Money Management

The cost of borrowing $5,000 varies, depending on the borrower’s credit history. Here’s how much it might cost you to borrow the money. 

If you’re reading this, it’s probably because you’re curious how much the monthly payment on a $5,000 personal loan will be. Unfortunately, the answer involves one of the most frustrating phrases in the English language: “It depends.”

Your monthly payment depends on how much you put down on the loan and your credit score. Stick with us here, though. We’ll help you approximate your interest rate, which, in turn, allows you to approximate your monthly payment.

Skin in the game

Let’s say you’re selling a classic car for $20,000 and have agreed to allow the buyer to make monthly payments. You haven’t quite settled on how much interest you will charge. There are two parties seriously interested in buying the car. One does not plan on putting any money down. The other is making a $5,000 down payment and only intends to borrow $15,000.

Both parties understand that the car acts as collateral. In other words, if they miss payments, you can repossess the vehicle, sell it to someone else, and recoup your money. In light of that, you recognize that the buyer putting $5,000 down will likely work harder to make payments because they have more to lose. Because you feel you’re taking less risk with the buyer putting money down, you’re willing to loan them the remainder at a lower interest rate.

When determining your interest rate, some lenders consider how much you’re putting down on the loan. The more you put down, the lower the rate.

That three-digit number

Your credit score may only be a three-digit number, but it’s what lenders use to decide whether you qualify for a loan and what your interest rate will be. To a lender’s eye, the higher your credit score, the lower the risk that you’ll stop making loan payments. The lower your score, the higher the interest rate.

FICO and VantageScore are the two big consumer credit-scoring systems in the U.S., and FICO® Scores are most commonly used by lenders. According to FICO, here’s how much you can expect to pay for a 48-month, $5,000 loan with a fixed rate:

Ever-changing interest rates

The bottom line is how much a loan ends up costing you. As the table shows, the lower the credit score, the more interest you’ll pay. The monthly payment for someone with a credit score of 500 is only $24 more than that for a borrower with a near-perfect score — which doesn’t seem so bad. However, the borrower with the lower score ends up paying $1,156 more over the life of the loan. That’s $1,156 that could have gone into an emergency savings account or retirement fund. In other words, a higher score would have left them more money to invest in their future.

Trying to pin down a precise interest rate before applying for a loan is like trying to catch a toddler who’s just gulped down a handful of Pixy Stix or catch a greased pig at the county fair. As of today, rates range from a low of 5.20% to a high of 35.99%. In terms of monthly payment, that’s a difference of $116 versus $198. However, the total interest paid on 5.20% is $549. At 35.99%, the total interest is a whopping $4,497, for a difference of $3,948. Imagine having an extra $3,948 to fund an IRA or pay toward your child’s education.

If your credit score is lower than you would like and you don’t need the money right away, there are steps you can take to boost your score quickly. If you need the money now, make it a point to pay the loan off as soon as possible. The faster you pay the loan off in full, the less you’ll pay in interest.

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Having a high credit limit is better for my credit score. Find out why I haven’t been shy about asking for increases from my credit card issuers. 

I have a credit card that has $95,000 of available credit on it. That huge credit line means I could spend a whole lot of money on luxury (or practical) purchases.

Now, since I always insist on paying off my credit card in full out of my checking account each month in order to avoid interest charges, it’s very unlikely that I’ll ever charge $95,000 a month or anything close to it.

So why do I have so much available credit, and how did I make it happen? Find out here.

This is why I have so much credit available to me

I chose to take steps to get a $95,000 credit line because by doing so, I can ensure that my credit utilization ratio is very low.

See, credit utilization ratio is the second-most important factor when your credit score is calculated. While payment history accounts for 35% in the popular FICO credit scoring formula, credit utilization ratio comes in a very close second at 30%. So it’s a very important determining factor that shapes the score that lenders, landlords, insurers, and other companies use to decide if you’re a reliable person to do business with.

Credit utilization ratio refers to the percent of credit used versus credit available. To figure out what yours is:

Add up the amount owed on each of your credit cards.Divide this amount by the total lines of credit available to you.

Let’s say, for example, you have the following three credit cards:

A card with a $500 balance and a $1,000 limitA card with a $100 balance and a $500 limitA card with a $900 balance and a $1,500 limit

You would be carrying a total balance of $1,500 and would have $3,000 in credit available to you, so you’d have a 50% utilization rate. This is really high, and you don’t want to be in this situation. Your utilization ratio should be below 30% to avoid hurting your credit and, ideally, should be as low as possible to get the best score.

I worked to get a $95,000 credit limit because having such a high limit means even if I charge a lot, my utilization ratio would still be very low. To get above 30%, I would need a credit card balance of $28,500 or higher. That’s not very likely to happen.

Here’s how I ended up with a $95,000 credit line

That explains why I have a $95,000 credit line. But not how.

Fortunately, the process of getting such a large credit line was simple. I opened the credit card, and I regularly signed into my online account. Periodically, an option would show up in my online account to request a credit line increase. Every single time that showed up, I submitted the request and asked for a $100,000 credit line.

Now, the card issuer didn’t increase my credit line that much all at once. But my limit was raised each time I requested an increase and with no credit check required. By doing this repeatedly for years, I ended up with a ton of available credit.

If you want to make sure your own utilization ratio stays low — and you can trust yourself not to charge a fortune if you have a high credit limit — sign into your own account regularly and make credit line increase requests. You could end up with a $95,000 credit line over time, too, if you work at it for enough years — and you’d get the credit score benefits that come along with it.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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Life insurance is important to have. Read on for a surprising reason you may not be able to get it. 

If you have people in your life who depend on you financially, then it’s important to buy a life insurance policy. That way, you can rest assured that your loved ones will be eligible for some sort of lump sum in the event of your untimely passing.

You may be aware that life insurance companies take different factors into account when evaluating life insurance candidates. One factor that’s likely to come into play is your age. Another is the state of your health.

If you have a host of health conditions, you may be denied life insurance due to an insurer not wanting to take the risk. Or, at the very least, you could end up stuck with very expensive premiums for coverage.

But there’s a less obvious factor that could result in you being denied life insurance. And it’s something you may want to work on.

When your driving record is far from stellar

Life insurers don’t just look at the results of your medical exam when deciding whether to write you a policy or not. Rather, they look at the big picture, which includes your occupation and hobbies.

If you’re employed as a sky-diving instructor, you may not be denied coverage. But you might face much higher premium costs than someone similar to you in age and health, but who works as an accountant or editor.

Meanwhile, when you apply for life insurance, you give the company you’re applying with the right to access your driving record, says Archstone Insurance Services, LLC. An unfavorable driving history could make it difficult to secure life insurance.

Let’s say you have a driving history that’s loaded with speeding tickets. That’s considered risky behavior. So a life insurance company could decide not to write you a policy because of that, or otherwise stick you with a very high premium rate. The same might hold true if you have one or more DUIs on your record.

It pays to shape up on the road

Driving recklessly could put your life, as well as the lives of other people out on the road with you, at risk. So for that reason alone, it’s worth trying to kick some bad habits, like speeding or weaving in and out of lanes due to being impatient.

Plus, continuing to drive dangerously could hurt you from a financial standpoint. For one thing, it could result in very expensive auto insurance premiums. And it could easily drive up the cost of life insurance. In a more extreme situation, you could end up being denied life and auto insurance by having an unfavorable driving history.

Some changes to your schedule and routine could make it so you’re less likely to drive recklessly. For example, leaving a few minutes earlier for work or taking a less busy route could result in better driving — and fewer tickets. The longer you’re able to go without a moving violation on your record, the better it bodes for both auto and life insurance.

Also, do whatever you have to do to avoid a DUI. The fact that services like Uber exist these days makes that so much easier. If you can’t afford to pay for a ride home after a night out, when you arrange social plans, stick to locations that are within walking distance of your home. If that’s not feasible, invite people to hang out at your home.

You may be surprised to learn that a poor driving record could hurt your chances of getting life insurance. But worse yet, poor driving habits could hurt you. For that reason alone, they’re worth breaking.

Our picks for best life insurance companies

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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If you can’t pay your debt, you should see what options you have. Learn how to cope with debt payments you’re struggling to afford yours. 

Being in debt can be really stressful — especially if you feel like you’re struggling to make the monthly bills out of your bank account. If you’ve found yourself in a situation where you’re unable to pay the minimums you owe to your credit card company or other creditors, then this can be an especially bad situation to be in.

If that’s something that’s happening to you, there are three steps you should try to take right away to deal with this serious financial issue.

1. Explore options to increase your income

If you are struggling to make payments on your debt, see if you can do something — at least temporarily — that will give you the funds you need to make fulfilling your obligations to creditors easier.

Missing payments can be detrimental to your credit score and leave you with late fees and other penalties that make debt payoff even more expensive in the long run. So if you can take on a side hustle or work some overtime temporarily to ensure your payments are on time, you’ll be a lot better off.

2. Look into options to lower your monthly payments

You can also consider ways to reduce the payments that you owe. This could involve refinancing your loans, for example. If you have a personal loan with a 15% interest rate and could refinance it using a personal loan with a 10% rate, your monthly payments and total borrowing costs could decline.

Both lowering your interest rate and making your loan repayment term longer can reduce your payments. Just be aware that if you refinance into a loan with a longer time and agree to pay interest for more years, this can make total borrowing costs higher even if it does lower your monthly payments. This may be worth it, though, to give you some breathing room if you’re struggling right now to make your payments.

3. Contact your creditors

If you can’t increase your income or reduce your monthly payments, the next best option is to contact your creditors.

Your creditors do not benefit if you stop paying. In fact, they will usually end up having to charge off the debt and sell it for pennies on the dollar to collectors (or, they’ll get stuck repossessing or foreclosing on a car or home if the debt is secured).

Creditors know it’s in their best interest to try to help you pay as much as possible, so they are often willing to work with you if you get into financial trouble. They may allow you to pause payments for a period of time (although interest will keep accruing) or to go on a payment plan that allows you to modify how much you pay.

You won’t know your options until you reach out, and you should do that as soon as it becomes clear that making your payments as promised isn’t going to work. Taking swift action can help you minimize added late fees and interest charges if you’re able to work out an arrangement to pay off your debt in a different way.

By taking these steps, you can find a solution to the debt you’re struggling with so you can begin to rebuild your financial life.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

 Read More