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MEL POTESHMAN If holiday spending has left you strapped for cash, the best place to look for a little financial help might be in the mirror. That’s because often your own resources can provide the money you need to see you through a cash crunch. Because your assets secure loans against your resources, this type of borrowing arrangement tends to be inexpensive and hassle-free. For most homeowners, a home equity loan or line of credit is likely to be the cheapest source of credit. With a home equity credit line, you draw against your approved line of credit by writing a check. You pay interest only when you access your credit line, generally at an adjustable rate that is indexed to prime. A home equity loan lets you borrow a predetermined amount of money at a fixed rate and requires that you pay back the loan in installments over a specific term. The amount you can borrow is based on the market value of your home, less what you still owe on your first mortgage. Another selling point in favor of home equity borrowing is that interest on up to $100,000 of a home equity loan is tax deductible. Be sure to use home equity loans carefully because you put your home at risk. If you default on your loan, you could lose your home. Most employers allow you to borrow half the money in your 401(k) retirement plan, up to $50,000. Unlike hardship withdrawals, which require that you demonstrate serious financial need, you can generally borrow against your 401(k) with no questions asked. Because the loan is secured by your retirement funds, the interest rate is almost always lower than you’d pay elsewhere. You typically have five years to repay the loan (longer if you’re using the money to buy a home) and, in most cases, the payments are deducted from your paycheck. Because the interest you pay goes back into your account, you are essentially paying yourself interest. Be aware that if you should leave your job, the balance you owe on your loan becomes due immediately. If you don’t repay it, the loan is treated as a withdrawal, which means you’ll have to pay taxes on the outstanding balance and a 10 percent penalty if you’re under age 59. Borrowing against the cash value of your whole-life and certain other cash-value types of life insurance can provide easy access to money at rates that are lower than most other forms of debt, perhaps as low as 5 percent or 6 percent on some older policies. But there are drawbacks to borrowing against your policy. First, if there is an outstanding balance at your death, that amount is deducted from the policy’s face value and your heirs receive less than you intended when you purchased the policy. Second, the interest rate you would normally earn on the cash value is reduced on the portion that is used as loan collateral. In effect, that loss of interest increases the cost of your loan. If you’re cash-poor, but have a sizable investment portfolio, a margin loan is a way you can borrow from yourself. Using your securities as collateral, you can typically borrow up to 50 percent of the current market value of your stocks and up to 90 percent of U.S. Treasury holdings. Although margin loans are most often used to buy investments, the proceeds can be used for any purpose. The advantage of borrowing against your stocks is the low interest rate charged by most brokerage firms. Another benefit is that you can repay margin loans as quickly or as slowly as you like. (In general, interest is not tax deductible when margin loans are used for purposes other than purchasing investments). One caveat: If the price of the securities you’ve borrowed against drops, you could get a “margin call” from your broker requiring you to put up additional cash or securities as collateral against your loan. lf you don’t meet the margin call, the broker has the right to sell your stock at market price. Because of these risks, the safest strategy is to borrow no more than 20 percent of the value of your holdings and to limit the use of margin loans to short-term borrowing needs. Even when you are borrowing from yourself, you should have a repayment plan in mind so you don’t risk losing valuable assets such as your home or retirement funds. Check your record Your credit report contains important information about you, information that can help you land a job or get approved for a mortgage. Last year, in an effort to continually improve credit-reporting accuracy, Congress enacted the Consumer Credit Reporting Reform Act, which took effect in October 1997. The new act strengthens the older Fair Credit Reporting Act and includes several new provisions. While the act is designed to improve the way credit information is handled, it’s important that you’re aware of your responsibilities with regard to your credit report. Review your credit file every few years to make certain the information it contains is accurate and complete. Most errors occur in files of family members with the same last name and address and in those of people with common names. Misspellings and incorrect Social Security numbers add problems as well. Make it a point to check your credit report in advance of applying for a mortgage or other major loan. That way you can correct any errors and avoid delays in the processing of your loan request. To obtain a copy of your credit report, you can contact one of the three major credit reporting agencies: Trans Union at (216) 779-7200; Experian (formerly TRW) at (800) 682-7654; and Equifax at (800) 685- 1111. The new act limits to $8 the amount credit-reporting agencies may charge you for a copy of your report. By law, if you contact the credit-reporting agency within 60 days of being denied credit, your credit report is free. Based on the new act, you are also entitled to a free report if you are unemployed and looking for work, are on welfare, or have reason to believe that your credit report contains inaccurate information due to fraud. If you discover that your credit report contains inaccurate or incomplete information, complete the “request for reinvestigation” forms you receive with your report or write to the credit-reporting agency stating specifically why you believe the information is incorrect. The agency must contact the source of the disputed information. Under the new act, which places more of the burden on the creditor, the creditor must certify that the questioned information is correct. If the information is found to be incorrect or incomplete, the credit-reporting agency must delete the information or modify it based on the results of the investigation. Mel Poteshman is president of Poteshman Consulting International & Co., a West Los Angeles-based business consulting firm.

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