Personal Finance Ology

Another step you can take in making an informed decision on which loan or savings product you choose is to know as much as you can about the financial services you need so that you can shop around for the best deal.

Alongside it being your duty to do as much research as possible there is also a responsibility that the lenders have to you. The Consumer Credit Protection Act of 1968, also known as Truth in Lending, is a law requiring lenders to disclose all the costs affiliated with your loan. This is where the Annual Percentage Rate (APR) or the actual cost of the loan including fees and expenses is found. This rate is normally higher than any advertised rate that may have gotten your attention and should be the rate you use when deciding which loan will work best for your situation.

For example, the next time you receive a mailing for a credit card pay attention to the way the interest rate is advertised. The company may state that the interest rate is 10 percent however somewhere in the fine print will be a disclaimer indicating the APR is 10.25 percent. You must review the credit card company’s guidelines to be really sure about their offer.

Deception

There is a lot of confusion and complication when deciding to choose a loan based solely off of the APR. This is because lenders use APR’s differently. Some may include all of the fees associated with the loan while others will include some fees and leave others out. Lenders use this to get around the Truth in Lending law and provide the consumer with a number that will more likely get them to borrow.

Advantages of APY

Not only did the Truth in Lending law require lenders to provide the APR but it also requires them to quote interest rates on an annual basis. This is the Annual Percentage Yield. APY is easier to use over APR because it gives you numbers that you can compare. Whereas with the APR you couldn’t really compare numbers because all of the numbers were calculated differently depending on the lender.

With the APY it’s pretty simple. All you have to do is calculate the total interest earned on an interest-bearing account for a full year. The APY allows you to compare two products with the same length however one may pay interest quarterly while the other pays it monthly. Since it would be more complicated to compare the rates of the two products by using their methods of interest payouts, it would be easier to calculate the APY. The key thing to remember here is that some products you are calculating the APY for may not have a length of time for a year. They may only last for 6 months or so. In this case you would be using the APY to get an idea of which product is the best deal. Your calculations for that particular product will not give you the actual APY.

Clarity

APR, Annual Percentage Rate, is meant to be the cost of the loan in totality and is used when you are borrowing money. Meaning any fees or expenses normally are added in and the total amount you are going to pay for the loan is revealed in the APR. However, many lenders will only disclose certain fees and expenses in the APR making it a deceptive number. You should always read the fine print and if you have any misunderstanding contact a bank representative for clarity.

APY, Annual Percentage Yield is the total amount of interest you could earn on an investment or deposit product. It is used to calculate and compare your profit on different deposit products. It should be remembered here that if you are comparing products that don’t last as long as a year then you are only getting an idea of the potential earnings of those accounts for the sake of comparing and not getting the actual APY.

Another factor in calculating interest rates and their effects on your loan or investments is compounding interest. For more information on compounding interest you can take a look at the article “The Basics of Interest (Part Three)” where it is discussed in more detail.

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Inflation is often watched by economists with a detailed eye due to the effects it can have on the economy. It is normal to have moderate inflation this is a sign of a growing economy however, if inflation gets out of control it can have an ugly effect on the value of the dollar and on your savings.

What is Inflation?

Inflation is when there are too little goods or services for the amount of demand on those goods or services. Simply put it is when a lot of people want too much of one thing. This allows for the merchant to raise the price because it is a highly desired product that is hard to get.

The biggest effect inflation has is it’s ability to rob you of your purchasing power by lessening the value of your money in the future. For instance, if there is a 4 percent a year inflation that means anything costing a dollar today will cost $1.04 in a year. Usually when you see the rate on inflation it is just an average number and does not necessarily mean everything will rise to that number. Some things will not rise as high and some will rise higher, whichever way keep in mind that the rate of inflation is normally given as an average and not a definite number.

It is important to consider the effects of inflation on the future value of your investment only if you are choosing between different time periods. If you are choosing between two different amounts but with the same time period the effects of inflation need not be considered.

The Dangers of Inflation

In most cases with the rise in prices there is a rise in salaries. However, there may be some companies who, due to the need to compete with other businesses, aren’t able to raise their prices therefore enabling them to raise the salaries of their employees. This in turn has a negative effect on those employees.

Another danger with inflation is for those who are invested in a fixed income product such as bank CD’s or bonds. With one of the solutions to inflation being higher interest rates those involved in a fixed rate investment will definitely lose out on the benefit of the prevailing interest rate.

What Does Inflation Mean To You?

Inflation can work for you or against you depending on your situation. If you are invested primarily in stocks for a lengthy period of time you could do fairly during the fluctuation of inflation. However, the negative effect comes into play if your money is heavily involved with bank CD’s or bonds with fixed interest rates. If you feel safer with your banks CD’s or bonds it is important to see if they offer special investments with inflation protection. If your bank doesn’t there may be other banks that do offer these services. Therefore, always remember to do your research before committing to an investment.

Whenever picking and choosing your investments and determining their present and future value it would be wise to always consider inflation and the effect it will have on your investment.

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In my last blog, I talked about online banking and it’s association with customers concerns about identity theft. Well here I will take a moment to explain to you the safety of the money in your account as it pertains to your banks stability. I know with the current economic instability and the prevalence of banks going under there is a high concern of where your money is and if it should stay there or not. The reality is there is some protection of your money by the Federal Deposit Insurance Corporation. The origin of this entity goes back to the Great Depression of 1929-33 which caused the crash of the stock market. It was during this time that a lot of depositors lost their money due to the failing banks. Due to this turn of events, bank regulations were created to protect the bank and it’s customers.

The FDIC

The creation of The Federal Deposit Insurance was designed to insure up to $100,000 of the money deposited by the banks customers. This means in the case of bank failure the FDIC will guarantee a return of your funds up to and not to exceed $100,000. Any bank that offers the protection of their customers deposits by the FDIC will have a sign in their facility that says “member FDIC”. When opening an account with a bank be sure to look for this sign to ensure your protection.

Although the FDIC covers $100,000 per customer there are a few exceptions to the rule. U.S. Treasury securities, annuities, insurance products, stocks, bonds and mutual funds are examples of items not covered by the FDIC. Although you may come across some of these products that operate like a checking account-allowing you to write checks, etc.-it is imperative to find out if it is protected by the FDIC.

Is Your Bank Safe?

A good way to check out the stability of your banks is to visit www.bankrate.com and use the rating service titled “Safe and Sound”. This tool gives you a rating of banks and credit unions by using different financial measurements such as earnings (how profitable a bank is), liquidity (how well the bank can meet its day to day expenses), asset quality (the quality of the loans provided by the bank, how risky they are and how many are delinquent) and capitalization (how much of the company’s assets are company owned or owned by it’s shareholders as opposed to being owned by creditors). The strongest rating is a 1 and the weakest rating will be a 5.

You can use the ratings provided by the website to choose a bank or decide if you are going to stay with your current bank. However, this doesn’t mean that the ratings are 100% accurate but they will give you an idea of where each bank stands.

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Online Banks vs. Traditional Banks (Which is right for you?)
Aside from the option of banking at physical financial institution you can walk into there is the option of banking online. The advantage to online banks are that, due to them not needing actual employees, or buildings or anything of that nature, they have less overhead and can offer better interest rates on investments opportunities as well as interest bearing accounts. There have been some concern amongst customers in regards to identity theft, however the online banks know this concern and it’s importance and has gone through great lengths to be sure (and prove) that your money and identity is just as safe as if you were using a brick and mortar bank. The truth is, because of the technical skills of a lot of thieves, if a thief really wanted to steal your identity they could do it through computers that access online bankers information as well as brick and mortar bank customers information. The key is to take precautionary measures to be alerted when there are suspicious transactions on any of your accounts.

Net-Only Banking

Online banking isn’t for everybody. It has its disadvantages. For instance, the majority of the Net-Only banks, or Online banks, only allow access to tellers through email. Therefore, you won’t get an immediate response but instead have to wait for them to answer your email. There used to be a problem with having to make your deposits by mail, however a lot of Net-Only banks are now making ATM’s available to their customers allowing immediate withdrawals and deposits. Even though the disadvantages are slim to none it is important to go to the website of the Net-Only bank you are deciding on choosing and make yourself familiar with their site and the way they operate. You may find that you will be able to become accustomed to online banking or that it is just not right for you.

Why Choose A Net-Only Bank?

If you find yourself on the fence about Net-Only banking some things to consider would be if you travel a lot or have to relocate often a Net-Only bank will work for you due to you not having to worry about it being in the region you are moving to. With Net-Only banks, they go wherever you go! Also, as previously stated, Net-Only banks offer lower fees and better interest rates than brick and mortar banks. On top of these advantages, Net-Only banks also offer the same services as brick and mortar banks such as online bill pay, applying for loans, purchase certificate of deposits, transfer money and of course manage your account online.

I have a savings account with a Net-Only bank simply because I wanted to try it out and I must say so far so good. It is pretty much the same as a regular bank however I did get a sweet interest rate on my account. And to my surprise communication is not just through email, there is a 1-800 number I can dial if I need immediate assistance with my account. If you feel comfortable with online banking I recommend opening at least a savings account so that you can take advantage of the higher interest you can get!

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