First Time Loans Can be a Solution or a Cascading Problem
A growing group of consumers looking for first time loans are new college graduates. They were issued credit cards when they entered college four or five years ago.
At that time, any college student could qualify for a new credit card with a low spending limit ($300-$1000) as lenders were competing madly for new customers.
At that time, the economy appeared to be booming and credit lending institutions wanted young adults to obtain their bank’s credit card and become lifetime customers of that branded lender.
In a healthy economy, this was a good business practice. To this end, lenders did not require student to have an income to qualify for a new credit account and many of the rewards and benefits were aimed at attracting a youthful consumer.
New credit lending regulations put into effect last year prohibited banks from issuing credit cards to those who have no means for repayment. Students must now be able to prove income or have a parent or guardian co-sign their credit application.
In other words, lenders can no longer issue credit cards to people who have no means of making payments for debt they incur.
For some students, 1st time loans were not loans in the traditional sense but were cash advances taken against their credit card. Young adults often live in the moment and obtaining $50 to use for a weekend trip or as spending money at a concert was as easy as inserting a credit card into an ATM.
As debt mounted, the student might notice he paid dearly for the $50 that was his 1st time credit card loan. A transaction fee plus a much higher APR applied to cash advances may have cost him more than double the cash he received by the time that $50 was repaid.
First time credit card loans are most often thought of as consolidation loans. This might be a personal loan for the purpose of paying off one or more credit cards or a loan from a family member to pay credit debt and avoid high interest.
For years, the common first time loans were home equity lines of credit (HELOC). This was a logical solution in the mind of a debt burdened consumer who saw the market value of his home or condo appreciating by double digits each year.
If you paid $80,000 for your home in 1990, that home may have doubled in value by the year 2000. The amount of value between the appraised value of the home and the mortgage you owe on the property is called equity. Consumers who had accumulated credit card debt saw the equity in their homes as cash they could not spend.
The HELOC provided an easy solution. By taking a second mortgage or home equity line of credit the homeowner could take out that equity in the form of cash. He could pay off his credit card debt in full. He could buy a new car or new appliances or replace his old furniture with the latest styles.
Top financial experts promise consumers and Congress that home prices could never decline – home values would continue to rise and rise and rise. The few experts who questioned this wisdom were shouted down as naysayers and doom-and-gloomers.
Financial Crises for Many Consumers
For consumers, the ability to borrow money against their home became an escalating problem. When credit card bills became excessive, first time loans added debt to their mortgage payments but relieved the stress of credit card debt.
Most lenders require you to close your credit card accounts when you obtain a payoff loan. The credit lenders, however, allow you to reactivate those accounts with a simple phone call if your payment record was acceptable in the past.
Serious problems began to appear as homeowners took one HELOC after another against the equity in their homes. They would pay off credit cards and then build up that debt through purchases added to those cards over the next year.
When the debt rose too high, they would refinance their home equity line of credit to a high amount and pay off the old credit line and the new credit debt.
It is estimated that 30% of homeowners in the US has a mortgage that is “under water”. That means the amount owed on their home is more than the current value of the property.
Many who have this problem created the problem through accessing their home’s equity year after year to pay off credit card debt.
Credit card loans can have several meanings. To the young person with his first plastic card, it may mean a cash advance taken from his new account. To the homeowner it may be dealing with a HELOC against his home’s value that was obtained to pay off unsecured credit card debt.
The important part for consumers to remember is that first time loans are a symbol of potential problems with your money management system. When you first obtain a loan to pay off credit debt, make a plan to avoid facing the same problem again in the future.