Do you need Credit Insurance?

Do you need credit insurance? In a word, maybe! It depends on a number of things like where your income is derived, the type of other insurance coverages that you have, and the type of credit that it is covering.

What is Credit Insurance?

Not to be confused with debt forgiveness programs, Credit Life Insurance will guarantee that if you die, your loan will be paid in full, thereby leaving your estate (or at least a little more of it) to your heirs. Example: You have a $15,000 car loan which is covered by Credit Life Insurance. You die. Instead of having to payoff the car with your life insurance policy, liquidating it, or letting the lender repossess it, the credit life insurance pays off the loan, the estate keeps the car, and the life insurance proceeds can be used for things other than paying off the car. Your estate effectively gets the car without having to pay for it. Like debt forgiveness programs, you pay a monthly premium for Credit Life Insurance.

Credit Disability Insurance is what you want in case you live! Insurance studies show that you are 4 times more likely to become disabled than die in an accident. This type of insurance will make 100% of your loan payment until you are able to return to work or until the loan is paid in full (up to an upon amount, talk to your loan officer). Example: You fall off of you back porch and break you back while going outside to get your dog. You can't work. How are you going to pay for your car loan? Here comes Credit Disability Insurance to the rescue! Sure, you might be entitled to short term disability from other sources, but this temporary income is usually significantly lower than your regular income. With Credit Disability Insurance, you don't have to worry about a large chunk of this temporary supplemental income going towards what is usually a pretty big car payment.

So, do you really need this coverage?

If you have a whole pile of life insurance (a million dollars or so), and relatively little other debt, then you probably don't need Credit Life Insurance for small balance loans, like cars, ATV's, snowmobiles, things like this. You might consider it for a mortgage or other very large balance loan. Although you could increase you life insurance policy instead...

To determine whether or not you should have Credit Disability Insurance, you need to think about how you will pay your loan obligations if you were to become disabled, earning a small percentage of your normal pay. If you can meet your obligations on the reduced pay, maintain your good credit rating, and otherwise not experience undo hardship because of the reduced pay, then you probably don't need credit life insurance. On the other hand, if your credit is at risk, if you think you might risk a repossession, or get behind on the bills, you should seriously consider purchasing this coverage.

How much does it cost?

Credit Life Insurance is relatively inexpensive, usually just pennies for every $100 of loan balance. Credit Disability Insurance will cost more than Credit Life Insurance, but remember you are 4 times more likely to use the Credit Disability Insurance than the Credit Life Insurance.

Don't let the cost of optional Credit Life and Disability Insurance deter you from purchasing it if you think you need it. Moreover, if you think the added costs is out of your budget then you need to reconsider whether or not you can afford to not have this insurance. If you can't afford the payment with insurance, then you probably can't afford the loan because how will you pay it back if you become disabled?

Summary

For most of us, Credit Life and Disability is worth the added expense. If you feel you can't afford it, then you should examine very closely whether or not you can even afford the loan. If you can't afford the payment with insurance, how will you afford the payment on a reduced income?

Most lending institutions offer optional credit life and disability insurance. You can expect the cost to run about $.50 per thousand for single credit life, and about $2.00 per thousand for single credit disability. The amount added to you monthly payment for a $25,000 loan would be $62.50. Keep in mind that this is decreasing term insurance. The premium is recalculated each month based upon the outstanding loan balance. As your loan balance decreases, so will the monthly insurance cost.

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Proposed Changes to Truth In Lending

The Federal Reserve has put out for comment proposed changes to Regulation Z- Truth In Lending. These changes, if adopted and made into law, will have an effect on the mortgage loan industry, and as you have probably read or heard by now, make qualifying for a mortgage much more difficult.

Is this additional regulation good for the consumer? Is it good for the industry?

From a consumer perspective, it will afford yet another opportunity for you to sign and read something; more disclosures for you. I've been lending money for a long time and virtually NOBODY reads these things unless the banker takes the time to go over the documents together with the applicant. Now, most applications are originated through the mail and online, diminishing the opportunity to go over the documents with the applicant.

From an industry perspective, it appears that this might be a bad thing. Anytime an already heavily regulated industry is burdened with more regulation, it impedes business. Moreover, in this particular case, it may very well put some people right out of business.

Not only have I given mortgage to a lender as security for a loan on some real estate that I own, and I am a lender who takes mortgages from others as security for real estate loans. Although far from unique, my perspective is from both sides of the desk.

As a consumer, I'm not sure that I will be effected much, nor will I feel more informed. Just more paper that I need to affix my initials and signature to. Sure, I might be REQUIRED to provide evidence of my income and assets because the regulation mandates it, but I kind of expected to do that anyway.

From a lenders perspective, I think that the regulation will have a broad and adverse impact on the industry. Our government would like to mandate sound underwriting policies and requirements, requiring that the lender verify income and assets, and the borrowers ability to repay the loan. This makes me wonder what the government thinks we bankers are doing? Is this to suggest that we just willy nilly give out loans to people without first making a determination as to whether or not they qualify or if they can repay the loan? Why would anyone do that anyway? I can see increasing regulatory requirements for those involved on the business side who have nothing to lose if the deal goes bad, but for those that have real money at stake on the business side; they don't want to lose their money anymore than the next guy does!

So much of what happened with this sub-prime mortgage disaster is credit score, LTV, and MORTGAGE BROKER driven. Not to vilify the Brokers out there, most are professionals, but there are some that will tell you only what they want you to know, and only what you want to hear, just to get a juicy commission check at the end of the month. In my opinion, the subprime mortgage loan problems could be almost entirely resolved by simply prohibiting mortgage brokers access to these types of loan products.

Those that received the 'Liar Loans' or NINA's (no income, no asset verification) or stated income loans, had to have had very good credit history's in order to qualify. Many of these homes that are foreclosing are NON OWNER OCCUPIED investment properties. The owners financed them with little money down, expecting that the real estate market would continue to climb, and that they could cash out on the equity in a short time. No principle investment, pay interest for a few years on the amount borrower, then sell the property at a high profit because the market value has risen so much.

For example, an investor buys a $100,000 property, no money down and takes an interest only loan to finance it. This invest er is gambling that in a relatively short time frame, the property will be worth $160,000, and that they will sell and profit on the new equity. What happened is that instead of increasing in value, the property decreased in value, and the investor is walking away without losing any real money...

Anyway, here is what the Fed is proposing to do with Regulation Z:

Highlights of Proposed Rule to Amend Home Mortgage Provisions of Regulation Z

The proposal would establish a new category of “higher-priced mortgages” that should include virtually all subprime loans.1 The proposal would, for these loans:

-Prohibit a lender from engaging in a pattern or practice of lending without considering borrowers’ ability to repay the loans from sources other than the home’s value.

-Prohibit a lender from making a loan by relying on income or assets that it does not verify.

-Restrict prepayment penalties only to loans that meet certain conditions, including the condition that the penalty expire at least sixty days before any possible payment increase.

-Require that the lender establish an escrow account for the payment of property taxes and homeowners’ insurance. The lender may only offer the borrower the opportunity to opt out of the escrow account after one year.

The proposal would, for these and most other mortgages:

-Prohibit lenders from paying mortgage brokers “yield spread premiums” that exceed the amount the consumer had agreed in advance the broker would receive. A yield spread premium is the fee paid by a lender to a broker for higher-rate loans.

-Prohibit certain servicing practices, such as failing to credit a payment to a consumer’s account when the servicer receives it, failing to provide a payoff statement within a reasonable period of time, and “pyramiding” late fees.

-Prohibit a creditor or broker from coercing or encouraging an appraiser to misrepresent the value of a home.

-Prohibit seven misleading or deceptive advertising practices for closed-end loans; for example, using the term “fixed” to describe a rate that is not truly fixed. It would also require that all applicable rates or payments be disclosed in advertisements with equal prominence as advertised introductory or “teaser” rates.

-Require truth-in-lending disclosures to borrowers early enough to use while shopping for a mortgage. Lenders could not charge fees until after the consumer receives the disclosures, except a fee to obtain a credit report.

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Footnotes

1. Higher-priced mortgages would be those whose annual percentage rate (APR) exceeds the yield on Treasury securities of comparable maturity by at least three percentage points for first-lien loans, or five percentage points for subordinate-lien loans. Return to text

The Promise and Pitfalls of Courtesy Pay

Does your financial institution offer a product that will honor a check that you have written, even if it overdraws your account? This service is commonly referred to as Courtesy Pay or Overdraft Protection. How does it work? Is it for you? Let's take a look at how it works.

Now that you're all done shopping at the grocery store, you're at the check out and whip out your checkbook or check card or debit card to pay for the purchase. You write or swipe and you're on your way. What if there wasn't enough money in the account? What will happen to the check? Will it be returned? If there wasn't enough money in the account, why did it accept my check or debit card? Because you have Courtesy Pay!

Courtesy Pay isn't a loan; instead you pay a flat fee as opposed to daily interest, in other words, it isn't an overdraft line of credit. In my experience, Courtesy Pay is more expensive than an overdraft line of credit. The fees can range from very little to quite a lot! One local institution charges an initial fee of $29 per returned item. More on that in a minute...

The bank or credit union who offers this product does so under no obligation. This means that it is discretionary. If they feel you are abusing the privilege, or if it is not in your best interest, they may revoke it.

The institution decides what the maximum amount per account will be honored if the account is overdrawn. Let's say that the institution has determined that they will honor up to $750 overdraft protection, or as a Courtesy, pay the check or debit on your behalf up to $750. For this service, they charge you a fee. They expect, and a condition of continued protection, that you will bring the account to at least a zero balance within a certain number of days. Courtesy pay will honor your check, draft, or debit, even if your account does not have ample funds available to pay the item in full.

Is it for you? That really depends. If you occasionally make an error in your checkbook, then maybe it is for you. Courtesy Pay saves you the embarrassment of having an item returned to a merchant, and it saves you the expense of 'non sufficient funds' and returned check fees. In our marketplace, a returned check will cost $25, and the NSF fee averages $30, so this could be a $55 mistake.

What if you regularly make mistakes in your checkbook, or what if you're running short on cash? What if you used to play the check 'float'? If this is the case, you should really consider whether or not you really want this type of service. Why wouldn't you want this service? Good question. Let me explain.

Let's say that you write a check for $250, but there is only $225 in your account. You had made a mistake in your math, or forgot to enter a transaction because according to your records you had $400 in the account. You have courtesy pay so your bank or credit union honors the check and tacks another $29 (the courtesy pay fee) to your account. Now, you're $54 overdrawn in your account.

But wait, you're not done writing checks yet! You write another check, this time to the grocer, for $100. But, there isn't $100 in the account. The check is honored by your bank, they add the $100 plus the $29 fee to your account. Now, you're $183 overdrawn in your account when, according to your checkbook, you think that you have $75 left in the account. Now, off to the gas station.

You pump $60 of fuel in the car, use your debit card to pay, the transaction is processed. Your account is charged the $30 plus another $29 for the fee. Balance in your checkbook says $15, balance at the bank is negative $272.

On your way back home, you stop and pick up a few last minute items, use your debit card to pay for the $10 purchase... $39 more added to your negative balance. Your checkbook register shows a $5 balance until your next deposit (maybe you have the deposit all ready to go, just waiting to deposit it tomorrow), when the actual balance THAT YOU NOW OWE is $311!

As you can see, a one time fee of $29 isn't such a bad deal, but overdraw just a few items (some institutions will even honor withdrawals at ATM machines that overdraw your account!) and the fee can quickly surpass $100. Now, what if you didn't have courtesy pay and instead bounced 4 checks around town? Courtesy pay would still be less expensive than paying the NSF fee and returned check charges, say nothing about the humiliation and risk that the merchant no longer accepts checks from you. I guess Courtesy Pay is the lesser of the two evils.... but you know what they say; the lesser of the two is still evil!

My vote: pass on the courtesy pay and overdraft protection programs. If you feel more secure having this type of protection, look for an overdraft line of credit instead. You'll need to meet credit requirements, but in the long run, this can be MUCH less expensive and it will save the embarrassment and costs associated with bouncing a check.

Transfer Fees and Minimum Payments

You just received a fantastic balance transfer offer in the mail and you have a couple of credit card balances that you have been thinking about consolidating. Maybe this is the time! Should you transfer those balances using this offer? Let's take a look to find out how much it might cost.

So the offer says that you can transfer your balances at a low 3.9% fixed rate for 12 months. Sounds reasonable, after all, you are paying 16% on the accounts that you want to consolidate, so at least for the first year (if you carry a balance this long) you will have paid less in interest. So far so good.

The transfer fee (see the small print on the offer that you received) will increase the balance that you are transferring, and you will pay interest on this transfer fee. In our example, let's use a nice round number, say $6000, as the amount that we are thinking about transferring.

What would it cost if you did nothing and decided not to consolidate and transfer the balances? According to Bankrate's credit card payment calculator, it would take TWENTY FOUR YEARS and cost of over $6,500 in interest to repay this debt if you paid just the minimum monthly payment. If you were to instead make a dedicated payment of $200 per month (instead of whatever the minimum payment is) you would retire the obligation in just 39 months, and pay only $1,714 in interest. Now, if the minimum payment was 2.5% of the outstanding balance, then it would be $50 more each month to save almost $5000 in interest and shave a couple of decades off of the time it would take to pay it back!

Do we agree that if at all possible, you should pay a regular fixed amount each month rather than making just the minimum payment?

Alright, now back to the balance transfer. Assuming that the balance transfer fee is 3% of the balance transferred, the 'new' balance on the card that you are transferring to would be $6,180.00. How does this compare to just leaving it on the other card and making fixed monthly payments? Let's take a look.

Because the interest rate on the transferred to account is fixed for only 12 months, we need to take an additional step to calculate the total costs. During the first 12 months, you will have paid $220.00 in interest, paying the principal down to $4,751. If instead you made a fixed monthly payment of $200 per month, your interest expense would be $207, and your outstanding balance would be $3,987. Now we have to make some assumptions as to what your adjusted interest might once this introductory rate of 3.9% expires at the end of 12 months.

Most all credit cards use the Prime Rate as an index. To this they add a margin for risk. Let's base our scenario on today's current Prime Rate of 7.25% with a margin of 8.75 added for risk, making your adjusted rate 16.00% (note that this new rate is the same as what the old credit card rate is at today..). Note that these rates are subject to change anytime that the Prime Rate changes. For our purposes, we will assume that the Prime Rate stays until the balance has been paid in full.

If you had paid only the minimum monthly payment for the first 12 months, and assuming the adjusted rate thereafter is 16%, it will take you 20 years to payoff the remaining balance, and the interest expense would be $3,949. If you dedicated $200 per month for this debt, it would be paid in 28 months at a cost of $845.00.

Now, let's see how the transfer option works out...

Option 1- Do Nothing
It will take 288 Months to repay, and cost you $6500

Option 2- No Transfer, Dedicated $200 Monthly Payment
This option reduces the time to pay to just 39 months, and costs $1714

Option 3- Transfer, pay minimum
This option shaves 7 months from the term, and saves quite a bit, costs $5548

Option 4- Transfer, Dedicated $200 Montly Payment
Here you have the best of both. Retires debt in 29 payments and costs $1400

As you can see, doing something is a whole lot better than doing nothing! If you were to transfer the balance and make only the minimum payment, you would payoff the debt 7 months sooner, moreover you would save almost $1000 in finance charges. No, over 20 years, that is not a whole lot of money but it is money that you did not give to the credit card company.

Quite obviously, based upon our assumptions that the adjusted interest rate will not change (unless you have a fixed rate card, it will!), the apparent best choice would be to take the balance transfer option and dedicate a higher monthly payment. Doing so will cost you significantly less AND get payoff the obligation much faster.