Ninety percent (90%) of all the people in the world today are in need of loan planning. They pay too much to banks, credit card, finance, and mortgage companies in interest, points and other payments.

The way out of debt is to control these loans with a combination of strategies which include tactics for lowering interest rates, payments, points and principle of the loans.

The first step is to understand the system: Loans are composed of several factors.

• The total amount borrowed is referred to as principal of the loan. Regardless of the amount of cash that you get in hand, you need to be aware of the amount you borrowed. But the principle is only one factor in determining the amount of the monthly payment and the total amount of the loan that you pay.
• The interest rate is the number of percentage points used to calculate the amount of interest included in the payments of your loan. The principal times the interest times the time the money is borrowed is equal to the amount of interest you pay.
• Interest can be fixed or variable. Fixed interest is fixed by the contract that you used to borrow the money. Fixed interest can rise if the contract says that it can rise. Variable interest is related to some economic figure in the paper such as the 30year municipal bond rates, the prime rate, or some other rate you can read in the paper and which changes regularly. The variable rates are recalculated according to a schedule outlined in the original loan documents.
• Points, loan origination fees, mortgage company fees, lenders fees, or any fee that is calculated by multiplying a fixed (and sometimes variable) percentage figure times the principal is the amount of interest that you pay in advance of receiving the money.
• Time is the third factor which contributes to the amount of interest that you pay. All loans are based upon the "time value of money" principle. Simply stated the time value of money theory says that $1 now is worth more than $1 later. If a man owed you money, would you rather he pay you the $1 today or a year from now? Everyone wants their money as soon as they can get it because it is worth more now. The amount that $1 in the present is worth in the future can be calculated by "future value of money" tables in almost any basic accounting textbook. The amount the $1 in the future is worth today, in the present, can be calculated by "present value of money" tables, also available in basic accounting textbooks.
• Settlement costs represent costs that are incurred in obtaining a loan or using a loan to buy property. Since these costs represent a cost of borrowing they are equally important when comparison shopping for loans. Settlement costs are most often seen when financing or refinancing a house or other secured property.

Generally, you want to pay the least amount of costs including interest, which can be evaluated by looking at interest rates.

How companies cheat you.

Mortgage companies and others in the loan business, who sell cars and furniture try to confuse consumers with the amount of the payment, and not the length of the loan, the interest, or even the principal. The wise loan shopper must consider all the aspects of the loan.

We have seen people refinance a 10% fixed interest mortgage loan which had only about 10 years left to pay on it to a 16% fixed interest loan and pay 10 points to the mortgage company to reduce their payments. This represents an interest rate of 26% (16% interest and 10 points). The mortgage company reduced the payment by streatching out the payments to 30 years, and they pocketed a check at settlement for 10% of the principle value of the loan. The refinanced $50,000 on their house, plus $5,000 for the prepaid points and $3000 for settlement costs and ended up paying 16% on $58,000 dollars over the next 30 years. The real tragedy was that the going rate for loans at that time was 6 to 10% and a 15 year loan through a bank would have lowered their interest by at least 2 points (2%) and the payment would have been less than the mortgage company loan.

Points are prepaid interest and although they do not seem like a lot of money, remember the "time value of money" principle. If the consumer pays 5 points today that is the same as adding 5% to the loan and paying it over time, because the mortgage company often adds the prepaid interest to the principle of the loan. The consumer ends up paying interest on the interest. We had another client come to us after seeing a mortgage company, who refinanced his 10% mortgage to 13% with 5 points while extending the payment period to 30 years to reduce the payment. The consumer looses and the mortgage company pocketed $5000 in commission on a $100,000 loan at the loan refinance settlement.

Credit card annual "membership" fees are also like paying interest. Many credit card companies charge annual fees. Whenever you pay fees to borrow money you are paying interest. Depending upon your credit balance the interest changes. If are paying a $60 annual fee this is equivalent to 12% annual interest added onto your regular credit card interest with a balance of $500. If your credit card interest is 9.9% your effective rate is almost 22% with a $500 balance. Be smart don't pay annual fees on your credit cards.

How do you get started?

• Make a list or chart of all loans showing principal amount, interest rate, payment amount, grace period, fees if any, 800 telephone numbers, name of bank and card.
• Determine what cards have better terms, such as interest rate, grace period and fees. ABC Interest Rate Guide
• Resolve all loan disputes. See our own Loan Disputes section for more information.

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