MONEY Debt

9 Ways to Outsmart Debt Collectors

iPhone submerged in water
Henrik Sorensen—Getty Images

More than a third of Americans have debts reported to collection agencies. If you're one of them, here are the repayment and negotiating strategies you need to know.

Today’s encouraging economic news notwithstanding, plenty of Americans are still struggling with their own personal economies. According to a study released Tuesday by the Urban Institute, more than 35% of Americans have debt that has been reported to collection agencies. What’s more, the share of consumers in collections hasn’t changed, even as overall credit-card debt has decreased in recent years.

If you’re one of the many people being dunned for delinquent credit-card, hospital, or other bills, it’s easy to feel intimidated by collection agencies and confused about the repayment process. But rather than panicking and avoiding your collector’s many calls—and there will be many—here are 9 ways to gain the upper hand in negotiations and, most important, keep from paying a penny more than you have to.

1. Don’t Get Emotional

When a debt collector calls, he’s trying to assess your ability to pay and may attempt to get you to say or agree to things you shouldn’t. You’d be best served by keeping the initial call short and businesslike. Collection agencies are required by law to send you a written notice of much you owe five days after initially contacting you. Wait to engage with them until after you receive this letter.

2. Make Sure the Debt Is Really Yours

If the debt sounds unfamiliar, check your credit reports. Request a report from each of the three credit bureaus for free from annualcreditreport.com and scan for any incorrect data. A study by the Federal Trade Commission found that one in 20 consumers could have errors in their reports, and 24% of the mistakes people reported were about a debt collection that wasn’t actually theirs. (Learn more about how to fix costly credit report errors.)

3. Ask for Proof

Once you get written notice, contact the debt collector. If you are disputing the debt because of an error or identity theft, send a letter to the collector by certified mail within 30 days of receiving your notice stating that you will not pay and why. Also notify each of the three credit bureaus by mail, explaining the error and including documentation so that the problem can be removed from your report. If you are unsure about whether you owe money or how much you owe, ask the collector by certified mail for verification of the debt. That should silence the calls for a while; collectors must suspend activity until they’ve sent you verification of the debt.

4. Resist the Scare Tactics

Some debt collectors may try a range of tricks to get you to pay up, but it’s important to know your rights. Under the Fair Debt Collection Practices Act, collectors cannot use abusive or obscene language, harass you with repeated calls, call before 8 a.m. or after 9 p.m., call you at work if you’ve asked them to stop, talk to a third party about your debt, claim to be an attorney or law enforcement, threaten to sue unless they intend to take legal action, or threaten to garnish wages or seize property unless they actually intend to. If the agency commits a violation, file a complaint with the FTC and your state Attorney General, and consider talking to an attorney about bringing your own private action against the collector for breaking the law.

5. Be Wary of Fees

Typically, the contract you agreed to when you took out the loan or signed up for the line of credit states how much interest a collector can charge on your debt. Most states have laws in place capping the amount of interest agencies can tack on. Check the balance the original creditor listed as “charged off” on your credit report. If there is a big increase in the amount the collector wants, consult your original contract. Your verification letter may also give you more info about how fees are calculated. If you believe the debt has been inflated, reach out to the Consumer Financial Protection Bureau, which might be able to resolve your issue with the collector.

6. Negotiate

Collection agencies will push you to pay the full debt at once, but if that is not an option for you, tell them how much you can afford to pay and ask if they will settle for that amount. If they accept these terms, get confirmation of the deal in writing before you pay. This way, you avoid any miscommunication about the total to be paid and time frame for the payments.

7. Call In Backup

If you and the debt collector can’t reach an agreement and it appears likely they will take you to court, consider hiring an attorney. While the fees and costs of doing so may be prohibitive, the collection agency is more likely to drop the case in favor of easier targets, a.k.a debtors without attorney representation.

8. Know the Time Limits

Creditors may imply that court action can be taken against if you don’t pay up, and while that’s true, there is only a certain window of time—typically three to six years—in which a creditor can sue you over the debt. While you’ll still owe the money, and collectors may still call about it, creditors cannot take you to court over it once it’s past your state’s statute of limitations. Statutes vary widely by state and type of debt, so check your state’s specific rules if the collector is calling about older debts.

9. Don’t Get Tripped Up By Your Own Good Intentions

Collectors can’t legally “re-age” your debt by giving it a new delinquency date, but you can inadvertently extend the statute of limitations or restart the clock in some states by making a payment on old debt, agreeing to an extended repayment plan, or even acknowledging that the debts is yours.

More Help for Conquering Debt:

3 Simple Steps to Get Out of Debt

7 Ways to Improve Your Credit

Which Debts Should I Pay Off First?

 

 

MONEY mortgages

The Best Loan You’ve Never Heard Of—And How You Can Get One

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charles taylor—iStock

Does a home loan with no down payment and decent rates sound too good to be true? It isn't.

No money down, better rates than an FHA loan, and the ability to finance closing costs. It may sound too good to be true, but in fact it’s a U.S. Department of Agriculture guaranteed rural development loan, and now is your best chance to get one.

Before we get into the details, a bit of background. The USDA provides extremely attractive loans to people in certain rural locations, as an enticement to settle down and develop new areas of the country. The Department of Agriculture uses population data from the US Census and other factors to determine which areas of the country count as “rural,” and then allows buyers in these areas (who meet a few other requirements) to get a USDA-backed loan from an approved lender.

If you’re a candidate for one of these loans, there’s no time like the present to apply. Here’s what you need to know.

What Makes USDA Loans Special?

Ag Department-backed financing is so attractive because it requires no money down but still has rates competitive with other government mortgage products. FHA loans, the most common type of government loan, require a 3.5% down payment at minimum, and saddle low-credit buyers with costly mortgage insurance premiums. USDA mortgages only require a small annual fee (a fraction of the FHA’s rates) and an upfront premium of 2% of the loan amount. However, that premium can be rolled into the mortgage, giving buyers the option of getting financed with a 0% down payment.

What’s The Catch?

The catch is the Department of Agriculture limits who can get one of these loans. If you make more than 115% of your area’s median income or already have “adequate housing,” you’re not eligible for USDA financing. You’re also required to purchase housing that is “modest in size, design, and cost” and meets various building codes.

Then there’s the matter of credit. Technically, the USDA doesn’t have a strict credit minimum, but most lenders are reluctant to sign off on anyone with a score south of 620. That’s more than 100 points higher than credit limits for FHA loans, which require a minimum FICO score of 500 for buyers willing to put down 10% up front. The good news is buyers can offset poor credit by showing mitigating factors like a healthy bank balance or a monthly rent bill higher than the home’s future mortgage payments. You can read the details of buyer and property requirements on the USDA’s website.

Most important, you must live in a specific area defined by the USDA as rural. The department provides a map showing which regions are eligible here.

Why Is Now The Best Time To Get One?

Remember how the USDA decides which areas are eligible for these loans based on census data? Well, the Department of Agriculture hasn’t actually updated its map since 2000, and a lot has happened in the last 14 years. Many areas that were previously considered rural, and therefore eligible for USDA financing, have become regular suburbs. According to a 2011 study by Housing Assistance Council, 97% of the country’s land mass, an area that includes 109 million people, is eligible for a USDA loan. That means about one in three people lived in regions that were USDA eligible when the report was published.

Unfortunately, the ride is almost over. The USDA plans to update the eligibility map with 2010 census figures this October. The Housing Assistance Council estimated that the new information will make 7.8 million people ineligible for USDA financing unless they move to areas within the new eligibility zone.

In reality, the change is going to effect significantly fewer people than that, thanks to congressional action that grandfathered in many areas. However, the USDA told Money.com they don’t yet have exact numbers on how many Americans will no longer live in rural areas after the update, so if you’re eligible now and looking for a loan, it’s better to be safe than sorry. At least some at the department anticipate a rush to get financing before the old rules expire. “We’re going to get inundated,” predicts Neal Hayes, Housing Programs Director for the New Jersey USDA state office.

How Do I Get One Before My Area Is Made Ineligible?

The current map expires on September 30th. That means a USDA-approved lender needs to have submitted a complete, fully underwritten application package to the department’s relevant state office by no later than close of business September 30, 2014, or the application will be considered under new, less favorable requirements.

What If I Already Have a USDA Loan? Can I Still Refinance If My Area Loses Eligibility?

Don’t worry. If you’ve already got a USDA mortgage, you’re done worrying about regional eligibility requirements. As long as you still meet other requirements, you should be able to refinance.

MONEY Ask the Expert

Avoid the Parent Trap: Why a PLUS Loan Isn’t the Best Way to Pay for College

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Robert A. Di Ieso, Jr.

Q: Would it be more beneficial to take out a Home Equity Loan versus a Parent PLUS to pay for a child’s college education?
—Lou M., Brooklyn

A: PLUS loans should be your last resort.

Sure, these federal loans allow parents to borrow up to the total cost of their child’s college education, minus any other aid the student may be receiving. But that’s where the good news ends: PLUS loans currently carry a 6.41% rate, and without Congressional intervention, that rate will jump to 7.21% come July 1. Plus, these loans also come with an “origination” fee of about 4.3% of the principal amount you borrow.

Additionally, the credit standards required for PLUS loans have gotten tighter in recent years, notes Fred Amrein, a financial planner who specializes in college funding, financial aid and student loan repayment. (Though there is one upside to this: If you’re denied a PLUS loan, your child can receive additional student loan money above the standard limit.)

Rather than you taking on a PLUS loan, Amrein advises pushing your child to take out the full amount they can in federal student loans—$5,500 to $7,500 annually for dependent students whose families weren’t turned down for a parent PLUS loan.

The interest rates for student loans are significantly less: After July 1, they will be 4.66% for subsidized and unsubsidized federal direct undergraduate loans and 6.21% for direct unsubsidized graduate loans. These loans have lower fees, too—about 1.1%. Students also aren’t subject to a credit check as parents are.

Students also have more flexibility with their repayment plans if they can’t keep up with payments than parents have with PLUS loans, says Amrein. And student loans can be forgiven or reduced through the teacher or public service loan forgiveness programs. Parents who take out PLUS loans can only have their loans discharged if the child dies, or if the borrower dies or becomes totally and permanently disabled.

Don’t want your child to be burdened with debt? You can treat the student loan in the same way as the PLUS—and you simply pay the bills for your kid.

If you need additional funds above the student loan limit, home equity financing is probably your next best move. Via a home equity loan or line of credit, you can borrow up to 85% of the equity in your home, with fees similar to those you paid when you financed your original mortgage. And in either case, up to $100,000 of interest you pay on home-equity debt is tax-deductible.

A home equity line of credit will have a lower initial cost of money than a home equity loan, but both have some drawbacks.

With a loan you are borrowing a single lump sum, usually at a fixed interest rate—currently averaging 6.22%, according to Bankrate. You’ll have to know upfront how much you’ll likely need to fund your child’s entire college education, since you probably won’t be able to take out a new home equity loan each year they’re a student. Also, once you have the loan, that amount becomes an asset and can reduce the amount of financial aid your child qualifies for by thousands of dollars, says Amrein.

A line of credit is similar to a credit card, allowing you to draw from a line in smaller sums as needed, up to a certain fixed amount. HELOCs typically only require you to pay interest for the first several years and have an average interest rate of 4.9%. But that rate is variable, meaning your monthly payments can change during the course of your repayment period. Borrowers should be prepared for their rates to rise since interest rates currently remain near historic lows.

Because you are borrowing smaller sums over time and using those to immediately pay bills with a HELOC, the money is not viewed as an asset and won’t affect financial aid awards. But because these loans are variable, they’re considered a little riskier since your interest rates could rise over time, though they do have set lifetime caps of—gulp!—18% in most states.

 

TIME

This Chart Shows How China Just Surpassed the US

But analysts warn that China's growing appetite for debt coincides with a growing appetite for risk

China’s corporate debt raced ahead of the US by more than $1 trillion in 2013, to $14.2 trillion, beating analysts’ forecasts by one year, according to a report released Monday by Standard & Poor’s. The new report highlighted not only the growing clout of China’s financial sector, but also its growing appetite for risk.

S&P estimates that one-quarter to one-third of the debt originated from China’s shadow banking sector, a system of informal lending that operates outside of government oversight. A series of defaults in that sector alone could expose one-tenth of the world’s corporate debt to a sudden contraction, the report warns. “Given the substantial share that shadow banking contributes in financing not just China’s corporate borrowers but also local and regional government financing vehicles, a sharp contraction would be detrimental for business generally,” the analysts wrote.

One graph in particular showed that the risks might be thriving in the shadows. S&P compared cash flows and indebtedness among China’s corporations to 8,500 of their global peers. These measures together offer a rough gauge of their ability to repay loans, and unfortunately here too, China surpasses the rest of the world.

getImage

 

MONEY Autos

The Big Mistake More Car Buyers Are Making

We're extending the terms of our car loans, and it's costing us thousands.

The average length of new auto loans reached a record-high of 66 months, or 5.5 years, credit bureau Experian found in a report released this week.

More than 40% of all new loans signed for the first part of this year lasted 61 to 72 months, while loans extending out 73 to 84 months made up 25% of all new leases signed. Meaning less than 35% of us take out financing for five years or less.

And that’s costing us, big time.

“Beyond lower monthly payments there are no pros to this,” says Ron Montoya, consumer advice editor for Edmunds.com. “In fact there are a ton of reasons why you shouldn’t go past a five-year loan.”

Among the reasons for limiting loans to no more than five years:

Higher Interest Rates: The longer you finance a car, the more interest you’ll pay on it. Not just because you’ll be accruing interest and paying it off over a longer period, but because you’ll also be charged a higher interest rate for the loan.

“The best rates are offered between 36 to 60 months,” says Kelley Blue Book’s Alec Gutierrez. “Five years is really the breaking point; after that, rates jump up.”

Last year, the average interest rate for a new auto loan with a term between 55 to 60 months was 2.4%. That rate jumped to 4.8% when the term was between 73 to 84 months.

That means if you were to finance a car for the current average amount, $27,612, for 55 months at 2.4%, you’d pay $1,574.30 in finance charges. But if you were to finance that same car for 84 months at 4.8%, you’d pay $4,953.12 in charges.

The 84-month loan would “save” you $142.98 per month in payments, but cost $3,378.82 more in interest and give you about two-and-a-half years more of car payments.

Negative Equity: Whenever you first purchase a car, you’re considered underwater on it, meaning you owe more than the car is worth. The longer your car loan, the longer it will take you to build equity in your car and get “above water.”

If you have little or no equity in your car, you can’t sell it at a profit. A buyer will only pay what a car is worth, not what you owe on it. You’ll still have to cover the remaining balance. It works the same way with insurance companies if you get in an accident and your car is totaled.

Lower Resale Value: The longer you own a car, the less it’s worth and the less desirable it becomes.

Edmunds found that at five years, a car has lost 55% of its value, on average; at seven years, it’s down 68%. Dealerships and private buyers will pay less for your car, and that could hurt you if you were planning on using that money as a big source of your down payment for another car.

What to do before signing your next auto loan

Make a large down payment. Montoya recommends putting down 20% of the total car price, or as much as you can. This will bring the total amount you need to finance down.

Get preapproved financing. Before going into a dealership, apply for a loan with two or three financial intuitions you do business with, advises Gutierrez. This way, you know if you’re getting a fair offer from the dealership, and can ask the dealership to beat the bank’s offer.

Negotiate financing on total car price, not just on monthly payment. Use the total car price to run different monthly payment and interest scenarios to see if you’re being upsold or pushed into a longer loan with an online calculator like this one from Bankrate.

Consider cheaper options. If the car you’re looking at only fits into your budget with monthly payments stretched out over six or seven years, you may be shopping outside your actual price range. “Reassess your priorities and decide if you absolutely need that trim level, or even that model,” says Gutierrez, “because if you can squeeze into a five-year loan, it’s just smarter.”

TIME Technologizer

Square Banks on Cash Advances for Small Businesses

Bloomberg San Francisco
Square CEO Jack Dorsey demonstrating a Square reader at Square headquarters in San Francisco, June 14, 2013. Jeff Chiu—AP

The commerce startup aims to simplify a business with a not-so-great image

Among the various ways that a small business can get access to funds, the cash advance—borrowing against money which a company hasn’t yet made, then paying it back as a percentage of future sales—doesn’t have the best of reputations. Typically, it’s a last-ditch measure taken by a company which can’t convince a bank that it’s a good prospect for a loan, and the fees involved can be steep and complicated.

Depending on how you look at it, that makes it an odd business for Square to enter—as it’s doing with a new service called Square Capital—or a logical one. Twitter co-founder Jack Dorsey’s startup, after all, sees its purpose in life as bringing elegant simplicity to transactions which are usually neither simple nor elegant, as it did with its tiny credit-card swiper. And the whole idea of Square Capital is to make cash advances a more straightforward, respectable funding option.

Among the unusual things about Square Capital is the application process—or lack thereof. A company can’t seek an advance. Instead, Square reaches out to prospective businesses which it’s picked as good candidates based on the their statistics as revealed through the sales they’ve processed using Square.

“We send an offer to the seller based on our holistic understanding of their business,” says Gokul Rajaram, Square’s head of product.

Square is also aiming to make the math involved in an advance transparent. As an example, Rajaram says that Square might offer a small business a $10,000 advance. The total payback might be $11,000–making the cost of the advance $1,000–and Square might hold back 5 percent of the business’s sales through Square until it’s recouped the $11,000. A merchant who accepted this deal would receive the money as soon as the next day, and then would monitor it through the same dashboard used for other Square tasks.

All of those figures are hypothetical: Square says that the advances, fees and payback percentages will all vary from offer to offer. That makes it tough to make any sweeping generalizations about how costly an option Square Capital is compared to other sources of small-business funding, from banks to startups such as Dealstruck, Kabbage and OnDeck.

Unlike a loan with an interest rate and fixed payments, one of the advantages of a cash advance is that the pace of the repayment auto-adjusts itself to reflect cashflow, since it’s based on a percentage of sales. If a business boomed after receiving the advance, it might end up paying back the advance more quickly than it expected; if it went through a seasonal lull, or sales turned just plain lousy, the payments would be smaller and the process would take longer. Rajaram says that the goal is to offer amounts which typically will take around ten months to repay.

Square says that it’s already advanced tens of millions to small companies in Square Capital’s pilot phase, such as New York-based coffee chain Cafe Grumpy; San Francisco comic-book collectible shop ZeroFriends; and Follicle Hair Salon, another San Francisco business which used two advances to buy twelve new chairs, each of which can bring in an additional $5,000-$8,000 in sales per month. “It’s part of our broader mission of helping sellers grow,” Rajaram told me.

Among the growing companies which Square Capital might help is Square itself, which has lately been looking to sources of revenue beyond the 2.75 percent processing fee it collects on transactions handled with its card reader. Earlier this month, for instance, it announced Square Feedback, a service for collecting and addressing comments from customers.

The company acknowledges that it’s currently losing money–it’s still in a mode of investment and expansion rather than focusing on turning an immediate profit–and its own financial future is the subject of constant speculation, including rumors of everything from it getting ready to go public to shopping itself to potential acquirers. The more well-rounded its offerings, the brighter its future could end up being.

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