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I am currently paying $500 every month into my student loans.  I am in the deferment period, which means that my loans have not “priced” yet.  I am not required to make any payment at all.  Whatever balance is outstanding at the end of the six month period will be amortized to create my future monthly payment.

I don’t have a whole lot in my cash savings account.  I am keeping myself on a tight budget to pay down my student loans as rapidly as possible.  At the current rate, my loans will be completely paid in two years.  I have about enough saved for two months of expenses at my current spending rate, which could be lowered if needed.

I am required to begin paying the loans in September.  Should I keep paying the $500 per month until September and then make the minimum?  Should I save up now while I can and start making higher payments when I have more put away?  Should I do something completely different?

What do you think, save or pay off the loans?  Please give me your thoughts in the comments.

On March 30, President Obama signed a new law that redefines the roles of much of the student loan industry.  The law appears to be better for the government and better for those taking out student loans.  Big banks are going to take a hit, however.

In the old world, students (or parents) would apply for the student loan through a major bank approved for student lending.  When I needed to apply, I found the best long term deal applying through Citi Group.  In exchange for processing and lending, the government subsidized the bank to keep rates fixed at 6.8% with no application or origination fees.

The savings for the US Government will be about $68 billion over the next ten years.  Some of the savings will go to increase subsidized Pell Grants, for student demonstrating financial needs, and other scholarship programs.

For existing loan holders, it doesn’t look like you will see any major changes.  I am expecting to keep paying my loans as usual, which means new servicers every year or so that screw up my account and take over a month to fix it.

For anyone with a new student loan starting in July, 2014, there are some great new provisions.  Student loan payments will be capped at 10% of annual income above a defined living allowance, where it was 15% before.  If you make regular payments at that rate for 20 years, your loans will be forgiven, rather than 25 years under the old law.  The forgiveness period is still ten years for certain government employees, teachers, health care workers, and the military.

If you are reading this, it is probably to late for the new laws to effect you directly, but your kids might have a much easier time dealing with student debt than you.

As you all know if you are a regular reader, I am a fan of Lending Club.  Lenders on the site are exposed to the entire dynamics of a market system, and that correlates directly to what you experience when investing in the stock market.  If you are not familiar with the site, I will start with a quick breakdown of how it works.

When you sign up with Lending Club, you are given the ability to invest in personal loans to other people in $25 increments.  If you sign up through links from this website, you are given a risk free $25 bonus to begin investing.  The loans are listed by a credit rating system developed by Lending Club.  Higher risk loans have a lower rating.  As the risk level increases, so does the interest rate.

What does this teach you about the stock market?  Higher risk should equal higher return, but high risk means a higher chance of losing all or part of your investment.

This is what investment analysts, insurers, credit issuers, and individuals look at when deciding how to invest and what return is expected.  If you invest in a stable blue chip company like Walmart, the risk is low and the stock return will be relatively low.  If you invest in a start-up tech company, there is a good chance it will fail and you will have a loss.  However, there is also a chance that the company will be wildly successful and you will have a several hundred percent return.

Lending Club is a great way to get a feel for what you should be thinking when investing.  Many people buy and sell stocks based on emotion and news.  This is a bad strategy, because it does not take the intrinsic value of the company into account.  The intrinsic value includes risk, and higher risk should correlate to a higher return.

A recent example of this can be seen in by looking at two companies: AIG and Lehman Brothers.  Around the same time, these two companies appeared to be on the brink of bankruptcy and possible closure.  Had you invested $100 in Lehman Brothers in mid 2008 as the financial crisis began unfolding, you would have nothing today.  Shortly after Lehman’s bankruptcy, there was an opportunity to purchase AIG for less than $10 per share.  Many people speculated that the company would fail.  That $100 investment would be worth about $400 today.  That is an example of high risk for high return.

In the same time period, you could have purchased Walmart with little worry about its future.  That $100 would be worth about $114 today.  That is still a good return, but not nearly 300% that you would have earned had you made a risky bet in AIG.

The same is true at Lending Club.  You can buy into an A rated loan for a 7.14% return or a G rated loan for a 20.90% return.  Higher risk means high possible return, but a higher chance of default comes along with it.

If you decide to start investing with Lending Club, please consider signing up through an affiliate link from this site.  Not only do you get $25 for free, but I get a little something for referring you as well.

Trent at The Simple Dollar wrote a great post, complete with calculations, on why you should consider rounding up payment to the next dollar, ten dollars, or hundred dollars.  The scale of savings on rounding up your credit card or car payments can be huge, but nothing compares to the might mortgage:

Rounding up to the nearest hundred dollars If you decide to round the payment up to the nearest hundred dollar increment, you’ll submit a payment each month for $900 – an overpayment of $94.77. Your payments would end six years and four months earlier and your final payment would be only $2.95. This would result in a total savings over the life of the loan of $34,605.19.

Take a look at the original post to see how it works.  To make it work, it helps to automate your finances.  If you follow Trent’s plan for a $150,000 mortage and round up about $100 per month, you save more than the cost of a brand new car.

As you may have picked up in the past, I am not a big fan of predatory loans that charge 400% APY.  The only companies that do this are in the infamous payday loan and check cashing industry.

In my native Colorado, things might get a little bit better on this front.  The legislation is far from perfect and does not do enough to protect consumers, in my opinion, but it is a start and brings attention to an important issue.

House Bill 1351, sponsored by Rep. Mark Ferrandino, D-Denver, would limit the amount of interest that payday lenders can make off of loans. It was approved on a 7-4 vote by the House Judiciary Committee, with Democrats backing it and Republicans opposing it, and is headed next for debate on the House floor.

Under current law, payday lenders can charge a finance charge of $20 per $100 on the first $300 loaned and $7.50 per hundred dollars after that until the loan has reached its maximum $500 limit. The average payday loan in 2008 was $391, with an average annual interest rate of 317 percent, according to the nonpartisan Colorado Legislative Council.

HB 1351 originally proposed capping the annual percentage rate on each loan at 36 percent. However, Ferrandino amended the bill Thursday to increase that number to 45 percent APR and added a provision allowing a loan-origination fee of $10 per $100 lent for the first loan made to a person in any 12-month period.

The changes came after payday lenders, who made more than $566 million in loans in 2008, complained that the reduction in profits they would be able to make would shut down many of their businesses and put thousands of people out of work during an economic downturn. A number of Democrats have spoken against the potential effects of the bill as well.

Under current law, Ferrandino argued, lenders can make $75 off of a two-week loan, while his new bill would reduce that amount to $58.63, much higher than the $6.90 they could have made under the original HB 1351. The goal of his bill, he said, is to stop lenders from making large amounts off of future loans that keep borrowers in a perpetual cycle of debt.

Read the entire article at the Denver Business Journal.  Do you think payday loans are a bad thing?  Are they needed at all?  Should they be allowed, but at more reasonable rates?  Please give your thoughts in the comments.

I work in finance at a large company.  We get leases and loans for large purchases, just like a consumer.  When we sign a new lease or loan contract, they often have balloon payments, just like consumers.  Part of my job is to determine whether it is a better deal for the company to lease or buy new equipment, and balloon payments are always favorable compared to loans without balloons, and they almost always are to consumers to, despite everything bad you may have heard about them.

First, it is important that everyone knows what a balloon payment is and how balloons work.  A balloon payment is a deferred amount that is paid in lump at the end of a loan/lease.  For my company, those lumps can be as high as $3,000,000 or more depending on the size of the equipment.  For consumers, the balloon is usually in the thousands of dollars range.

Why Balloons Are Good:  The time value of money demonstrates that deferring payments is beneficial because you can earn interest on the money rather than give it to someone else to earn interest with.  If the loan interest rate is 4.95% and you can earn 5% or more in another investment, you are better off deferring the payment.  In the corporate world, if the interest rate is lower than the discount rate, or cost of capital, the loan with deferred payments is favorable.

Why Balloons Are Bad For Some People:  A 15% balloon on a $100,000 mortgage leads to a $15,000 payment at the end of the life of the loan.  If you are smart, you would stash away $42 per month in a high interest savings account (affiliate link) over 30 years to cover the balloon at the end.  Everyone is not that smart.

Some people spend that $42 every month and have no way to pay off the loan at the end.  This is poor planning, and is not the bank’s fault.  It is the fault of the person who signed papers for a loan they could not handle.

How To Make Balloons Work For You: If you can’t earn more in interest than your loan interest rate, it is in your best interest to pre-pay everything as fast as you can.  If you can do better elsewhere, such as the stock market or bond investments, it is best to delay payments as long as possible.  Just be sure to save every month so you can pay it at the end.

Ever had a baloon loan or know someone with a good story?  Please share in the comments.

Long before I had this blog, I had a car loan.  My old car, a hand-me-down 1990 Volvo Station-wagon with about 200,000 miles, decided to stop working while driving west on Belleview Avenue one summer morning.  Fixing it would have cost as much as the car was worth, so I decided to get a brand new one.

After all, I had a good job and was living at home with my parents.  It seemed like a good idea.  Now, two and a half years later, it still seems like it was a good idea.  I still love the car and I was able to pay off the loan two and a half years early.  That is half of the scheduled time for those of you who are math impaired.

Over the lift of the loan, I paid a total of $675.53 in interest to the credit union for my $10,995 loan.  That is not too bad.  I like to think of that $675 as my car rental fee for the roughly 30 months I have been using the car so far.  That is a savings of $573 from the total interest if I had only made minimum payments.

I took a screen shot to commemorate my last online payment.  Silly me, I didn’t check the “payoff amount” and was left with four cents that I could not pay online.  A quick phone call took care of that though.

I plan to keep this car for many, many years and I am glad I have it.

What am I going to do with all of the money I had been putting into the loan?  I am sticking to my own advice.  My debt snowball leads me to student loans from here.  I have just about $21,900 left there.  I am still in school, so most of the loans are not accruing interest for another 7 months.  I have paid about $20,000 into my student loans while I have been in school, so paying down the rest shouldn’t take more than another two or three years.

Do you have any good loan payoff stories?  Please share in the comments.

If you have taken out loans to go to school, you most likely have Federal Stafford loans from at least one bank.  If you ended up with more than one bank, you have to make two sets of payments every month for those loans.

I have two sets of loans, and in about 7 months they will come due.  When that happens, I will probably find a consolidation loan.  There are a few important things to know about consolidation loans if you are planning to consolidate.

First, do not get the impression that a consolidation loan will save you money.  Federal Stafford loans, the most popular type of student loans, are fixed at 6.8% by the government.  If you have two loans with minimum payments of $100 each and you consolidate, you will just have one payment of $200.

If you do not get the same kind of loan when you consolidate, the process can actually cost you more money.  Make sure that if you have student loans to consolidate you continue with a Federally backed loan with the same fixed interest rate.

Consolidation can also impact your credit score.  The impact should not be big depending on when you got the first loan.  When you consolidate, you close two loans with history and replace them with one brand new loan.  This lowers your average account age and can impact your credit.

I have had some Peer to Peer lending excitement that I thought I would share.  I have had both a scare and an early payment, but it seems that all is doing well in Eric’s Lending Land.

First, I will share the scare and how it was resolved.  I first noticed something was wrong one day when I logged in at LendingClub and saw that one of my loans was in the 31-120 day late bucket.  The loan had a partial payment and missed payment.  I was not sure if I would be out the $25 or if it would work out.  This is the collection log as of today:

You can see where the trouble begins, on 11/6, with a failed payment.  Since then, Lending Club worked dilligently to bring the loan current.  It took a few months, but things have smoothed out.  I also got a $.09 late fee for my portion of the loan. (Click to enlarge)

I have also now had two loans payoff in full.  That means I lose out on interest but get my entire outstanding principle back early.  I can re-loan the outstanding principle into a new loan, and plan to do so shortly.  My account balance today, including the outstanding loan, is $53.92.  That is roughly a 7% annual return.  Not bad at all.

Since last writing about Lending Club, I have become an affiliate.  That means, if I refer you to sign up, you get $25 to start with and I get a little bonus in my Lending Club account.  I promise that if you sign up, I will keep the cash in Lending Club and will keep you updated on the progress.

What do you have to lose?  It takes five minutes and you get $25 bucks for free.  I think an hourly rate of $300 is not too shabby.  To sign up, follow this link to Lending Club for $25 free. (If you sign up, please also let me know in a comment or through the contact form.  Thanks)

If you are a fan of peer to peer lending, you might be interested in microfinance.  Microfinance is a type of lending designed to help people in poor communities around the world start a small scale business that can completely change their standard of living.

Muhammad Yunus, a banker from Bangladesh, is often credited with bringing microfinance to the mainstream.  His principle is that people in poor communities might only need a small loan to start a profitable business model.  Remember that currencies, exchange rates, and standards of living are completely different in rural Africa and Southeast Asia.  There, $25 or $100 might be all that is needed to change the outlook for an entire family.

Microfinance lenders are small banks accessible by people living in rural areas.  The banks will generally lend money to a community of people, rather than an individual.  Experience has shown that communities are generally very honest when working together, and default rates are much lower.  Remember, rural Africans do not have bank accounts or credit scores, and their economies are generally sustenance based.

Microfinance banks, for the most part, take out large loans from major commercial banks.  While on a trip to New York over the summer, I met the microfinance team for Deutsche Bank.  These lenders do due diligence on the lenders around the world, and give them large sums to lend out in the form of microloans.

While this growing system, which has proven both challenging, risky, and profitable, is able to reach people all over the world, there are still financing shortages.  That is where you can come in.

One major project, called Kiva, is a peer to peer lending facilitator for microloans.  Kiva describes itself as a service that helps you lend to low income entrepreneurs.  You can learn more at about it at Kiva.org.

I like several things about microloans through Kiva.  First off, it is like a charity, though it is not a donation.  When you loan money to someone, you can plan to get that money back with interest.  In $25 increments, you can change the lives of family or village somewhere in a developing part of the world.

Lending through Kiva is not risk free.  There is a good chance that these people, living with no financial infrastructure, will not pay the loan back.  However, most do.  The people receiving microloans are generally honest people with a sense of responsibility to pay the loan back.  Kiva facilitates the payment through one of a number of microlenders, and those lenders are responsible for collecting the loan payments and ensuring the transaction is equitable for all parties.

Kiva also allows you to give gifts to friend through loans.  You can give a friend a gift at Kiva that they choose how to distribute.  The goal is, in a few years, that they get the gift money back with interest.  It is not too late for a Chanukah or Christmas gift through Kiva.

The site has been endorsed by political leaders and business people around the world, though it has been criticized for its high loan rates.  Kiva argues that those rates are high because it is important for the banks to offset the high default rate for these types of loans.  Kiva takes funds through a no fee PayPal transaction.

What do you think of Kiva?  Have you tried it?  Have you heard about it?  Please share in the comments.