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What to Do If You Can’t Make Your Car Payments


Usually, I write about about ideas to reduce monthly expenses to free up cash for paying down debt or increasing investments to build wealth and move to financial independence. For many people, there is a day-to-day struggle along that road where existing debt and payments can be an issue. Here is a guest post from the folks at LendEDU, a US-based site that lets you compare loan costs from multiple providers to reduce your interest expense.

Depending on where you live, your car may be a nice convenience, or it may be a critical possession. If you’re in the city or live near your work, you may be able to get by without a car. If you have a commute every morning and no access to public transportation, however, owning a car may be a necessity for you.

It’s fairly easy for those with moderate-to-good credit to get a car loan, but what happens if you lose your job or have some financial difficulty and can’t make your payment?

Not paying your car loan can affect your credit and maybe even your employment for years to come, so simply ignoring the payment obligation isn’t a valid option. There are, however, other options for you if you find yourself unable to make your payment—and you should check them out long before your credit is in trouble.

Options If You Can’t Afford Your Car Payment

Talk to Your Lender

Your first step if you think you won’t be able to make your payment is to talk to your lender. You’re not the only person who’s ever had financial trouble—whether it be for just one month or a longer-term situation—and lenders have lots of ways to help you. If you’re not making your payment, they’re not making money, so it’s in your lender’s best interest to make it possible for you to do so. They do this in several ways.

Loan Modification

Sometimes, depending on the lender, you may be able to do a loan modification, which means you and the lender agree on a repayment term change. Usually the object of a modification is to lower the monthly payment, which can help you keep your obligation.

The downside to a modification is that it may raise your interest rate—and that means even though you’re paying less per month, you’ll pay for a longer time. A longer term also means paying more over time.

Refinance

If your lender is not interested in a modification, they may be amenable to an auto loan refinance. This is when you take out a second loan, with new terms, that pays off the old loan. If you receive a higher interest rate or longer term when refinancing, you’ll likely pay more over time. If you need the help right now in the short term, however, it’s a valid option.

Deferment

Some lenders offer a one-month deferment, which means they allow you to skip a payment, which they tack on to the end of the loan. If you’re simply having a temporary financial shortage, this could be an option. Just keep in mind that if you do this, your loan term will be a bit longer—and your final payment will be more. If you do take advantage of this, you’ll want to make that “skipped” payment as soon as possible, in addition to your regularly scheduled payment.

Balance Transfer Credit Card

Another option is to get a balance transfer credit card with a 0% APR balance transfer offer. While doing this can give you a year to pay down the balance without also paying interest, keep in mind that if you can’t pay it off within the introductory period—usually 12 months—the interest rate will skyrocket back up, possibly to almost 25%. If you’re not careful, you could find yourself in an even worse position.

HELOC

If you own your home, a home equity line of credit could give you the money you need to get caught up on your loans, consolidate payments, and help you keep your car—all at a lower rate of interest than you may have with your car loan. Since the money comes from your home’s equity, the rates are generally better. Be aware, however, that because your home secures this line of credit, if you find yourself unable to make that payment, you could lose your home.

Trade Your Car in

Trading your vehicle in for something less expensive can also help if you’re unable to make your payments. The object here is to trade it in for another vehicle that is cheaper—and therefore will result in a smaller loan and lower payment.

Allow Someone Else to Assume the Loan

A few lenders allow loan assumption, or someone else taking over the payments on your loan. Most lenders prefer to do a new loan for the new buyer instead of them taking over your loan, but a loan assumption can be done in some cases. You can also make an agreement with someone who will make the payments to you, and then you turn around and pay the lender. This is a highly risky maneuver, however; if your other party decides not to pay, not only are you out of the payment, but you’re out of the car.

Sell the Car

If your car is in decent shape and not “upside down,” where you owe more on it than its Blue Book value, you may be able to sell the vehicle and use the money to pay off your loan. This is one of the better options—if you can get the full value of your loan in the sale. If not, you’re still on the hook for any remaining payments.

Repossession

If you’ve gone long enough without making payments, your lender will send someone (a “repo man”) to physically take your vehicle back on behalf of the lender, who then sells or auctions off your car. Any costs gained in the sale or auction are applied to your loan, and whatever is left—plus the costs of repossessing it to begin with—is passed back to you. If possible, don’t ever allow your car loan to get to that point.

Voluntary Repossession

This is mostly the same, except in a voluntary repo, you’re turning over your vehicle to the lender of your own accord. If you’re late on several payments, you may want to consider this option because it will save you the additional costs involved if the lender repossesses your vehicle.

Bottom Line

The best time to start looking at options is before your payment is late. If you even think you’ll have a problem making your payment, talk to your lender first. Have a plan in place for if you experience financial difficulties, and make sure you’re aware of all your options.

Read full article here: What to Do If You Can’t Make Your Car Payments

For thoughts on how to buy the perfect economical car, have a look here.

What are your thoughts on the costs of running a car and what to do if you can’t make the payments? Let me know in the comments.

5 Reasons Not To Panic About The Market

The paper statements won’t be arriving for a while, but no one reads those anyway. It’s the online numbers that hurt. It takes some courage to login and look at the big number at the bottom of the page. The one that used to be big. That sickening feeling in your stomach like when you overslept for an exam back in college. Relax. You don’t need to panic about the market. Here’s why:

1. Corrections are normal

Look at the chart for most any stock over a 1 week period. Or even a month. How did it do? Who cares? Always a lottery over the short term. Now look at some long-term data for quality companies. Likely sold growth over 20 or 30 years. Over the long haul, stocks outperform bonds. The short term dips and dives are the price to be paid for the superior returns.

As an example, let’s look at Apple. Here is the company stock chart. A disaster. A price drop from $178 to $156. A heart wrenching plunge of 12.4% in just one month. Even the red shading on the chart looks scary. Good time to sell? Move into something else? There are lots of factors to be considered in making buy and sell decisions, but the short term stock direction, and the shade of the chart isn’t one of them.

Let’s look at the same stock over 10 years. Now the stock goes from $13 to $156. If you invested $10,000 back then, it would be worth $120,000 today. Nice! Even with the recent drop, that is an average annual growth rate of 28.21%. That doesn’t even include the dividends you would have earned. Not a lot of bonds pay that. Pretty good ride. And if you hung in for 10 years, you would have seen plenty of drops, like the 43% one from Sept 2012 to July 2013 where the stock dropped from $98.75 to $56.65. Ouch. But your patience would have been well rewarded.

This doesn’t mean that I am recommending any one stock. Or to buy Apple. Just that corrections are a part of investing. Pull up any stock charting tool and look at short term and long term data for individual stocks and for the market as a whole. The long term trend for quality stocks is up. The short term is, well, we know not what. Build a well diversified portfolio that is suited for your age and risk tolerance and let the power of compounding work for you. Don’t panic about the market.

2. Stocks are on sale

When clothing goes on sale, we rush in to get the best bargains. Boxing Day deals bring out the beast in people. And a 2 for 1 deal can work us into a frenzy. But when stocks go on sale, everyone panics. Why? It’s a chance to buy quality companies for less. Same employees working just as hard to earn you money.

Using the US Dow Jones Index as a view to the overall US market, we see that it has risen from 9,035 to 22,859 over 10 years. Thats an average annual growth rate of 9.73%. Even after the recent drop of 14.5%. By staying in the market and not exiting on the drops (tough to do) an investor would have earned a solid return. And that doesn’t include dividends. Keep investing through the ups and downs with a well diversified portfolio.

3. DRIPs help ease the pain

DRIP stands for dividend reinvestment program. Your financial institution can set this up on your account so that the dividends that you earn are used to buy more of the stocks you already own. The compounding effect is a powerful way to build wealth. In a quality company, the dividends often grow, providing more cash with which to buy more shares. But this becomes even more important as share prices fall since your dividends now buy even more shares since they are on sale. And fewer as prices rise. DRIPs build wealth and help stabilize a portfolio.

4. You don’t need the money right now

For those of us in our 20’s, 30’s, 40’s or 50’s we needn’t be concerned since we likely don’t need our investments right away. The numbers on the statement are just numbers on a statement. They don’t need you reacting to them. Time is the great healer. Keep saving and investing for the long haul. You don’t need to panic about the market.

5. Retiring? You still don’t need to panic about the market

But let’s take the case of a 65 year old who just retired with a plaque, a party, some bad speeches and a gold Apple Watch. Her $500k portfolio has declined 20%. It is now $400k. The projections might suggest that she no longer has enough to live on. Time to panic, or at least sell her Apple Watch? First off, her advisor shouldn’t have had her in a portfolio that could decline 20% at age 65. That is true even if she is her own advisor. But even still, she doesn’t need all of the money this week. The average bear market lasts 11 months. Time for her to withdraw what she needs for now and let the market run its course. When the market recovers there will be an opportunity to rebalance to an investment mix that is better suited to her age.

Summary

Here are a few thoughts to keep in mind as the market tumbles:

  • Don’t panic about the market and succumb to the instinct to sell everything. Take the long view. If you own quality companies, they are full of people getting up early and working hard to grow these businesses. If you own their shares, they are your businesses. Stay invested and let them work for you.
  • Over time, rebalance your portfolio to get a mix of quality stocks, bonds and cash that is appropriate for your age risk tolerance. A qualified financial advisor or robo advisor can help. Not tips from your Uber driver. Unless she has a Certified Financial Planner. Who loves driving.
  • In uncertain times with rising interest rates, the best defence is to aggressively pay down debt and reduce expenditures. Being rich is about spending less than you earn. And the longer you do that, the richer you get. Especially if you invest your savings in quality, well managed companies and give them time to grow. If you need some ideas to reduce your expenses, subscribe to my blog or have a look at Cashflow Cookbook where I offer 60+ “recipes” to reduce recurring expenses. If you are in the Toronto area, I am doing a series of free lectures on wealth building ideas. The complete schedule is here.
  • Set up your finances so that a fixed percentage of your income goes directly and automatically into savings. If your employer has a matching RSP or 401k, that is a great place to start. Can’t afford to make the contributions? You can’t afford not too. Reduce other expenditures. Find the money. Make the contributions.

What are your thoughts on the market correction? What are you changing in your approach?

Photo credit Yu Tang of Unsplash

Surfing to Financial Wellness

Financial wellness has become a thing.  Corporate wellness programs that focus on exercise and healthy eating are now expanding their scope to include financial wellness and organizations are realizing that helping employees stay financially fit is a great way to reduce their stress and keep them focused on their work.  My calendar is filling up with speaking engagements to help employees think about how to optimize their finances. In addition to education on financial wellness, organizations promote their internal financial programs like matching RSPs, company pension plans and Employee Stock Purchase plans.

Why don’t employees sign up for free money?

While the financial wellness sessions are well attended, it is often tough to increase participation rates in programs where companies actually offer employees free money. How can this be? Although these kinds of programs offer employees a chance to access free money, participation requires money, and that becomes an issue for many.  Joining an Employee Share Purchase Plan, signing up for a RSP matching program or even joining a company pension plan, all require a piece of a paycheque. Which means that they compete with kids programs, home repairs, Zumba classes, car payments and everything else in the budget.

A similar issue happens in other aspects of personal finance. Nearly half of Canadian credit card users don’t pay off their credit cards each month despite punishing interest rates north of 20%. (BMO ‘s 2015 credit card report). Consumers select longer mortgage terms even though slightly higher payments could knock years off the loan. We select car loans with an average duration of 69 months and often roll in negative equity from our last car loan. Only about half of university students have their education funded by an RESP, leaving $7,200 of free government funding on the table.

Are you swimming up financial waves or surfing down them?

So it seems that we are swimming up the financial wave rather than surfing down it. If we could free up some monthly cashflow, we could access this free money and accelerate our ride to financial wellness.

  • Freeing  up cashflow would let us participate in company programs like share purchase plans and matching RSP plans. These plans often provide free money in addition to a growth opportunity
  • Having available funds would mean that we can take full advantage of government giveaways like RESP grants, RSP tax deductions and tax savings by maximizing TFSA contributions
  • With some extra monthly cash we could pay off our credit card balance in full, saving us from ongoing interest charges
  • Extra funds would also enable the ability to pay cash for other purchases, eliminating the need for additional consumer loans.

By getting ahead of these things, our money starts to really work for us. Free money from our employer programs can help drive us forward. We can reduce the interest cost and the impact of taxes that are pulling our finances backwards.

How to ride a wave of financial wellness

So how to get on the wave and let our money do the work? Here are some thoughts:

  • Make a list of all of the government plans that are relevant for you (TFSA, RSP, RESP etc) and the extra value to you of getting to full participation in each and the cashflow needed to do so.
  • Build a similar list of all available employer plans inclusive of pension plans, stock purchase plans and RSP matching programs. Again, calculate the extra value to you of getting to full participation in each and the cashflow needed to do so.
  • Then list out the annual interest cost of not fully paying off any revolving credit each month. Eliminating that can also add extra value to your net worth.

Then look for ways to make some changes to start surfing down the waves. As an example, by getting your credit cards paid off, you could save on monthly interest payments. Could that interest amount be the extra you need to enrol in your company’s share purchase plan? Bit of a two for one. Is there a way to reduce household expenses to maximize RESP contributions and take advantage of the maximum government grant of $7,200 per child? Its money that you will need, might as well have it come from the government, rather than you. If you need more ways to find savings to enjoy the benefit of these programs, check out the ideas in Cashflow Cookbook. If your company has a matching RSP program and you are tight on cash to contribute, complete a form T1213 (available here) to reduce the tax withheld by your employer. You won’t get a tax refund in the spring, but it will ease your cashflow so that you can join the program and get the employer provided benefit.

By making some simple changes you can surf a wave to financial wellness and let your employer, the government and even your financial institution help.

What ideas have you found to surf your way to financial wellness?

Photo credit Jeremy Bishop on Unsplash.

 

 

 

 

 

 

The Secret to Great Investing

In Cashflow Cookbook, I curated 120 of the best ideas to free up cashflow for debt repayment or increased investment. Through the power of compound growth, relatively small monthly savings can result in building real wealth over time. Many of my readers have applied the concepts and are now keen to get their money to work for them. One of the most common questions I get is, “What is the secret to great investing?”

At a recent speaking engagement, a similar challenge was raised. An audience member was interested in the ideas in the book but questioned an example I had used of an investment growing at 7%, seeing that as unattainable. Looking at the history of the stock market over the long haul, the rate of return of money that stayed invested through wars, recessions, 9/11 and every other type of peril is about 7%. The Vampire that drains investing returns is usually the investor them self, pulling money out of the market when things look scary (selling low) then clamouring back in as markets rise (buying high). Not a winning approach. Studies have shown that fund investors typically underperform the funds themselves for exactly that reason.

So what is the secret to great investing?

But back to the question, what is the secret to great investing? There is no shortage of analysis of stocks, many with conflicting opinions. And many studies show that researchers carry a bias toward positive reviews to avoid the conflict that comes with a negative one. So how do you pick the winners and what is the secret to great investing?

I don’t know that there is a single secret, but I think that one of the keys is to understand the major shifts that are happening and ensure that your portfolio is on the right side of those shifts. Let me give you some examples from the last few years of some of these structural changes and some of the investments that I made.

 

Major Trend or Shift(s)

 

Company

 

Last 12 month’s Performance

Artificial Intelligence, blockchain, machine vision NVIDIA +82%
Outsourced IT, IT Infrastructure CGI +25%
eCommerce (software) Shopify +94%
eCommerce (shipping packages) FedEx +24%
eCommerce (core business) Amazon +79%
Mobile Computing Apple +32%
Out of Reach Housing Costs Canadian Apartment REIT +27%
Social Media and Digital Advertising Facebook +26%

 

Are technology trends the only thing to consider?

Did I win on every investment I made? Absolutely not. Could these stocks have suffered from some calamity that might have thrown off their returns? Absolutely. Should investors conduct other types of securities analysis and ensure that possible investments are secure. 100%. As an example, FedEx rival UPS was more or less flat over the past year. Not all trends are technology-related. The housing cost one above is an example. Global warming leading to more violent storms is another. And bear in mind that a trade war, misguided nuclear missile or even, ahem, a bad tweet could drive a big dip across the overall market.

But all things being equal, why not have the wind at your back as an investor? By overlaying known trends in addition to sound analysis, there could be some incremental gains to be had. Could Lance Armstrong beat me in a bike race? Sure. But what if I had a huge downhill and he was climbing over the same distance? Well, OK, he would likely still beat me. But you get the idea.

What are the shifts ahead that will impact stocks?

So the history lesson was great, but what is the secret to great investing going forward? And where do we find the trends that will provide the right kinds of tailwinds? One of my investing favourites is Mary Meeker’s Internet Trends Report. It comes out every year around June 1st and it is one of the best ways of learning about the tech trends in the year ahead. Best of all, it is free. You can have a look at it here. The McKinsey Insights iOS app is another great and free source of information on emerging trends. The Motley Fool website has tons of great articles on these kinds of trends. For each trend, think about the securities you hold. Will the company benefit from using the new technology? Are they a maker of the technology? Or will their company become roadkill as the technology becomes more popular? Younger people aren’t familiar with the old red and yellow Kodak logo, but today it serves as a grim reminder of the effect of being on the wrong side of a technology shift.

How do you apply your knowledge of the trends?

Once you build your knowledge of the trends, how do you apply it? Work with your financial advisor to discuss how some of these trends might affect your portfolio. If you invest on your own, look at your holdings to see how they might be affected by some of these technology shifts. For many of these trends, there are exchange traded funds that focus on the themes. Examples would be Vanguard’s VGT, which holds high technology names, or HACK, a cybersecurity focused fund. Be sure to balance these ideas with other blue chip holdings of the broader market.

The securities mentioned are for illustrative purposes only. Investors should always conduct their own research and consult a financial advisor before buying any security. Stock markets are subject to volatility and investors should ensure that any investments are suitable for their risk profile.

Disclosure, I hold all of the securities above personally.

Where are you getting your information on trends? What trends will affect share prices going forward?

Photo credit Chris Lawton – Unsplash