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Choosing the Right Debt Management Service
Regardless of age many consumers are guilty of committing financial suicide. For some people juggling bills and robbing Peter to pay Paul is a vicious and endless cycle. The average American lives ten percent beyond their means. For the individual...
Consolidate Your Debt With A Home Equity Loan And Improve Your Credit Score
A home equity loan is a loan based on the difference between what your current home value is and what you currently owe on your house. There are also mortgage companies that will loan a little over the equity you have in your home. They can usually...
Debt Elimination 2
The First Step To Debt Elimination Regardless of your personal and financial circumstances, your education and your background, the chances are the first step you need to take in debt elimination has to take place in your mind. The Western mindset,...
Do you worry about credit card debt and your card payments?
Do you worry about credit card debt and your card payments? It's one of the most expensive loans we can take out, so why do so many people have credit card balances that they don't pay off each month? Perhaps it's because the application form comes...
How To Determine Apples From Oranges: Debt Consolidation Programs And What Works Best For You
Life is a b*tch but we all know that so might as well stop whining. Or so they say. So you have financial problems. Well, you’re not alone there. Everyone’s got one. Except for Paris Hilton and Nicole Ritchie, may be. But since we can’t trade...
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Helping Your Clients To Manage Their Debt
In the very recent past a young couple close to us broke up their marriage due to the pressures of debt. They are now fighting with lawyers over sharing that debt. Their legal bills are now over $40,000, which is more than the debt they are fighting over. Another young person we know went to a loan shark to pay off a debt because their lawyer was hounding them to pay their bill quickly. Another case in our community involved a young man who sold his home at a very handsome profit and put the money in the bank while he planned the building of his dream home. While waiting he started to go to the local casino in his spare time. Eventually after losing all of the money he committed suicide. Many advisors have more horrific examples. While these three examples are not unheard of, they registered with us because they all occurred recently. There is no doubt in my mind that, had these people consulted with a financial advisor these things would not have happened.
An important part of what we do for clients is debt management. Some advisors do a great deal of work in this field, but many others do almost none. I feel that this is a profitable area of practice and one, which endears us to the client and keeps them with us. They may well find another advisor that can handle their investment portfolio, but not too often will they find one that will advise on their investment portfolio, debt management, tax matters and estate planning. By offering the complete package of services the advisor can enhance his income and protect his client base.
What's In It For Me?
In addition to holding the client to you there is additional revenue that flows out of debt management services. The hourly fee based service is obvious, but often there are additional fees such as a finder’s fee, or a referral fee upon successful implementation of a financing package, or capital infusion from other sources. These arrangements can be attractive to the client whom may not want to add to their debt load by incurring a fee. However, they may be very willing to pay for your services if you’re successful in finding them the financing they are looking for. For a corporation there are far more situations where you can help in securing financing from other sources such as the issuing of new securities, or locating a silent partner, or other investor, or even a purchaser of the business. In some jurisdictions you need to be sure your activities do not require licensing as a mortgage broker. In most cases this licensing does not apply.
In many situations there need not be any fee at all if you handle products. In return, you merely ask the client for a commitment that if they implement your planned financing that they arrange the creditor life insurance with you and/or any product purchases that result. Two simple examples are the mortgage cancellation insurance, or the RRSP purchased from an RRSP loan. If a leverage investment loan or an RRSP Meltdown Plan is being negotiated, the placing of the investment portfolio will reimburse your time and efforts for the debt structuring.
Over the years we have enjoyed a lot of business, which has resulted from our assisting clients with debt matters whether they be the lender, or the borrower. Here are some of the areas we provide service:
Credit Card Debt
To a Financial Planner non-deductible debt is a mortal sin. However we need to work with clients that find themselves with non-deductible debt especially credit cards which carry a usurious rate of interest with a rapid compounding frequency, especially for cash advances.
I remember a client a number of years back that wanted to save for a down payment so we set them up on a pre-authorized cheque plan (PAC) where we would draw out $1,000.00 per month from their chequing account. After two years we figured they could have the down payment needed. After the first year they came back to see me for their annual review. They were very proud that they had accumulated over $12,000.00 in the account with interest. With a little further digging during our annual review we uncovered that they were almost $10,000.00 in debt on their charge cards, which was new from our last meeting. We then had to draw out most of the savings to pay off the high interest debt on the charge cards. After a long lecture they agreed to try again. A year later the same thing happened again. I then had to threaten to dump them as clients if they did not get more serious. (As they were a nice couple I wanted to give them another chance). They even increased the monthly deposits to try and catch up. A year and a half later they moved into their first home. They are still clients and we often laugh about their bad start on a savings program. If you are doing debt management work for a client we now recommend more frequent reviews. Not to generate more fee income, which it will, but more importantly it will ensure that the clients stay on track if they know they have to come in and face you in the next month or so.
If faced with a credit card debt it is often easy to arrange for better financing terms somewhere else, or to consolidate the loan and debt requirements. I have often found that in addition to the existing debt there is pent up demand for additional debt. For example, the client will often be in the need for a new vehicle but has been holding off because of the carrying costs of the new vehicle. In these situations, by reviewing their current situation as well as their future requirements a better picture can be had. The debt and future borrowing requirements are often the source of a lot of stress and fighting in the marriage. In many cases of marriage breakdown the main problem is found to be money matters.
We find that it is often possible to arrange for a loan from a bank, or re-finance their first mortgage, or arrange a second mortgage at much better terms. Failing that there are some low interest rate options available to those transferring credit card balances. Although these are often for only six months at the reduced rate they allow for a breather from the high interest rates while a better long-term alternative is arranged.
We have arranged interesting loans with banks for clients with debt and RRSP contribution room. By using a new loan to wipe out the high interest rate debt plus an RRSP loan we have often been able to eventually reduce the clients cash flow requirements and provide a tax refund to get rid of the remaining debt.
Refinance Yes or No?
Most refinancing figures
I have looked at are of benefit to the bank only. It amazes me how they can charge the difference in interest rate up front and add it to the principal of the loan. What about the time value of the money? The customer most often pays the interest difference up front, which has the effect of making the interest rate even higher. In addition there are often re-application, legal or appraisal fees to add to the cost.
Having said that, there are sometimes cases where the re-financing at the maturity date cannot, or should not be delayed. In fact we have had to have the client pay a refinancing penalty in order to reduce the clients cash flow requirements, or to achieve other debt elimination strategies. In these cases, a lot of shopping around is time well spent. We use a loan proposal kit that we have put together to present all of the information to the lender with the information they need as well as our plan for the new funds and the rates we recommend for the client. Our loan proposal package is submitted to prospective lenders with proof of income, a financial profile with a summary statement of their holdings, cash flow details, etc. Not surprisingly the lenders fall all over themselves vying for this business.
We have found that a second mortgage at first mortgage rates is often the preferred solution for the new financing. Although the lenders will try to tell us it cannot be done, they quickly find they can do it if they are going to loose the business. If the loan required with the existing mortgage is less than 75% of the appraised value of the property it can be financed by them at first mortgage rates even if it is a secondary charge on the property. If the new mortgage is deductible for tax purposes it is better to have it separated from the first mortgage anyways. If an extra payment is made on the principal it is better applied to the non-deductible loan. By doing this there is no doubt about the deductibility of the full interest charges on the other mortgage.
Finding the Right Provider
Done properly, finding the source of the financing at the right terms is the easiest part. However, we look first to non-conventional sources. Often one of our other clients is looking for an investment that pays more than the current term deposit rates. If the loan is well secured the advisor can benefit both parties by recommending the clients to each other and handling the transaction between them. My favourite is when we can bring in either or both parents to help their children out. This often leads to estate planning opportunities for the parents whom often become clients if they are not already. By the use of the formulas for Gross Debt Service Ratio and Total Debt Service Ratio we can determine the amount of financing the client qualifies for and then devote our efforts to finding the best terms. You would think that this would be easy but it requires a little pressure on the lender. They have the posted rate for the suckers and the lower rate for those that threaten to leave, or that talk to the manager. What a way to do business. No wonder so many people dislike the banks. A knowledgeable advisor who knows what is possible and where, can get a much better deal for the client.
Family Loans
The problem with loans to the kids is that the parents hardly ever get paid back and seldom receive any interest on the loan. However the greatest risk is that the parents loose their capital if the loan is not secured. We have found that by offering a second mortgage to their offspring keeps everyone happy and protects the parents capital. If the kid’s marriage breaks up, the parents are secured creditors and will get paid. As far as the interest goes they can charge it, waive it, pay it back, or whatever they wish. With term deposit rates very low, a five-year GIC at 4.5% only nets a taxpayer in the 43.41% bracket, a yield of 2.547% after tax. And less in the highest bracket. This can make it more attractive for the parents to look at helping their kids. But even as a gift it makes sense to instead to use a mortgage in the event the marriage breaks up. The parents can amend their will to forgive any loans but deduct the amount from their share of the inheritance. We have found that having the parents give their children a second mortgage is a perfect solution for many situations not only for the kids, but also for the parents. Our favourite plan is to take a partnership interest in the purchase with the kids and secure it with a second mortgage. The mortgage is then for the amount the parents or grandparents investment bears to the original purchase price. So a loan of 10% of the purchase price receives a payout at the time of sale of 10% of the selling cost. So instead of earning interest income they have a potential capital gain from their partnership interest in the kid’s home.
In 1989 I wrote an article for our client newsletter explaining the details of this plan. It has worked extremely well for our clients and us. I recommend it to you. A reprint of that article follows this one.
Today it is getting more difficult to make the correct debt decisions because of confusing advertising and a society where many have a buy now - pay later mentality. When you look at a car advertisement it seldom even shows the total price, only the monthly payments, or monthly lease costs. Even when it does it is almost impossible for the average person to understand all the fine print, or figure out the true cost of financing or leasing. They all need your help.
It is amazing to me how often clients on their own make the wrong financial decisions. This is most obvious when reviewing a client’s investment portfolio when they have acted as their own advisor. Equally they make the same wrong decisions about their debt. Although they may often be slow to admit that they have made a mess of things, it is important to offer your help. By suggesting that they allow you to offer a second opinion it is often easy to get them on board for your recommendations.
Copyright – www.money-software.com
About the Author
Peter F. Baigent CFP, CLU, CHFC, RFP. is a Past President of the Canadian Association of Financial Planners for British Columbia, a former Director of the Canadian Association of Financial Planners. He has spoken across Canada on financial planning matters and has taught courses for the Chartered Financial Consultants & Certified Financial Planners degrees. He is the founder of Money Minders Software which produces financial planning software.
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