Tuesday, September 25, 2007

The difference between a finance company and a bank.

What is the difference between a finance company and a bank?

There’s actually not a lot of difference between a bank and a finance company as they both accept funds from the public to be used for any manner of lending. Lending can include loans for housing, car finance, business ventures, personal loans and more.
The main difference would be the risk level and the fact that banks are more regulated than a finance company. A finance company will lend to those unable to obtain funds from a bank. In saying that, there is a place for finance companies as there are many projects that would never get off the ground if non-bank lending was unavailable.

Either financial institution could fail (an inability to meet its credit obligations) if there was a run on its money or a case of fraud or of mismanagement. In New Zealand we are seeing the failure of many finance companies but we have seen bank crisis and bank failures in the past. There has been the Great Depression, the Japanese banking crisis in the 1990’s or the Savings and Loan Crisis in the USA in the 70’s and 80’s. Of course there’s also been fraud such as in the case of Barings Bank, one of the oldest merchant banks in the UK.

An interesting paper on Bank Failures in Mature Economies was prepared in April 2004 for the Basel Committee on Banking Supervision.

Monday, September 17, 2007

Insurance: Are you comparing apples with apples?

I have just finished reading the real life case of a business partnership who had received good advice from their adviser. They had appropriate insurances in place two of which were term life policies to fund an equity transfer, commonly called “buy/sell”. But why would this make news?

The story begins when the partners (let’s call them Joe and John) went to their bank to meet the new business manager who was looking after their loan. He saw an opportunity to refer Joe and John for some up-selling and referred them to the bank adviser who saw a large insurance premium on the business profit and loss statement. The adviser prepared a quote showing a substantial reduction in the premium but failed to complete a fact find and look into details of the existing policy.

One of the partners, John, had a health condition which was allowed for in the existing policy but not the new quote. Joe and John asked their adviser if he could do better. He asked the two whether they were comparing ‘apples with apples’. But by now they were both viewing this as a cost issue.

He realized that he would not be able to compete on price and still allow for the loading on the partner with a health problem. They would not hear of staying with the same policy. The adviser quoted for a new cover with a rebate of commission.

An application was made. In the meanwhile the policy of Joe, the healthy client, was due to be renewed. Against the advice of the adviser who recommended putting the policy on a monthly premium he decided to cancel the cover, after all he couldn’t see any benefit in paying for insurance that he was about to cancel.

I’m sure you can see what’s coming – Joe, the healthy client had developed a condition unknown to him and his cover was declined.

The bad news was not only that he had a condition he was unaware of and that was likely to get worse but the business was now in a riskier situation than before. Unable to reverse the decision of cancelling his existing cover he now has no insurance and is unable to get any cover.

Not only that his family are now in a vulnerable situation. After all it is those we leave behind that we get insurance for.

Monday, September 10, 2007

3 Golden Rules to Avoid the Debt Trap

By Lyn Bell

To avoid debt don’t get a loan – simple isn’t it? But, is it really that simple?

Sometimes we can’t avoid having to borrow otherwise how are we to get our new home? Not many of us would have the cash to buy it outright. But what you need to understand is that there is good debt and there is bad debt.

So what is good debt? Good debt is for things that appreciate in value such as property, or a successful business. It has the potential to bring in an income or to increase your earning capacity (such as a loan for education).

Bad debt on the other hand would be a credit card that is never paid in full each month. Remember that expensive new restaurant you tried for that special night out? The night out has long gone, the food consumed and the wine drunk. If the credit card has not been paid in full that dinner has probably doubled in price and the interest is now what’s causing the heartburn and headache.

• The golden rule then is to only borrow for things that appreciate in value. Know the difference between good debt and bad debt.

What about a car loan? Is this good or bad? Well, generally you should save to buy a car but if transport is essential (and not just a desire) sometimes you may need to borrow. But make sure it’s the smallest amount possible as a motor vehicle depreciates as soon as it’s driven off the lot. And it’s so easy to end up owing more than the car is worth. Better still get a cheap car that will get you from A-B and SAVE for an upgrade.

• Golden rule two – always pay your credit card in full each month. Only place thing on your credit card that you know you can pay for when the bill comes in.

Do you really need the latest technical gadget? These days you will find that electronics almost always depreciate in value. So why would you go out and use a credit card to buy an expensive electronic gadget when it will lose its value after it’s purchased? My laptop cost nearly $6000 a few years ago and now looks outdated, is slow and doesn’t do half the things I could now get for $1500. Luckily I didn’t borrow for the purchase – I might still be paying it off and feeling quite sick!

Shop at the sales – most people love to get a bargain. But don’t get carried away by buying something that’s too small (you’re going to lose weight, yeah right!) and ill fitting or something that you wouldn’t even consider buying normally at full price. That bargain may end up forever with the price tag hanging off, and that’s not a bargain.

In your budget you should have catered for clothing so stick to the limit you set yourself and don’t load up the credit card.

• Golden rule three – set up a budget and allow for savings, emergencies, tithing, bills and spending (that means entertainment too). Know where your money is going and be in charge.

It’s easy to get into a cycle of debt. Credit cards never seem to reduce when you pay only the minimum – the payment often covers the interest with barely much more. And interest on credit cards is one of the highest you can get.

Used wisely credit cards will save you money but used as an endless source of spending and cash you will find yourself on the debt merry-go-round. Credit card companies and banks will continue to thrive while many consumers get further into debt.

Be a wise credit card user, and always pay the account in full on, or before, due date. And never spend more than you earn and use the three golden rules.

Friday, September 7, 2007

Cancer...Did you know....?

Last Friday in New Zealand was Daffodil Day the symbol for the Cancer Society's official collection day. Did you know that:
  • About 7,500 die from cancer each year, with the number expected to increase to about 9000 by 2012 (Ministry of Health 2002).
  • In 2000, cancer accounted for approximately 29% of deaths in New Zealand (NZHIS 2004).
  • Cancer is the leading cause of death for Maori women (78% higher than for non-Maori) and the second highest cause of death for Maori men (Minister of Health 2003).
  • 1 in 3 New Zealanders are affected by cancer.
Makes you think, doesn't it?

Have a health check up and make sure your insurance requirements are up to date and appropriate for your circumstances.

Wednesday, September 5, 2007

What is NINJA ?

In financial terms NINJA has nothing to do with the Japanese origin of the name. This is what a type of housing loan has become known as in the USA.

It means No Income, No Job, no Assets.

Unfortunately there were unscrupulous lenders who made the loan application criteria fit and as a result when house prices dropped there were problems - i.e. the sub prime housing market. Sub prime loans are given to those borrowers who do not qualify through mainstream lenders.

In New Zealand we have 'lo doc' (documentation) or 'no doc' mortgages. I would hope that intermediary brokers here would not follow the path of those in the US.

Tuesday, September 4, 2007

Strategies for investing

Some strategies for investing:

  1. Understand what your tolerance is for risk or your investment style
  2. Invest for medium and long term, not for the next few months. Take advantage of the magic of compound interest.
  3. Allow for market cycles - the ups and down of the market. We are all human and are affected by optimism and pessimism that is what affects cycles. REMEMBER. Three strategies for market cycles:
    1. Invest in gloom, sell in boom
    2. Invest in gloom and hold - like Warren Buffett
    3. Invest for the medium and long term and ignore the cycles.
  4. Diversify - 'don't put all your eggs in one basket'.
  5. Seek good advice.
  6. Avoid fads - or if you do buy them, get in early and get out early e.g. dot com.
  7. Beware of being overly influenced by the media. Their job is to report the sensational. They're happy to report the negative and ignore the positive. It sells more papers.