What Is a Personal Loan?

A personal loan is a flexible loan that you can use for a wide variety of purposes. Unlike loans designed for a specific thing, like a mortgage or auto loan, a personal loan can be used for nearly any legal purpose.

There are different types of personal loans. One of the most basic distinctions is between secured and unsecured personal loans.

Learn more: Dive into the latest personal loan statistics for 2024, including rates, debt levels, and borrower trends in our comprehensive overview.

Unsecured Personal Loan

Unsecured personal loans are one of the most common types of personal loans, and most personal loans you see advertised will fall into this category.

An unsecured personal loan doesn’t require any collateral. The lender offers the loan based purely on your credit history, financial situation, and a promise that you’ll repay the loan. This contrasts with secured loans, like mortgages, where an asset serves as collateral for the loan.

The obvious benefit of unsecured personal loans is that you don’t need to have anything of value to offer as collateral. You also don’t have to go through the process of letting the lender examine your collateral and make sure it’s worth enough to secure your loan, which can speed up the lending process.

However, because there’s no collateral, lenders are more choosey about offering these loans. You’ll need strong credit to qualify for these loans, and your interest rate will be higher than it would be with a secured loan.

Learn more: Find out exactly what documents and information you need to apply for a personal loan with our comprehensive guide.

Secured Personal Loan

Secured personal loans are the opposite of unsecured personal loans. When you apply for one of these loans, you need to offer a form of collateral.

Many lenders will accept a Certificate of Deposit (CD) or savings account balance as collateral for these loans. For example, if you have $5,000 in a CD at a bank, that bank may be willing to offer you a secured loan. The size of the loan that you can qualify for will depend on the value of your collateral and your credit score.

Learn more: Our detailed analysis answers the question: Is getting a personal loan a good idea for you? Find out now.

Because you’re offering collateral to secure the loan, secured personal loans are generally easier to qualify for. Many lenders will also offer lower interest rates on these loans because of the reduced risk that they face.

A major drawback of secured personal loans is the fact that you need to have something of worth to serve as collateral. If you’re in need of a loan, odds are good that you don’t have much savings available and might not have enough to serve as collateral.

Offering something as collateral also puts it at risk. If you’re not able to make payments on your loan, the lender could take possession of the collateral.

It may also take longer to get a secured loan because the lender has to assess your collateral and ensure it’s worth enough to secure the debt.

Learn more: Explore our expert picks for the best personal loans for excellent credit, tailored to maximize your financial options.

Branded Personal Loans

If you’re shopping for personal loans, you may find that some lenders offer specialized or branded personal loans. For example, you may see loans described as vacation loans, home renovation loans, or debt consolidation loans.

These loans are advertised as special types of personal loans for a specific purpose. Some of these loans may offer special features related to their branded purpose. For example, if you apply for a debt consolidation loan the lender may pay your other creditors directly, so you don’t need to handle the money at all.

Keep in mind that personal loans are highly flexible. You can use a personal loan for almost any purpose; the few that are disallowed by most lenders are things such as paying for education, gambling, or illegal activities.

Some branded personal loans may be a good deal. You might find a debt consolidation personal loan that can help you save a lot of money. However, just because a loan is described as being good for a specific purpose does not mean that it is the best loan available. Always shop around and consider generic personal loans before going for a branded one to make sure that you’re getting the best deal.

Bad Credit or No Credit Check Personal Loans

Another common thing to see when looking for personal loans is a loan advertised as a bad credit or no credit check personal loan. These may seem appealing, especially If you don’t have a great credit score or have struggled to get approved for loans in the past.

As with anything, you pay a price for these types of loans. Lenders who are willing to offer loans to people with poor credit or without checking people’s credit need to compensate for that risk somehow. Often, they compensate for that risk with highly unfavorable terms such as high interest rates or large origination fees.

If you need a personal loan, but don’t have good credit You should still avoid these loans due to their predatory terms. You’ll get a much better deal if you are able to qualify for a secured personal loan. If you don’t have enough assets to serve as collateral, you are likely to be better off if you spend some time working to improve your credit and apply for a traditional personal loan instead.

Learn more: Learn the step-by-step process of securing a personal loan with a co-signer in our comprehensive guide.

Payday Loans

A payday loan is a type of bad credit or no credit check loan. They share some characteristics with personal loans, but it is important to know that payday loans are highly predatory and should be avoided whenever possible.

Like bad credit or no credit check personal loans, payday lenders typically don’t look at your credit score when you apply for a payday loan. These loans have massive fees High interest rates and short repayment periods. For example, if you get a payday loan today, you might be expected to pay it off in 2 weeks. The idea is that you use the loan to make it the next payday and use your next paycheck to pay back the balance.

Payday loans typically come from specialized lenders, so if you look for loans from reputable Banks and online lenders, you are not likely to find them. Their high fees and interest rates can make it easy to get trapped in a cycle of debt, so try to avoid these loans except as a very last resort

Learn more: Unlock financial opportunities with our recommendations on the best personal loans for good credit and fair credit, designed to match your credit profile.

Other Types of Consumer Loans

Personal loans are a type of consumer loan, which is a wide category of loans that describes pretty much any type of loan that a regular person could apply for. Some examples include personal loans, mortgages, auto loans, and credit cards.

When looking to borrow money, it’s important to make sure that you’re applying for the right type of loan. Some types of purchases, such as a home or a car, have unique loan types designed specifically for those purchases. Trying to use a credit card or a personal loan will likely result in you paying more than if you used a specially designed loan.

Personal Lines of Credit

Personal lines of credit are similar to personal loans in many ways. Like personal loans, they’re highly flexible and can be used for many different purposes. They can also come in both secured and unsecured varieties.

What makes them different is that a line of credit is a pool of funds that you can draw from multiple times while a loan is a lump sum of cash that you can only access once.

That makes personal lines of credit more useful for people who have unpredictable financial needs. If you have a one-time expense and you know the size of that expense, you can apply for a personal loan for the correct amount. With a personal line of credit, you can take money out of the line of credit when the need arises and do so multiple times if you find that you need to draw money more than once.

For example, a personal loan might be a good fit if you have to pay an unexpected bill. A personal line of credit might be a better fit for someone working on a home improvement project who isn’t sure exactly how much it will cost.

Get acquainted with the types of #personal-loans and how each can impact your financial strategy. #PersonalFinance

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Common Uses for Personal Loans

Personal loans can be used for many different reasons.

One of the most common reasons is for debt consolidation. If you have multiple credit card balances and other small loans, you can use one personal loan to pay off those balances. That leaves you with a single monthly payment to make and may reduce the amount of interest you pay.

Home renovations and vehicle repairs are also common uses for personal loans.

You can also use a personal loan for unexpected expenses. Because they have lower interest rates and credit cards tend to, using a personal loan in this way may help you save money.

Many people use personal loans for weddings, vacations, and similar costs. Be careful: you’ll be paying off that loan long after the party or the trip is over!

Learn more: Learn how to protect yourself from personal loan scams by recognizing the warning signs in our latest guide.

Bottom Line

Personal loans are highly flexible loans that you can use for a variety of purposes. There are many types of personal loans, but they all offer money that can be used for a range of personal needs.

If you need money for something, applying for a personal loan can be one way to get that cash. Just keep in mind that you will be paying that loan back with interest. It’s best to use these loans for essentials, not luxuries, and to avoid borrowing if your credit isn’t up to par!

The post Types of Personal Loan: A Comprehensive Guide appeared first on FinMasters.

Let’s take a closer look at why claims get denied and what you can do about it, including two health insurance appeal letter templates.

What Is a Health Insurance Appeal Letter?

When your health insurance company receives a claim from your doctor or a healthcare facility, it will review that claim. The insurer may approve the claim and make a payment. They may also deny the claim.

If the insurer refuses to authorize payment for treatment, you’ll usually get a denial notice or explanation of benefits explaining that the claim was denied and that you’re required to pay the medical bill yourself.

This decision from your insurer isn’t final. You can use a health insurance appeal letter to ask the insurer to reconsider. Depending on the reasons for the denial and your appeal, the insurer may change its decision and cover your bill.

Learn more: Our recent post delves into the statistics of how many Americans lack health insurance and the factors behind this issue.

Why Claims Are Denied

Claims can be denied for many different reasons. One of the first things to do before submitting an appeal to your insurer is to make sure you understand why your claim was denied. It’s important to understand why your claim was denied before preparing your health insurance appeal letter.

Common reasons for denial include:

Timely Filing

One of the simplest reasons your insurer might deny a claim is that your healthcare provider was slow about filing the paperwork. For most insurers, the deadline varies from 90 days to a year from the date service was provided, but some have shorter deadlines.

Learn more: Explore our expert picks for the best healthcare stocks & ETFs to consider for your investment portfolio.

Non-Covered Services

Not every insurance plan covers every type of medical care or every medical service. Under the Affordable Care Act, certain essential health benefits must be included in your plan, but some things can be excluded.

Some plans also sidestep ACA rules, so you might find unexpected exclusions. For example, your plan may not cover prescriptions or mental health care.

Learn more: Explore your options with our guide to the best health insurance for the self-employed in 2024.

Lack of Pre-Authorization

Some insurance plans require that you work with a primary care provider before seeking help from a specialist. There are also plans that make you get certain services pre-authorized.

Bundled Services

Healthcare, especially when you have an issue serious enough to lead to an ER visit or hospital stay, can be incredibly complicated. Many services and tests are closely intertwined, so insurers may see them as effectively bundled together.

Data Discrepancies or Paperwork Errors

Simple paperwork problems or data discrepancies can also be a source of denials. If your doctor submits a claim to your insurance company and lists your name as “Jim Smith” when your name is really “James Smith,” that could lead to a denial.

Entering the wrong codes for treatments or entering incorrect treatments or tests by accident could also lead to denials.

Network Issues

Depending on your insurance plan, you may have to visit specific in-network health providers. Out-of-network providers won’t be covered. If you get care at an out-of-network facility, expect to see your claim denied.

Learn more: Learn how to secure health insurance while self-employed with our practical guide, designed to navigate you through the process.

Levels of Appeal

If your insurer denies your claim, you shouldn’t panic yet. It can be scary to suddenly owe a large amount of money, but you still have the chance to appeal the decision.

Insurers are required by law to offer two levels of appeal: internal and external. You will have to initiate both appeal processes with a health insurance appeal letter.

Internal Appeal

The first level of appeal is an internal appeal. This is a request to your insurance company to look at your claim again and conduct a “full and fair review” of the decision. In urgent situations, the insurance company must expedite the review for you.

When filing the appeal, you must write a health insurance appeal letter. It must include your name, claim number, and insurance ID number. You can also provide supporting evidence, such as a letter from your doctor explaining why you believe the treatment should be covered.

If you need help filing, you can work with a Consumer Assistance Program in your state.

You have 180 days from the time you receive notice of claim denial to file your health insurance appeal letter. Once you file, your insurer must complete the appeal within 30 days if you haven’t received the service yet or 60 days if you’ve already received the service.

External Review

Requesting an external review lets you take the decision out of your insurance company’s hands and ask a third party to review your claim. You must file your health insurance appeal letter for an external review within four months of receiving a final determination that your claim was denied. You can also work with your doctor or another representative to have them file the request on your behalf.

The external review process will vary with your state of residence. In some cases, the federal government’s Department of Health and Human Services or an independent review organization will oversee the process. Some states have a process that goes beyond the minimums of federal consumer protection standards and will manage the process.

External reviews are more limited in scope than internal appeals. You can only request an external review for:

• Denials involving a medical judgment where you or your provider disagree with your insurer
• A denial that involves a determination that a provided or requested treatment is experimental or investigational
• Cancellation of coverage based on your insurer’s claim that you provided false or incomplete information when you applied for coverage

Standard external reviews take no more than 45 days, while expedited external reviews take a maximum of 72 hours or less, depending on the medical urgency of your case.

In most cases, external reviews are free, though insurers that have contracted with an independent review organization or using a state’s review process may charge a maximum of $25 for processing the review.

Learn more: Learn how to negotiate a medical bill effectively with our step-by-step guide to reduce your healthcare expenses.

Letter Templates

If you need to appeal a health insurance denial, you can use one of these health insurance appeal letter templates to help you get started. Consider sending the letter using certified mail to ensure that you can confirm that it has been received.

Denied #health-insurance-coverage? Learn how to write an effective #health-insurance #appeal-letter with our guide. #InsuranceAppeal #HealthCoverage

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Health Insurance Appeal Letter Template 1: Internal Review

Health Insurance Appeal Letter Template 2: External Review

Work With Your Provider

Dealing with a health insurance denial can be difficult, especially if they’re denying coverage for treatment that your doctor believes is necessary. Don’t be afraid to ask your doctor for help in communicating with your insurance company. A letter from your physician explaining why the care is essential could help your case.

In the worst case, if your insurer still refuses to approve your claim, you should reach out to the provider’s billing department to negotiate. Many healthcare providers are able to significantly reduce your bill or help set up payment plans if you’re having trouble paying for your care.

The post The Health Insurance Appeal Letter: Overcoming Coverage Denials appeared first on FinMasters.

Buying car insurance for a 17-year-old isn’t cheap, but there are a few ways you can make it cheaper. Let’s look at some options.

The Price of Car Insurance for a 17-Year-Old

According to online insurance company Clover, the average car insurance policy for a 17-year-old driver costs $5,900 per year. That’s a massive amount of money, especially for someone who is still in high school and may not have a job^[1].

Car insurance prices can vary significantly depending on many factors, such as where you live. In some areas, insurance will be cheaper, as little as $1,400 per year. In others, teens could pay as much as $10,500 per year to buy coverage.

Boys also tend to pay more than girls, with the average premium for a 17-year-old male reaching $6,300 compared to $5,500 for a 17-year-old female.

Average Insurance Prices by Age

The good news for 17-year-olds is that their insurance won’t remain expensive forever. As you gain more experience, your car insurance tends to become cheaper. In fact, 16-year-olds have to pay $7,200 per year on average for coverage, so just one year of experience has already cut your premium by $1,000.

That trend of big price decreases continues each year until you turn 20 or so. Prices continue to fall slightly until you turn about 60 years old, at which point they start to rise again.

According to data from car site Motor1, the average price of car insurance by age is^[2]:

What Is Car Insurance For a 17-Year-Old So Expensive?

Insurers use complex mathematical and predictive models to figure out what to charge for insurance policies. Their goal is to charge an amount that, on average, will leave them with some profit left over after paying out claims without charging so much that customers will look elsewhere.

That means that they adjust the price of an insurance policy based on perceived risk. A driver who is seen as more likely to get into an accident and file a claim will pay more than one who is viewed as a safe driver and unlikely to need the insurance company to cover costs after an accident or crash.

Age and Experience

We’ve already seen how age can impact insurance rates, but experience is another factor that plays a big role, and that’s closely tied to age. You can only start getting experience once you’re old enough to get a driver’s license, but waiting to get a license until you’re older won’t make insurance magically cheap at that age.

Insurers look at how long you’ve been driving to determine your premium. While a 25-year-old getting a license for the first time won’t pay as much as a 17-year-old who just got their license, they will pay far more than a 25-year-old who has been driving for years.

State Requirements and Selected Coverage

Every state has different laws regarding car insurance and the coverage that drivers are required to purchase.

The level of coverage that you purchase will affect the price you pay, with more coverage being more costly. If you want to buy the state minimum level of insurance, you’ll pay more in states with heftier requirements.

Car Make and Model

The type of car that you drive can cause insurance to be pricier or cheaper.

Some cars, such as trucks and SUVs, with high safety ratings can help lower your insurance costs. Luxury sports cars are more prone to theft and are often driven unsafely. They can also be more expensive to repair, so if you’re driving a high-end vehicle, you’ll face a higher premium.

Driving Record

Insurers will look at your driving record and ticket history to try to gauge how well you drive and the odds that you’ll get into an accident. Having a clean record can have a massive impact on the price of insurance.

If you’ve gotten into accidents, insurers see you as risky and will charge more to compensate. Even just filing insurance claims could make your insurer increase your rates when you renew your coverage.

Credit History

In many states, insurers will look at your credit history and score as part of pricing your insurance policy.

In general, insurers view people with good credit to be safer bets than those with poor credit. The idea is that someone who handles credit carefully is also likely to be a safe and careful driver. Someone with poor credit may not drive as safely.

Learn more: Discover practical and cost-free strategies to boost your credit score by checking out our guide on how to build credit for free.

In some cases, poor credit could raise your rates by as much as 50%.

If you live in California, Massachusetts, or Hawaii, insurers cannot use your credit to determine the cost of coverage. However, your credit can play a role in the other 47 states.

As a 17-year-old, you’re not likely to have a credit score, as you’re too young to apply for most forms of credit. Getting added to your parents’ card as an authorized user is a start, and building good credit will help you lower your insurance costs in the future.

Learn more: Starting your financial journey strong is crucial; our post on how to build credit at 18 offers eight effective strategies to consider.

Location

The state you live in determines the minimum level of insurance coverage you have to buy, but where you live within the state also plays a role. For example, if you live in a major city, you’ll probably pay more for insurance than someone who lives in the suburbs or a rural area simply because theft rates are higher, and you’re more likely to get into an accident with more people around.

Marital Status

While this isn’t typically applicable to 17-year-olds, it is a factor that insurers consider. In general, single people are seen as riskier drivers and pay more for insurance than married drivers.

Other Drivers on Plan

Having multiple drivers on the same insurance plan can be cheaper than insuring each individual separately. For a 17-year-old, the cheapest way to get insurance will often be to get included in your parent’s policy.

How to Save Money on Insurance

Given the high cost of insurance for young drivers, you should do your best to look for the best deal. Taking the time to shop around can save you hundreds or thousands of dollars per year.

Compare Multiple Insurers

The most obvious, and one of the most important, ways to find a good deal on auto insurance is to shop around. There are many auto insurance companies out there, so take the time to get quotes from multiple companies and compare them.

Consider the coverages that each insurer offers and how much each company is charging. However, make sure that the insurers you’re considering are reputable. Check their ratings from companies like AM Best, which rates insurers on their likelihood to default.

The last thing you want is to file a claim only to find that your insurer doesn’t have the cash to pay out.

Consider a Higher Deductible

The deductible for an insurance plan is the amount that you have to pay out of pocket before your insurance kicks in and starts paying for damage to your car or other liabilities.

Higher deductibles can be risky because it means more out of pocket when you have an accident, but it can reduce your premium.

Get Added to Your Parent’s Policy

Buying insurance for a 17-year-old on their own can be incredibly pricey. Adding a 17-year-old to a parent’s policy won’t necessarily be cheap, but it will likely be cheaper than getting insurance separately.

According to Car and Driver, buying insurance for a teen separately can be as much as twice as expensive as adding them to a parent’s policy.

Drive an Older Car

Driving an older, less valuable car can be a good way to reduce the cost of insurance. In the event of a major accident, the insurer will have to pay far less if the car is totaled than if you totaled a brand-new vehicle.

Cut Unneeded Coverage

Some auto insurance, like liability insurance, is absolutely essential, but there are other types of coverage that are good to have but not necessary in every situation.

Comprehensive coverage is similar but applies to non-accident damage, such as theft or weather damage.

Look Into Discount Options

Most car insurance companies offer a huge variety of discounts that can help you save money. Bundling is a common discount, letting you pay less if you get multiple types of insurance from the same company.

A discount that may be relevant for younger drivers is a good student discount. Some insurers will drop a student’s premiums by as much as $70 per month or $840 per year if they get good grades.

Typical requirements are to maintain a B average in high school or college. Keep in mind that your insurer will want proof, so be ready to send a copy of your report card or transcript.

Find out exactly how much #car-insurance is for a 17-year-old by checking out our new article.

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Consider Usage-Based Car Insurance

A good way for both young drivers and adults to save money is to sign up for a usage-based car insurance (UBI) plan.

Learn more: Dive into the world of usage-based insurance with our thorough reviews of Root Insurance and Karma Drive to see if they fit your driving style.

With UBI, your insurer collects data about your driving and determines the cost of coverage using that data. You’ll typically plug a device into your car’s diagnostic port, and that device will report your driving habits to the insurer.

The insurance company will collect data on when you drive, how far you drive, and things like how often you break too hard or accelerate too quickly. Depending on how you drive, you could save as much as 15% per year.

The average driver puts about 11,500 miles on their car each year, so if you log fewer miles than that, UBI can be a good way to save money. You’ll also benefit if you’re a careful driver and don’t break hard or accelerate quickly on a regular basis.

Some insurers even offer a pay-as-you-drive plan, charging you a small base amount plus a fee for each mile you drive.

Summary

Car insurance for a 17-year-old can be expensive, running upward of $5,000 per year. However, as you get older, insurance will get much cheaper, and with some effort, such as shopping around and looking for discounts, you can often find an insurer with a much more affordable premium.

The post How Much Is Car Insurance for a 17-Year-Old? appeared first on FinMasters.

There are many reasons your credit score could drop unexpectedly. Some are innocuous, while others could require quick attention to fix.

Components of Your Credit Score

To understand the different ways that your credit score could drop unexpectedly, it’s important to understand how credit scores work.

Your credit score is composed of five factors, in order from most to least important:

• Payment history
• Amount owed/credit utilization
• Age of credit
• Credit mix
• New credit

Changes in any of these factors could cause your score to drop.

Why Your Score Could Go Down When Nothing Changed

There are a variety of explanations for a surprise drop in your credit score.

Using a Different Scoring Model

One of the simplest and least worrying reasons that your credit score could drop unexpectedly is that you’re not comparing scores that used the same model.

When people think about their credit score, they often think of it as a single number, but that isn’t quite true. There are many different credit scoring models out there.

Two popular credit scores are the FICO Score and the VantageScore. They both look at similar factors, but they weigh things slightly differently.

Even within the FICO Score and VantageScore systems, there are differences. For example, FICO has FICO 8, FICO 9, FICO Auto Score, FICO Bankcard Score, and more. All of these scores are used by different lenders for different purposes.

Even if you’re looking at two scores calculated using the same model, if the information put into the formula differs, the answer will be different. Each of the three major credit bureaus can have slightly different information about your interactions with credit based on which bureaus your lenders report to.

If you’re looking at a score calculated using data from Equifax and comparing it to a score using data from TransUnion, there may be a slight difference between the two. If you’re comparing a VantageScore (often used by free credit score providers) to your FICO score, there could be a significant difference.

If you’re asking yourself, “why did my credit score go down when nothing changed?” the first step to take is to make sure that you are comparing scores of the same type.

Unexpected Hard Inquiry

Understanding the reasons behind a credit score decline is essential, particularly when you find yourself asking, “Why did my credit score go down when nothing changed?” One common but often overlooked reason is the effect of hard inquiries.

Whenever you apply for a credit card or loan, the lender will check your credit score with one or more of the credit bureaus. When this happens, the credit bureau places that information on your credit report. This is called a hard inquiry, and each hard inquiry on your credit report can cause it to drop by a few points.

A loan isn’t the only thing that can lead to a hard inquiry into your credit.

Renting a car, especially if you pay for the rental with a debit card or cash, could lead to a hard inquiry. The rental company will check your credit to make sure you’ll be able to pay for any damage or other issues with the card.

Signing up for a new cell phone plan could also lead to a hard inquiry if you’re trying to get a monthly contract. The cell phone company wants to make sure you’ll pay your bill before offering service.

Asking an existing credit card provider for a credit limit increase or applying for a business credit card can lead to hard inquiries on your personal credit as well.

If your credit score has dropped due to an unexpected hard inquiry, the impact is likely to be small, and it will fade quickly. As long as you can confirm that the inquiry was, in fact, caused by your actions, it’s not a major concern.

Co-Signing On a Loan

Co-signing on a loan can be another reason why your credit score could go down when nothing changed. When you co-sign on a loan for someone else, it can help them qualify for a loan they otherwise wouldn’t get or secure a lower interest rate. The reason for this is that you’re promising to pay the debt on their behalf if they aren’t able to make payments.

Because you’re sharing responsibility for the loan when you co-sign, the lender will want to check your credit, which means a hard inquiry will show up on your credit report. The loan balance and payment history will also show up on your credit, which could also cause it to drop by a few points.

An Old Account Was Closed

If you’re puzzled by the question, “Why did my credit score go down when nothing changed?” consider the impact of old credit accounts. You may have an old credit card lying around that doesn’t see much action these days. After a long enough period of inactivity, your credit card issuer might choose to close the card because you’re no longer making any purchases on it.

Closing an old account, either intentionally or through inactivity, can cause your credit score to drop, sometimes by quite a lot.

First, closing an old account lowers the age of your credit accounts. The older your average credit account, the better your score will be. For example, if you have three cards, one that’s 10 years old, one that’s 4 years old, and one that’s 1 year old, letting the oldest one close will drop the average age of your accounts from 5 years to 2.5 years.

That can lead to a big decrease in your score.

Closing an account also reduces your available credit, which can boost your credit utilization ratio. Your credit utilization ratio is the percentage of your total credit limits that you’re using. The more credit you have access to, the more of a balance you can build up without lowering your score by much. Removing some of your available credit means that a lower card balance will have a bigger impact on your score.

Your Credit Card Balance Went Up

This is another explanation that’s tied to your credit utilization ratio. If you spent a bit more on your credit cards than usual this month, it could lead to a drop in your credit score.

When your card statement closes, your credit card issuer sends details about your account, including its balance, to the credit bureaus. Even if you pay the balance off in full, the credit bureaus still see that higher balance, which can lead to higher credit utilization.

The good news is that credit bureaus don’t track the history of your credit utilization. Once you pay off the card and the card issuer reports next month’s balance, your score will return to normal so long as your balance also returns to normal. However, this does mean that big purchases on a credit card could cause a temporary drop in your credit.

If you plan to apply for a major loan, like an auto loan or mortgage, it’s important to try and avoid using your credit cards for large purchases as it can cause a drop in your credit score, making you wonder, “Why did my credit score go down when nothing changed?”

A Lender Reduced Your Credit Limit

Credit card issuers don’t usually make changes to your credit limit unless you ask for a credit limit increase, but they’re well within their rights to adjust your credit limits at will. That can mean increasing them or reducing them.

If one of your credit card issuers reduces the credit limit on one of your credit cards, that will reduce your total available credit. Like making larger than normal purchases using your credit card, which can cause your credit utilization to rise, causing your score to decrease and making you wonder why your credit score went down when nothing changed.

A Mistake On Your Credit Report

Credit bureaus aren’t perfect. They do make mistakes, and there could be inaccurate information on your credit report. Adding an account that isn’t yours, marking a timely payment as late, or putting the wrong number for a balance or credit limit could all cause your credit score to drop.

If there’s a drop in your credit score and you are thinking, “Why did my credit score go down when nothing changed?” it’s a good idea to check your credit every once in a while to make sure your credit report is error-free. Each bureau is required, by law, to give you a free copy of your credit once per year, and there are many other free services you can use to monitor your credit.

If you identify an error, reach out to the credit bureau to dispute it. Each bureau has a slightly different process for reporting errors, so make sure to follow the appropriate process based on the bureau that has inaccurate information.

Identity Theft

Dealing with the confusion of “Why did my credit score go down when nothing changed?” can sometimes be traced back to identity theft, a serious problem that affects many people. More than 300,000 Americans fall victim to scams that can lead to identity theft each year.

If someone steals your identity, they can do a lot of things that will damage your credit score. Applying for new loans in your name and racking up debt are among the most common ways identity thieves will damage your credit.

Confused about a sudden #creditscore drop with no apparent reason? See why it might happen in our new article.

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If you think you’re a victim of identity theft, the first thing to do is reach out to the credit bureaus and put a fraud alert on your credit. This will help prevent the thieves from opening any more accounts in your name. You’ll also want to file a police report. The FTC has an identity theft report page that can generate a recovery plan for you.

Reach out to any companies that the fraudsters have opened accounts with and let them know that the accounts were not opened by you and that you’ve been a victim of identity theft. You should also check your credit card and bank statements to make sure no one has accessed those accounts without your permission.

As you recover, consider signing up for an identity or credit monitoring service so you can try to prevent identity theft from happening again.

Derogatory Marks Added to Your Report

One of the most common reasons for a drop in your credit score is a derogatory mark on your credit report. If you’re asking yourself, “Why did my credit score go down when nothing changed?” it is always possible that you have overlooked a payment, and it was reported as late.

Check your financial records to be sure you haven’t missed anything…

What to Do When Your Credit Score Drops Unexpectedly

Many people often wonder, “Why did my credit score go down when nothing changed?” If you notice an unexpected decrease in your credit score, the first thing to do is see how much it’s gone down. A minimal drop is nothing to get alarmed about. Just keep track and make sure the trend doesn’t continue.

If the drop is significant, you’ll need to figure out what the root cause is.

The best way to do this is to check your credit reports. This will tell you if there are any actual changes in your credit history that could have brought your score down. You will need to know how to get your credit report and how to read a credit report.

Some of the things that can cause a drop in your credit are no big deal. For example, looking at a score produced using a different model or having a slightly higher credit card balance in one month is not a cause for major concern.

Some changes require immediate attention. If you notice mistakes on your credit report, you need to report them to the credit bureaus as soon as possible. Identity theft also requires an immediate response.

If your credit score has gone down when nothing changed in your financial life, you don’t need to panic. You do need to find out what happened and why!

The post Why Did My Credit Score Go Down When Nothing Changed? appeared first on FinMasters.

If you have the self-control to use your card wisely, signing up for a credit card is a good idea because it can help you build good credit.

Why It’s Important to Build Credit Early

Your credit score plays a significant role in your financial life. It determines both how easy it is to qualify for a loan as well as the price you pay for those loans.

If you have strong credit, you will likely be able to get loans and credit cards relatively easily, assuming you have sufficient income to handle the payments. If you have poor credit, you could have trouble finding a willing lender.

Your score is also one of the keys to determining the interest rate of the loans you get. That can have a big impact on how much you pay for a loan. Good credit can also help you rent an apartment, get utility connections without a deposit, and even get a job.

When it comes to building credit, time is key. You need to build a long history of making timely loan payments. Your score also tends to rise as the age of your credit accounts increases, so the sooner you can start building credit, the better.

Given that young people are likely to be applying for student loans or needing to buy a car in the near future, applying for a credit card as soon as possible and using it to build credit can help you save a lot of money.

Student Credit Cards

One of the best ways for young people to get their first credit card is by applying for a student credit card.

When you apply for most credit cards, the credit card company will look at your credit score, income, and financial situation. If you’re young, you may have very little or even no income to speak of, which can make it hard to qualify for a credit card. After all, why would a lender give you a loan if you don’t have income to use to pay the loan back?

Lenders understand that students need access to credit but have limited incomes, so they design specialized student cards for this group. Generally, student cards are easy to qualify for and may come with perks, such as cashback or rewards for good grades.

However, student credit cards often have very low credit limits and high interest rates. You also might not be able to get one if you’re not actually a student. Plus, like any credit card, you could damage your credit or wind up in debt if you don’t use it properly.

Some of the best student credit cards for 18-year-olds include:

1.

Discover it Student Chrome

The Discover it Student Chrome is one of the best credit cards for 18-year-olds who want a simple card. It has no annual fee and offers 1% cash back on most purchases. Restaurant and gas station purchases pay 2% cash back. As a bonus, Discover will double your rewards in the first year, meaning you’ll earn 2% or 4% back on your purchases.

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2.

Capital One Quicksilver Student Cash Rewards

Another option for students who want to keep it simple is the Capital One Quicksilver Student Cash Rewards. It offers a flat 1.5% cash back on everything you buy. That means you don’t have to spend time thinking about bonus categories.

Another perk of Capital One’s cards is that they don’t charge foreign transaction fees, making this card a great choice if you hope to travel or study abroad in the future.

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3.

Bank of America Travel Rewards Credit Card for Students

If you want a travel credit card, Bank of America offers a student card focused on travel. The Bank of America Travel Rewards Credit Card for Students gives you 1.5 points for every dollar that you spend and has no foreign transaction fee. That means you can earn rewards toward future travel and use the card while you’re abroad.

Some nice perks of the card include a signup bonus of 25,000 points when you spend $1,000 on the card within 90 days of opening and 0% APR for the first 18 billing cycles.

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Secured Credit Cards

Secured credit cards are another option for people who want to build their credit. If you’re a young person with limited credit history, they are worth considering.

To open a secured credit card, you need to offer a deposit to serve as collateral. Typically, you give the card issuer a cash deposit equal to the credit limit that you want. Your deposit secures the debt, which is why they are called secured cards.

When you close the card, you get the deposit back. Some issuers give you the option of upgrading to an unsecured card if you establish a record of on-time payments.

Because the credit card company is effectively lending your money back to you, they take on almost no risk. That makes it easy to qualify for a secured card, even if you have no credit history or damaged credit.

The obvious drawback is that you need to put up some cash to open a secured card. If you don’t have a few hundred dollars in savings, you won’t be able to open the account. They can also have very high fees and very low credit limits.

Here are some of the best secured credit cards for 18-year-olds:

4.

Capital One Quicksilver Secured

One of the best credit cards for 18-year-olds is the Quicksilver secured card. Like the Quicksilver for students, this card is designed for people who like to keep it simple. It has no annual fee or foreign transaction fee and offers 1.5% cash back on every purchase you make.

To open the card, you’ll need a deposit of at least $200, though you can offer more to get a higher credit limit. Capital One will also automatically review your account after six months to determine whether you qualify for a higher credit limit without needing to make an additional deposit. With proper use, Capital One may eventually refund your deposit and upgrade you to an unsecured card.

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5.

Chime Credit Builder Secured Visa

If you bank with Chime, the company’s secured credit card could be an appealing option. Unlike other secured cards, there is no minimum security deposit required. Instead, you can open the account with any amount of money in a credit-builder account. Your credit limit will be equal to the amount you deposit, so you’ll need to at least have enough cash to make the card usable, but you can avoid needing hundreds of dollars to open an account, making it one of the best credit cards for 18-year-olds out there.

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6.

U.S. Bank Altitude Go Secured Visa

U.S. Bank’s Altitude Go Secured Visa credit card does have a relatively high security deposit requirement of $300, but it can be worth applying for if you have the funds available.

With the card, you can earn 4 points per dollar on dining, takeout, and delivery food, 2 points per dollar on groceries, streaming, gas, and EV charging, and 1 point per dollar on everything else. You’ll also get a $15 credit each year for streaming services like Hulu, Apple Music, Peacock, Netflix, and more.

U.S. Bank will review your account usage regularly and may give you an upgrade to an unsecured card if you pay your bills on time.

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Unsecured Credit Cards

Unsecured credit cards, unlike secured cards, don’t require a security deposit to open. Student cards are typically unsecured credit cards, but you could also try applying for a regular unsecured credit card that isn’t designed specifically for students.

The advantage of a non-student unsecured credit card is that they can have higher credit limits and more perks than many student credit cards. However, it can be difficult to qualify for these cards unless you have an adequate credit score. Given that you’re just starting out with credit, you may not be able to qualify.

There are some unsecured cards designed to help people build credit, but they usually come with very high fees and interest rates.

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Here are some of the top unsecured credit cards for 18-year-olds:

7.

Petal 1 Visa

The Petal 1 Visa card is unusual in that it is designed to help people build credit but does not charge any annual or monthly fees. That means that you can use the card to build credit for free. Another bonus is the lack of a foreign transaction fee, making it one of the best credit cards for 18-year-olds.

The card also offers some useful features, such as the opportunity to get a credit limit increase in as little as six months if you make timely payments. You can also earn between 2% and 10% cash back when you use the card at select merchants.

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8.

Capital One Platinum

The Capital One Platinum card is advertised as being for people who have fair credit, which could include those with limited or no credit history. It has no annual fee but charges a very high interest rate.

Like the Petal 1 Visa, it offers an automatic credit line review after six months of timely payments, helping you boost your card’s credit limit. It also has no annual fee.

Customers also get access to CreditWise, a Capital One tool for tracking their credit score and modeling how it will change based on things like making an on-time payment or opening a new card.

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9.

Upgrade Card for Improving Credit

Upgrade offers a unique credit card that mixes aspects of credit cards and personal loans. When you use the card to make purchases, you’ll get a bill at the end of the statement period. Any amount you don’t pay off gets turned into a fixed-interest rate loan with a set term, much like a personal loan. This can help keep your monthly payments more predictable and makes this one of the best credit cards for 18-year-olds.

Otherwise, the card works like a typical unsecured credit card with no annual fee.

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Becoming an Authorized User or Getting a Parent to Co-Sign

Another option for young people is to ask their parents to help them build credit.

One of the simplest ways to do this is to become an authorized user on a parent’s credit card. Some card issuers report card activity to the authorized user’s credit report, so if your parents manage their card well, it can help boost your credit score.

You could also ask your parents to co-sign on a card for you. Co-signing means promising to make payments if the account holder doesn’t, so your parents would have to trust you not to overspend.

Co-signing on a card can be harder than making you an authorized user because many cards don’t allow co-signers.

How to Use a Credit Card Properly

Once you have a credit card, you need to make sure you use it properly to build credit. Just having the card won’t boost your score. Even the best credit cards for 18-year-olds can damage your score in the long run if you don’t use them wisely.

The first thing to do is set up automatic payments from your bank account. Set it to pay the minimum balance each month at least, though it’s even better if you can set it to pay the statement balance so you avoid interest charges. This will ensure you never miss a payment, which will hurt your credit.

Learn about credit utilization ratios. As a rule, you will want to keep your balance below 30% of your credit limit. That can be hard if your limit is low, but it’s a key part of building credit.

When using your credit card, treat it like a debit card and never spend more than you have in your checking account. This will help you avoid getting into debt you can’t pay off. If you feel like you’ll struggle even with that, make a plan to use the card only once every month. That will be enough to let you make a payment and build credit without risking getting into debt.

In short, avoid overspending on the card. Only spend what you can afford to pay back. If you do that and set up automatic payments so you never miss a payment, your credit score will grow over time.

The post Best Credit Cards for 18-Year-Olds: 1 Absolute Top & 8 Runner-Ups appeared first on FinMasters.

If you’re thinking about buying a home and trying to decide on the right size or want to know if a smaller home is right for you, it’s essential to know the benefits to downsizing your home.

Lower Purchase Price

One of the most obvious benefits of downsizing your home or buying a smaller one is that you can save money. Smaller homes typically sell for less than larger ones. Price per square foot is a common metric for real estate, so the less square footage a home has, the lower its price will tend to be.

According to data from the Federal Reserve Bank of St. Louis, the median price per square foot in the United States is $225^[1]. In 2022, the Census Bureau reported that the median newly built single-family home measured 2,299 square feet^[2].

All told that means that the median home would cost, on average, $501,525 to purchase. Imagine you choose to downsize, moving to a home that is just 1,500 square feet. Assuming a price of $225 per square foot, you’ll spend $337,500, a savings of more than $164,000.

That’s a lot of money that you can dedicate to other things, such as saving for retirement, going on vacation, or helping build a child’s college fund.

Save on Your Mortgage

Few people can afford to buy a home outright. If you’re downsizing from a larger home, you might have the equity to buy a new home with cash, but you might also consider using a mortgage to buy the home.

Opting for a smaller living space has its perks, one of which includes the financial benefits to downsizing your home. Lower purchase prices mean a less expensive mortgage. Spending less means borrowing less, which reduces the interest and the amount of principal that you pay each month, but there are other factors to consider.

Learn more: If you’re self-employed and navigating the housing market, our latest post provides a guide to securing a mortgage when self-employed.

Lower Property Tax, Utility, and Insurance Bills

Saving on property taxes is another one of the benefits of downsizing your home. Each municipality charges property taxes based on the value of your home. Smaller homes tend to have lower values, which leads to lower property taxes.

Insurance bills are also very closely tied to the value of a home. Insurance needs to cover the cost of repairing or replacing a home, and the less the home costs, the less repairs will cost. That allows for lower premiums.

One cost that depends on home size, rather than the lower price that accompanies a smaller home, is utilities.

The less space there is in your home, the less it will cost to keep the home climate controlled. According to data from Sense, a smart home company, a 4,000-square-foot home, for example, will cost $114 more to keep cool over the summer than a 2,500-square-foot home^[3]. Smaller homes tend to cost even less to heat or cool.

Smaller homes also tend to use less electricity. A one-bedroom apartment might use a few hundred kilowatt hours of power each month, while a large home could use thousands. With the average price of electricity in the US sitting at 16 cents per kWh, using an extra 500 kWh per month means spending almost an extra $1,000 on electricity each year.

Pay Less for Maintenance

Another one of the primary benefits to downsizing your home is that smaller homes generally have fewer maintenance requirements than larger ones. There’s simply less stuff in the home to wear down or get damaged, which means spending less to keep the home in working order.

A popular rule of thumb is to budget between 1% and 2% of your home’s value for repairs each year. Buying a smaller home could mean saving thousands each year on repairs.

On top of lower maintenance costs, you’ll also save a lot of time. A large home that has lots of room means more time spent cleaning, dusting, sweeping, and making sure the home looks nice. Larger properties also tend to have bigger yards, which means more time spent mowing and doing outdoor maintenance.

Move to a Better Area

Home prices can vary massively depending on where you live. In 2023, the median home in Illinois cost $133,750, making it the cheapest state in the nation. At the same time, the median home in Hawaii sold for $805,775.

Even within a state, prices vary widely. The median home in Boston, Massachusetts, sold for $801,000 in June 2023, while the median home in Worcester sold for just $402,000.

One of the benefits to downsizing your home is that you may be able to move to a more appealing area for the same price. Whether you’re looking for a better school district, nicer weather, or just a change of scenery, being willing to move to a smaller home can make it easier for you to afford a property in areas with higher real estate prices.

Downsides of Downsizing

Along with the benefits of downsizing your home, there are important potential drawbacks to consider.

Downsizing could mean giving up some privacy. If you’re used to living in a home that has enough space for you to have a home office, you might have to get used to working at the kitchen table and dealing with the others in your home while taking work meetings. It could also mean giving up a finished basement or other spaces that give your family space to spread out.

That smaller footprint and lower number of rooms can also impact your ability to entertain. If you have less square footage, there’s simply less space for people to occupy if you decide to host a party. That could force you to limit your guest lists. Giving up a guest bedroom can also make it harder for family or friends to come for extended visits.

Storage can also become an issue. If you have too much stuff, you’re left choosing what to keep and what to give away or sell. If you can’t decide, you’ll have to rent a storage unit to keep your excess stuff, which can get expensive.

Learn more: Looking to save on storage costs? Our post reviews Neighbor.com’s offerings, a platform that lets you access storage space for less than typical storage companies while also offering a way to monetize your unused space.

If you already own a home, consider the potential costs of downsizing. You’ll probably sell your existing home to buy a new one, which means paying hefty realtor fees and closing costs. If you’re planning to get a mortgage for the new purchase, you might wind up with a higher interest rate, which could bump up the cost.

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Who Should and Shouldn’t Downsize?

Downsizing makes sense for a few groups of people.

One of the most obvious is older empty nesters. Having a larger home with many bedrooms makes sense when you have a growing family and a child or two. Everyone gets their own private space in the home.

As your kids grow up and move on to college and start their own lives, you won’t need as much space. That makes downsizing to a smaller home a reasonable thing to do and a good way to lower your monthly budget, which can help you afford retirement more easily.

There are benefits to downsizing your home if you’re feeling overwhelmed by home maintenance and upkeep. Keeping a large home clean and properly taken care of can be a big job, especially if you’re living alone. Hiring cleaners and landscapers to help gets expensive, so you might consider downsizing to a more manageable property instead.

Another consideration, though not necessarily tied to the size of your home, is your neighborhood. If your neighborhood has changed, you might not feel like you fit in as well. If long-time friends and neighbors sell their homes and move, the vibe of where you live can change, and you can start to feel isolated.

Moving to a new home in an area where you feel more like you fit in can be appealing. This is especially common for seniors, who may choose to move to a senior living community.

Conclusion on the benefits to downsizing your home

There are benefits to downsizing your home. You can save money in a variety of ways or help you stretch your money to afford a home in a nicer neighborhood or location.

Think carefully about whether you really use your home to its full capacity and whether you could adapt to having a slightly smaller property. The advantages are often worth the change.

The post 5 Surprising Benefits of Downsizing Your Home appeared first on FinMasters.

What Is Home Equity?

Before discussing cash-out refinance vs HELOC, it’s important to understand what home equity is.

Home equity is the value of your home minus the outstanding balance of any debts secured by that home^[1].

Remember that home equity is based on the current value of your home, not the amount you paid for it. If property values in your area have increased, your home equity may be higher than you realize.

Knowing how much equity you have in your home is the first step in using any credit product based on home equity.

Lenders won’t let you borrow up to 100% of your home’s value. Depending on the type of loan you use, you’ll need to maintain a certain minimum amount of equity. That’s why understanding equity is key. The more you have, the more cash you can get out of your home.

There are advantages and risks that go with all methods of borrowing against home equity. Because the loan is secured by your home, interest rates are usually low, and approval is relatively easy.

Also, because the loan is secured by your home, you could lose your home if you can’t pay the loan. Never borrow more than you can afford to pay back, and be sure you have a realistic payment strategy in place.

What Is a Cash-Out Refinance?

A cash-out refinance relies on refinancing your existing mortgage.

When you refinance a loan, you apply for a new loan and use the proceeds to pay off the existing one. That lets you adjust the details of a loan, such as by changing its interest rate or adjusting the repayment term. For example, if you refinance a loan to a lower rate or a longer term, you can lower its monthly payment.

With a cash-out refinance, you refinance your mortgage but take out a new mortgage for an amount greater than you currently owe. You can then pocket the difference as a lump sum in cash and use those funds for other purposes.

You can’t cash out all of your home equity. Most lenders will require that you maintain 20% equity in your home. So, in the example above, you couldn’t get a new mortgage for more than $400,000.

Learn more: In case you’re considering options to utilize your home’s equity, our latest vlog post sheds light on the pros and cons of Home Equity Loan Vs. Cash-Out Refinance.

Pros and Cons of Cash-Out Refinancing

Cash-out refinancing has a number of advantages, but it’s also important to consider the drawbacks.

You’ll need to balance the pros against the cons and decide whether a cash-out refinance is worth it.

What Is a Home Equity Line of Credit?

A home equity line of credit (HELOC) is a revolving line of credit that is secured by your home equity. In many ways, it works like a credit card.

When you open a HELOC, you’re given a credit limit. You can draw funds from the HELOC when you need to and can draw funds from the line multiple times until you reach the credit limit. You only pay interest on the outstanding balance of the HELOC.

Typically, a HELOC comes with a draw period and a repayment period. You can take funds from the line of credit during the draw period. Each month, you’ll get a bill to pay the accrued interest. You can choose to also pay down the principal, but you aren’t obligated to.

Once the draw period ends, repayment begins. At this point, you cannot draw more money from the line of credit. You’ll need to begin making payments that cover both accrued interest and a portion of the principal.

HELOCs have slightly less stringent equity requirements than cash-out refinances. Some lenders will give you credit limits that will result in you having just 10% or 15% equity in your home.

Pros and Cons of Home Equity Lines of Credit

Home equity lines of credit are highly flexible, but it’s important to consider the disadvantages before opening one.

A HELOC can be an effective way to finance a project with an uncertain cost, like a home repair or renovation, but you have to resist the temptation to borrow more than you need.

Cash-out Refinance vs HELOC

When it comes to understanding the difference between cash-out refinance vs HELOC, it’s essential to know that they are similar in many ways, but there are a few key differences. For example, both rely on the value of your home to determine how much you can borrow, but one offers a lump sum of cash while the other is more flexible.

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When comparing cash-out refinance vs HELOC, generally, you’d opt for a cash-out refinance for one-time expenses and a HELOC for more flexibility.

When to Consider a Cash-Out Refinance

A cash-out refinance gives you a single lump sum of cash all in one go. That makes them a natural fit for one-time expenses or projects where you know how much you’ll need to spend.

A cash-out refinance can also be a cost-effective way to generate funds for debt consolidation, especially if you have large amounts of high-interest debt.

If you’re planning to rely on the funds for multiple projects or aren’t sure how much money you need, a cash-out refinance might not be the best idea since you’ll either need to borrow more upfront and pay unnecessary interest or wind up under borrowing.

It’s also important to think about the terms of your mortgage compared to current mortgages. For example, if you have a mortgage with a fixed rate of 3% and new mortgages are charging twice that, giving up the low rate is probably a bad idea, even if you need a lump sum loan. In that case, it’s better to consider alternatives.

When to Consider a Home Equity Line of Credit

HELOCs are the better option when you value flexibility or know that you’ll need access to financing but aren’t completely sure how much you’ll need to borrow.

With a HELOC, you’re free to draw money from the line of credit multiple times. You also won’t pay interest on the unused line of credit. That means you can open the line of credit and make an initial draw to start a project, then pull more funds as needed while limiting the amount of interest you have to pay.

A HELOC is also a good option if you have a good deal on your existing mortgage and don’t want to give it up. You can keep your existing loan while using a HELOC to tap your equity.

However, if you’d prefer getting a lump sum of cash, as you would with a cash-out refinance, you could also consider a home equity loan. That would let you get a lump sum at a fixed rate without changing your existing mortgage.

The post Cash-Out Refinance vs HELOC (Home Equity Line of Credit) appeared first on FinMasters.

Let’s look at the pros and cons.

What Is Self-Directed Investing?

Self-directed investing is managing your investments yourself. Rather than working with a financial professional or building a simple portfolio based on a few mutual funds or ETFs, self-directed investors evaluate and choose the stocks, bonds, and other securities that make up their portfolios.

What Draws People to Self-Directed Investing?

Self-directed investing first took off during the dot-com boom in the late 90s, when online trading platforms became widely available. The trend faded after many self-directed investors took serious losses in the subsequent bust.

Self-directed investing has seen a resurgence in recent years. The availability of mobile-focused, commission-free brokerages that make it easy to buy and sell stocks has drawn more people to the world of finance and investing.

Online communities have also played a big role. People gather in these communities to discuss their trades and investments. Often, people emphasize their wins and downplay their losses, which can help give people the impression that self-directed investing is an easy way to make money.

Active investors often achieve high status within these communities, pushing more people to try their hand at self-directed investing.

Pros of Self-Directed Investing

Self-directed investing is popular for a reason. These are a few of the advantages of actively managing your portfolio.

Potential for Higher Returns

Perhaps the biggest advantage of self-directed investing is the potential to earn a higher return than the market as a whole. Many high-profile investors have earned billions by carefully managing investment portfolios and beating the market on a consistent basis.

Active investors can beat the market in some situations. This is especially true during bull markets, where big-name companies tend to outperform. For example, as of July 28^th, 2023, Nvidia has seen a year-to-date increase of roughly 225%. The S&P 500, by contrast, has only gained about 19.7%.

A self-directed investor who took the plunge and loaded up on Nvidia shares based on AI and other tech news could have massively outperformed more passive investors.

More Choice and Flexibility

Active investors tend to have more flexibility when building a portfolio and making trades than passive investors. Those who take a less active role in managing their portfolio usually rely on buy-and-hold investments. That means holding shares through both up and down markets. They might rebalance based on market movements, but that’s about all they’ll do.

Self-directed investors can use different types of securities to make more complex trades and execute more advanced strategies.

Options are one of the most common ways for self-directed investors to do this. For example, an investor who feels like the market or a specific share is about to drop could buy put options. This gives them a way to generate a profit even in a down market.

More complicated options transactions allow for the generation of cash flow or profit in different scenarios. Options also let active investor leverage their portfolios, augmenting their gains but also their losses.

Fun

For many people, investing isn’t just a way to build wealth, though that is a major appeal. Investing can also be fun.

Researching the market and different companies can be entertaining, and keeping an eye on your portfolio is fun. It feels good to feel successful when an investment you make pays off.

For people who find finance fun, active investing is very appealing.

Cons of Self-Directed Investing

Though self-directed investing can be appealing and has its benefits, you also have to think about the drawbacks.

It Takes Time

One of the top drawbacks of self-directed investing is the amount of time it takes.

A passive investor usually spends a bit of time settling on their desired asset allocation and then uses mutual funds to help reach that asset allocation. Passive investors might spend some time every few months to rebalance their portfolio, but the time investment is minimal.

Self-directed investors spend far more time focusing on their money. How much time exactly depends on the investor.

People who try their hand at day trading could spend hours every day managing their portfolio, buying and selling securities to try and earn a strong return. Even those who don’t make daily trades likely spend hours every week researching the market and different investment opportunities.

The time spent on active investing has to be considered when looking at overall returns. If you can earn an extra 1% return but spend 10 hours a week to do it, is that worth the time spent?

Likelihood of Lower Returns

Though self-directed investors could earn more than the market, the opposite is far more likely.

It’s incredibly hard to beat the market on a consistent basis. While some people have built a reputation as great investors who can beat the market regularly, those people are few and far between.

Fewer than 10% of actively managed mutual funds beat the market on a consistent basis. These funds are managed by teams of highly experienced professionals who know the finance industry and the area of focus for their funds, inside and out.

If not even one out of every ten Wall Street pros can do it regularly, it’s easy to see how even an enthusiast who spends a lot of time managing their portfolio could struggle to beat the market and is more likely to produce worse returns than someone who uses a more passive strategy.

This is by no means the rule. There are exceptions. However, the odds are stacked against you, and you’re far more likely to underperform than overperform.

The Risk of Irrational Behavior

Everybody thinks that they are disciplined and in full control of their actions and decisions. It’s not always true, especially in the high-pressure crucible of the stock market. Many self-directed investors fail, even those that initially succeed, because they lose control and make bad decisions.

This irrational behavior can arrive in multiple ways.

• Overuse of debt. Many self-directed investors start playing with borrowed money, especially when they are on a roll and doing well. This adds a whole new layer of risk to the already risky investing game.
• Emotional attachment. It’s easy for investors to get attached to investments that they studied and chose. That can lead them to overconcentrate on one investment or hold onto it far too long, often with dire consequences.
• Addiction. Some self-directed investors begin to exhibit addictive behavior, trading constantly, neglecting other parts of their lives and plowing more and more money into trading.

It’s important for self-directed investors to be confident in their ability to maintain a rational investment strategy and continuously monitor their own behavior. These risks are real and have derailed many self-directed investors.

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Taxes

Active investors are likely to pay more taxes than passive investors. This is due to how capital gains taxes work.

When you sell an investment for a profit, you must pay taxes on the profit you’ve generated. If you’ve owned the security for less than a full year, you must pay short-term capital gains taxes. If you’ve held the security for more than a year, you pay long-term capital gains.

The short-term capital gains rate is equal to your regular income tax rate, meaning it could be as high as 37%. The long-term capital gains rate is lower, with those in the first three tax brackets (earning up to $95,375 as a single filer in 2023) paying 0%. Most others pay 15%, but those in the top tax bracket pay 20%.

Self-directed investors are more likely to sell winning stocks within a year of buying them, triggering short-term capital gains taxes. They’re also more likely to sell shares in general. Passive investors may hold shares for many years before selling them, which lets them delay their tax liability.

Which Should You Choose?

For the vast majority of people, the better choice is likely to use a passive investing strategy. Consider your goals and risk tolerance, then build a portfolio using low-cost index funds that create a portfolio with your desired asset allocation.

With occasional rebalancing, you can achieve reliable long-term returns without having to put in too much effort.

It is incredibly difficult to succeed at self-directed investing. If you have extensive knowledge of a specific industry or pay incredibly close attention to news covering certain topics, that may help give you some edge, but it can still be hard to outperform the market. Even investors who have a successful run often end up losing most or all of what they have gained.

Even if you do have that highly specialized knowledge, it’s key to diversify your portfolio to avoid catastrophic losses.

If you’re thinking about trying your hand at self-directed investing, consider a middle ground. Dedicate most of your money to a safe, diversified, passive investment portfolio. Then, you can use a small portion of your money for self-directed investing.

If you put 95% of your money into safer, passive investments, you can use the remaining 5% to try active investing without much risk. This lets you gain experience and have fun by trying to beat the market without risking your long-term financial stability. If you do manage to outperform, you can accelerate your portfolio’s growth and consider dedicating more funds to active investing.

Final Word on Self-Directed Investing

Passive investing that aims to track the market rather than beat it is the safe choice and the better solution for most people. Self-directed investing can be fun but takes a lot of time, and even the vast majority of professionals fail to beat (or even keep pace with) overall market returns consistently.

Whichever strategy you use, be sure to build a diversified portfolio that matches your risk tolerance and understand that investing is subject to risk. Avoid investing money that you cannot afford to lose.

The post What Is Self-Directed Investing: The Pros and Cons Explained appeared first on FinMasters.

How Expense Ratios Work

What is an expense ratio? Essentially, it’s the fee that investors pay for investing in a mutual fund or ETF. Handling purchases, withdrawals, and day-to-day management of a fund’s portfolio takes time and effort, especially for funds that have millions or billions of dollars under management. These fees help compensate fund managers for their work.

Expense ratios are quoted as a percentage. For example, you might see a fund’s expense ratio listed as 0.50%. That is the percentage of your invested assets that you’ll pay in fees each year.

It’s important to note that you don’t have to pay these fees out of pocket. If you invest $10,000 in a fund with a 0.50% expense ratio, the manager won’t send you a bill for $50 each year. Instead, the fee is automatically deducted from the mutual fund’s assets. It’s automatically accounted for when the fund’s share price is calculated at the end of each day.

Because expense ratios describe fees as a percentage of your invested assets, the amount you pay depends on both the expense ratio and the amount you have invested.

Learn more: New to mutual funds? Here’s a concise guide tailored for beginners to navigate the world of mutual fund investing.

Components of an Expense Ratio

Now that we have an answer to the “What is an expense ratio” question, we need to understand its components. Expense ratios account for many, but not all, of the costs of running a mutual fund or ETF.

The management fee, meaning compensation for the fund’s managers and other costs associated with handling the fund’s assets, is one piece of the expense ratio of a fund. Some mutual funds also charge a 12b-1 fee. The money from this fee goes toward advertising and promoting the fund to investors and is also included in the mutual fund’s overall expense ratio.

Loads, fees that you pay when buying or selling shares, redemption fees, and some other costs are not included in the expense ratio. For example, a fund may have a 1% expense ratio and a 4% upfront load. That means you pay a 4% fee when buying shares and 1% of your invested assets each year.

Passive and Active Funds

Mutual funds and ETFs can be broken down into two broad categories: passively managed funds and actively managed funds.

Passively managed funds are those that don’t involve a lot of day-to-day changes or adjustments. Instead, they tend to focus on tracking a specific index.

Actively managed funds are those where the managers attempt to beat the market by finding undervalued stocks and those that are expected to rise significantly in value. These funds often employ teams of analysts and researchers and make more frequent trades.

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Because they require more research and analysis, actively managed mutual funds tend to have much higher expense ratios than passively managed funds. In 2020, the average actively managed fund has an expense ratio of 0.62% compared to 0.12% for a passively managed fund.

When comparing funds, it’s important to know whether they use an active or passive strategy to understand where the expense ratio is coming from.

Why It Matters

Expense ratios are incredibly important for investors to understand. Fees play a big role in overall returns, and even a small difference in fees can have a massive impact in the long run.

This is why keeping an eye on expense ratios is so important. Small differences can compound into major differences in long-term returns. For a higher-cost fund to be worth investing in, it must consistently outperform a lower-cost fund.

Finding funds that outperform can be quite difficult. Only about a quarter of actively managed funds manage to beat the S&P 500 index over the course of a decade, and funds that can repeat that feat consistently are even rarer.

Bottom Line

Understanding expense ratios is crucial when investing in mutual funds. Paying a small fee for investing in a mutual fund is generally worth doing. They make it easy to build diversified portfolios, even if you only have a small amount to invest. However, high fees can significantly eat into your returns, so looking for low-cost, passively managed funds is a popular strategy for keeping costs low.

Learn more: Taking the first step into stocks? Here’s a simplified guide to building your inaugural portfolio.

The post What Is an Expense Ratio? This Is What You Need to Know appeared first on FinMasters.

Like any fee, this will add to the cost of your loan. So, what are these personal loan origination fees, why do lenders charge them, and how can you avoid them?

We’ll break down what you need to know.

What Is a Personal Loan Origination Fee?

Personal loan origination fees are a type of fee that you pay when you receive a loan. You don’t pay it out of pocket; instead, it comes out of the loaned funds. Lenders charge this fee for a few reasons.

The most obvious reason for lenders to charge a fee is to increase their income. The more fees a lender charges, the more money it makes, so they have an incentive to charge these fees.

Typically, lenders use origination fees to compensate for the cost of originating a loan. When you apply for a loan, the lender needs to do some due diligence and make sure you’re a trustworthy borrower. That means checking your credit score, examining your finances, and putting in some time and effort to ensure you’ll pay the loan back.

Origination fees are one way that lenders cover this cost.

This fee can also help lenders reduce the risk of lending to someone with less-than-ideal credit. Just as lenders increase the interest rates they charge for borrowers who are more likely to default, they charge higher fees to reduce their risk.

Learn more: If you’re considering a personal loan, our guide lays out the essential requirements to streamline your application process.

How to Calculate an Origination Fee

Origination fees are quoted as a percentage of the loan amount. Generally, the lender deducts the fee from the funds before disbursing them to you.

To calculate the cost of an origination fee, use this formula.
Loan amount * Fee expressed as a percentage = Total fee

If you get a loan for $10,000 and it has a 3% origination fee, the fee will total $300. When the lender sends the money to your bank account, you’ll receive $9,700.

This means that you don’t need to worry about having cash on hand to cover origination fees. They’re automatically paid out of the money you’re borrowing. It does mean that your starting loan balance will be higher than the amount you actually receive from the loan.

Finding the Total Cost of a Loan

Personal loan origination fees are just one part of the cost of taking out a loan. Lenders also charge interest on the money that you borrow. To understand the total cost of a loan, you need to consider both the fees you pay and the interest that accrues.

Comparing two loans with the same interest rate but different origination fees is easy. The one with the lower fee is cheaper. However, if you have multiple loan options with different origination fees and interest rates, the comparison gets harder.

One option is to do the math to find the fee for each loan and the total interest you’d pay over the life of the loan using a loan calculator, but this can take some time to do.

An easier way to compare is to look at the Annual Percentage Rate (APR) of each loan. APR is a way of expressing the cost of a loan as an interest rate while accounting for all fees and compounding. The Truth in Lending Act mandates that lenders provide the APR of any loan you apply for.

The formula for calculating APR is:
(((Fees + Interest paid over the life of the loan) / Principal) / Days in loan term) * 365 = APR

For two loans with the same principal, the loan with the higher APR will have the higher overall cost.

Learn more: If you’re considering borrowing, our post offers insights into the best personal loans on the market.

How Does Your Credit Score Affect Origination Fees?

One reason that lenders charge personal loan origination fees is to compensate for the risk of lending.

Your credit score is one of the key factors that lenders use to estimate the risk of lending to you. People with low credit scores are perceived as risky and more likely to miss payments on a loan. Those with strong credit are viewed as safer bets and unlikely to default.

That means that lenders are more likely to charge personal loan origination fees for loans to people with poor credit. Making sure you have a good credit score is important not only because it makes it easier to qualify for loans but also because it can help keep the cost of those loans low.

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Not only will people with stronger credit see lower rates on personal loans, but they’ll have a better chance of qualifying for a loan with no origination fee.

Finding Lenders Who Don’t Charge Personal Loan Origination Fees

If you want a low-cost personal loan, avoid loans with origination fees.

If you have strong credit, this will be relatively easy. Many lenders will be willing to offer a loan, and you’ll be able to find one that doesn’t charge origination fees. However, if you have fair or poor credit, finding a fee-free loan can be tricky.

To start, you’ll want to look at several different lenders and compare their offerings. The more lenders you compare, the more likely you are to find one that does not charge origination fees for its loans. Some lenders make their lack of origination fee a selling point.

Consider working with a local credit union or small bank, especially if you already have accounts there. These smaller institutions may be better able to meet your needs and keep things fee-free.

Another idea is to consider a secured personal loan. You’ll need some sort of collateral for this loan, but offering that collateral significantly reduces the lender’s risk. That can make these loans easier to qualify for and help keep fees (and interest rates) low.

The post What Are Personal Loan Origination Fees and How Do They Work? appeared first on FinMasters.