Finance On Wheels

Debt To Income Ratio

March 28, 2009 – 10:33 am

Probably most of the homebuyers ask many questions, but the first which catch our find 1st is that how much home can I afford? By calculating a debt to income ratio will give us a better idea on how much of our profits will be obtainable for monthly mortgage payments such as insurance, interest, including principal, taxes, and collectively concerned to as “PITI.” or Principal, Interest, Taxes & Insurance.

Many experts accord that PITI, the entire amount we pay toward our mortgage, which shouldn’t go beyond twenty eight percent of our gross earnings. The total amount that er pay in debt associated expenditures car loan payments, including your mortgage, credit card bills, etc.

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Occurrence of a credit crunch

March 20, 2009 – 7:31 am

Generally credit crunch happens when there is a shortage of funds obtainable in the credit market, making it very complicated for borrowers to get financing. This occurs when the lenders have limited resources accessible to lend or are indisposing to lend extra funds, or have increased the price of borrowing to a rate that is not affordable to most of the borrowers. Credit crunches also may happen when authoritarian bodies raise capital requirements for the financial organizations. Banks and other lenders are necessitates to sustain a net amount of capital liquidity based on their risk measured level of assets. If this condition increases, then banks require increasing capital. To meet the terms, literally banks will cut lending, decreasing the accessibility of loans for individuals and as well as for companies.

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How Does Recession Influence Secured Loans?

March 16, 2009 – 3:26 am

The current economic recession has affected everybody, especially in the area of finances. With money more difficult to come by, many are resorting to borrowing money in order to survive. For those in need of cash, there are several financial institutions that offer different types of loans. One of these is the secured loan.

Secured loans are funds that are borrowed with collateral, which is something of value that is used as security against the borrowed amount. A common example of collateral is a house. If the borrower fails to repay the loan, the lender has the right to repossess the collateral. Although there is a certain amount of risk to the borrower if he loses his asset in case of payment default, secured loans do have an advantage of having lower interest rates and longer duration of repayment period. Additionally, the amount that can be borrowed can go as high as 125 percent of the value of the property being put up as security.

In a recession, everyone is trying to cut down on costs as incomes decrease and the risk of being unemployed is ever present. There is possibility that lenders will increase rates to cover their losses since many will default on payments due to financial hardship brought about by the recession. For the borrower, paying off a loan during a recession could be quite a challenge. However, the government, in its effort to stimulate spending in this current economic crisis, has cut down interest rates. This has made secured loans cheaper since lenders charge rates in accordance to the one set by the Federal Reserve.

Bleak as the economic scenario may be, there are those that could gain something from the recession. First-time home buyers can avail of a secured loan and take advantage of the very low prices of foreclosed real estate to make their purchases now. This is an opportunity that comes rarely and for people who have been saving up for years to buy a house, this is the best time to do it. Even those without savings to put up the required deposit for a house can avail of the cheap loans that are presently offered by lenders.

For those who do decide to avail of secured loans these days, it is essential that they take time to plan on how to manage and clear debt. Even in these trying times when lenders are trying to entice borrowers, those who fail to pay will not be shown leniency and properties will be foreclosed or repossessed if needed. It is essential to do a thorough evaluation of one’s financial condition before committing to anything.
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What are the Causes of the Economic Recession?

March 6, 2009 – 5:17 am

The current global economic crisis has caused many countries to formally declare that they are in recession. This means that the country’s gross domestic product has fallen to a negative value for two consecutive quarters of year. The slowing down of an economy is felt when businesses cease to expand, employment rate decreases and unemployment rate rises, and prices of housing decline.

A recession is not an unnatural occurrence in the business cycle, as the world has gone through several recessions in the course of its history. Each has its own underlying cause but one common factor is that it is always preceded by a period of a boom in the stock market, called irrational exuberance. To cite an example, an economic boom occurred in 1999 when many people bought computers and software to ensure that their systems were Y2K compliant. This led to the rise in stock prices of information technology companies and investors became only too willing to put their money into any kind of hi-tech corporation, without even ascertaining first if there was a potential for profit or not. This irrational exuberance was called the dot.com bubble and it burst when the year 2000 came and it became obvious that computer sales would decrease. Investors sold off their stocks as quickly as possible and prices plummeted, along with the value of the technology companies and many of them became bankrupt.

One of the main cause of the current recession started way before its effects were felt. In 2004, the United States economy experienced a boom and the Federal Reserve kept interest rates low. Due to the low rates, investors bought homes to resell at a profit. This created a housing bubble and debt and many non-investors also took advantage of low interest rates to buy homes they could scarcely afford. In 2006, interest rates started to rise and the prices of housing declined. This caught many home purchasers by surprise as they realized that the value of the houses that they bought was less than the mortgage they had to pay. These houses were then foreclosed by their owners. The foreclosures, in turn, caused many banks and hedge funds to panic, since they had invested in mortgage-related securities and were losing money. As a result, banks stopped lending to each other because the houses that used to be accepted as collateral were now considered as toxic loans. Several financial institutions and banks became bankrupt; the most prominent of which are AIG, Bear Stearns, Freddie Mac and Fannie Mae. The government had to intervene and conduct a bailout in order to stop, albeit momentarily, the devastating effects of the crisis.
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