you have a fully funded retirement account, emergency savings and are living well below your income) – then consider it. But there’s a chance you’ll never see the money again. So if you do it, make sure you consider it a gift.

The second way to put your money to work by lending it to others is through ‘peer to peer’ lending. This is where you deposit your money with an intermediary, who then lends it out to people who need it. It’s very similar to the traditional way that banks work. But with a big difference – you get visibility into where your money is going. With some lenders you can see where your loan is going. You also get to choose the amount of risk you want to take, and what return you are looking for.

Prosper, SoFi and Lending Club are all peer to peer lending companies where you can deposit your money, which is then loaned out for higher interest rates than what you can get with your savings account at a regular bank.

So is it a good idea for you?

The first thing to consider is risk. When you put your money in a savings account, it’s insured by the FDIC for up to $250,000. So if the bank goes out of business, you won’t lose your money.

Funds with P2P lenders are not insured – so should there be issues with the financial stability of the lender, there’s a chance you could lose your money. So consider where you are on the spectrum of risk tolerance and see if this is money you can afford to lose.

Next thing to consider is performance.

The relationship between risk & return is what investing is all about. The stock market and P2P lenders are both higher risk / higher potential return. Currently the estimated returns from P2P loans are between 5-8% per year. This is significantly higher than what you can get in a regular savings account, and on par, over the past few years, with what you would have gotten in the stock market. But as with all investments, there is no guarantee of returns.

Third thing to consider is ethics.

For many borrowers, P2P loans are a godsend. If you’re consolidating high interest credit card debt for example, going from paying 20+% interest to 8% is pretty great.

But in order for these platforms to give high returns to investors, they also charge high penalties – such as late fees. It can happen that borrowers get trapped in these loans. It’s estimated that 70 percent of those who consolidate their debt end up with as much or more debt a few years later. So the benefits of these loans may have strings attached for the borrowers. And as a lender you have to make sure you are comfortable lending your money into this system.

Lending money doesn’t usually get included in recommendations by financial advisors. It’s an interesting and unique investing option. But doing so involves risk.

Think carefully about putting your money to work by lending it to others. Understand the risks involved. But if you enter this market, also enjoy the fact that you can direct your money to specific areas of specific need. It really can be a rewarding way of investing.

APR is one of those expressions that bubbles up from the acronym soup that the financial word is so good at brewing. But what does it mean, and why is it important?

First of all, APR refers to the Annual Percentage Rate of a loan. It includes not only the interest rate, but also any fees attached to the loan, so it gives you a good overall view of how much your loan costs. A high APR means that your lender is charging you a lot of money to borrow their money, and a low APR means that the lender is giving you cheap money.

APRs vary widely, and right now can range from 2% for a car loan to 29% on a credit card. The difference in dollar terms is huge. On a $10,000 car loan, the 2% will cost you about $200 in interest in the first year. If you instead bought that car using a credit card with a 29% interest rate (a terrible idea by the way!), you would pay $2,900 in interest. That’s a huge difference!

So here are some ways to reduce your APR.

1. If you have a credit card, the issuer has two rates, the regular rate and a penalty rate. The penalty rate is always much higher, and kicks in if you miss two payments. So NEVER miss a payment. Set up an auto pay to make sure something goes to pay your credit card bill every month. And secondly, if you do trigger the penalty rate, make sure you make the next 6 consecutive payments. Your credit card company must lower your after the 6^thpayment.
2. Consolidate your debt. If you have a bunch of debt that has an APR in the double digits, think about rolling that debt into a consolidated loan. These are installment loans, so they have fixed payments over a fixed term that are focused on paying the debt off. You cannot use this debt like a credit card and buy new shoes with it. But they are terrific ways of lowering your APR and paying off your debt.
3. Home equity loan or home equity line of credit. If you own a home, you can borrow against it at competitive rates, and you can usually use the money for whatever you want. Rates are usually in the mid single digits. So if you pay off your 16% debt using a 7% home equity loan, your overall APR will drop substantially.
4. Roll your credit card debt to one that has a 0% introductory interest rate. These are great ways of getting TEMPORARY relief from your high credit card interest rate. But be careful. There are fees associated with these products (usually 3% of your balance). If you use these products, make sure you use the time pay down your credit card balance; otherwise this break makes no economic sense.
5. Refinance. Interest rates are hovering at super low rates. See if you can refinance your existing mortgage or home equity loans at a lower rate.
6. Get help with you student loans. There are fantastic programs for federal loans that base your payments on your income or allow for loan forgiveness. Look to see if you qualify. If you have a private loan, ask your lender for a graduated or reduced repayment plan. Go to the Consumer Finance Protection Bureau for more information.

In conclusion, when you get some debt relief, make sure that you don’t rack up more debt with the money you’re saving. Once you’ve reduced your overall APR, work to ensure it doesn’t creep back up again.

And finally, stay VERY far away from Payday Lenders. They hide their APR by calling it “fees”. In reality their APRs can be as high as 300%! Stay away.

Lowering your APR may not be as fun as a new pair of shoes, but it will definitely keep more money in your pocket.

Debt is something of a double-edged sword. On one hand, it offers you ability to buy something that would normally be out of reach financially and allow you to pay for it over time. But on the opposite side, debt comes with a cost. You are borrowing someone else’s money, and for that privilege, you need to pay money.

So when is debt too costly? If you have extra money on hand, when does it make more sense to pay off debt, and when does it make sense invest the money instead?

Well... It all depends on interest rates.

The line between bad debt and good debt depends entirely on how expensive that debt is.  And the higher the interest rate on the debt is, the more expensive it is to hold. So debt that is considered bad, should be paid down, and if it is considered good debt, then the urgency to pay it down is lower.

So what is the dividing line between good debt and bad debt? A quick answer to that question is to say that right now, 6% or 7% is the dividing line between good debt and bad debt. But the issue is not as clear-cut as that. There are a lot of grey areas,

Instead, you should ask yourself if you should pay down your debt, or whether there is something “better” that you can do with your money? So instead of paying down your debt, is it a better idea to invest your spare cash?

To make that decision, you have to look at what kind of returns you can get from investing your money.  If the returns you can get from investments are higher than the interest you pay on your debt, then investing your money may be a better option.

So what kind of return can you get from investing? That’s a big question. Historically, average annual returns of from the US stock market (including from dividends) has been around 11%. We’ll note here that this number is debatable, and depends on the time-line you use and how you measure “the stock market”. But over the long run, US equities have generated handsome returns.

But for the sake of argument, let’s temper our expectation of returns. Let’s say we are conservative investors and expect a 6% return. Let’s see how that impacts your decision about paying down debt.

Historically, credit card debt has carried a double-digit interest rate. Average rates hover around 15% and penalty rates can be as high 29%.

Let’s assume your credit card interest rate is 15% and you have an extra $100 that you can use to pay down the money you owe on your credit card. If you pay down your principle by that $100, it means over the next year, you would have saved the 15% interest that would have been charged on that $100, which would be $15.

If you instead took that $100, and invested it, and everything went according to plan and you earned a 7% return, you would have made $7. So you’re $7 richer than when you started. But remember that you didn’t pay down your credit card debt. So you paid $15 in interest you could have avoided had you paid down your credit card debt. So in this case, you’re $8 worse off than if you had paid down your credit card debt.

Any way you look at credit card debt, it is almost always better to pay down this high interest debt than it is to invest. There will be some years where stock market will preform above expectations, and will give you better returns than paying down your credit card. But these are definitely the exception, and over the long run, paying down credit card debt is the better option than putting that money into investments.

On the opposite end of the debt scale are mortgages. Because they are backed by the value of a house, they tend to be lower risk for the lender and offer some of the lowest interest rates of any debt. In this case, the savings you get from paying down an average mortgage is usually lower than the gains you get on an average year of investing. Again we say “average” because in some years this will not be the case. But over the 20 or 30-year span of a mortgage, it wouldn’t make sense to stay away from investing while you pay extra on your mortgage. (You should still always pay your monthly payments though!).

While the logic of paying down debt is clear on both extremes of interest rates, the logic is much less clear when the interest rate is somewhere in the middle. There are no rules when it comes to making decisions about debt with moderate interest rates. So here are some guidelines.

1. Check your gut. Look at how well you tolerate risk. If you can stomach the ups and downs of a bumpy stock market, then maybe investing your extra money in the stock market is a good idea. On the other hand, if a bumpy stock market will cause you undue stress, then paying down your moderate interest debt may be a better idea for you.
2. Go you like guarantees? The savings you make by paying off your mortgage are guaranteed savings. You know that if you pay down your debt, you will save money. There are no such guarantees in investing.
3. What does the future look like? If the market is in turmoil, or there is economic uncertainty on the horizon, think twice about putting more money into investments. Paying down moderate interest debt might be a better option.

Here’s an important note for people carrying student loan debt. If the interest rate on your loan is low, and you can manage the payments easily in your monthly budget, try to prioritize saving and investing. Starting investing early can have a huge impact on your future financial success.

Finally, remember that there are no guarantees with the stock market. There is no way to predict which way the market will go in the future. So there is no guarantee that investing in the stock market will get you a better return than paying down any debt. The stock market can (and does) go down. All you can say is that the historical odds are in your favor over the long run. So if you do decide to use your spare cash to invest, make sure it is for the long run so you can ride out the bumps.