What to do when you’ve made a financial blunder
Philadelphia's Dailylocal.com
November 13, 2007
The following story was also posted online at www.leasetrader.com.
It’s time to fess up. Did you lease a two-seat convertible, conveniently forgetting that you have three kids? Or perhaps you paid a financial adviser big bucks to get into a deferred annuity with a stingy return.
The editors of Consumer Reports’ Money Adviser say to forgive yourself, but be careful not to make a rash response that could make a bad situation worse. You could damage your credit rating or boost your tax bill if you bail without careful planning. Here’s what to do if you made one of three bad financial decisions:
CAR LEASING
Dumb move: You lease a car or a truck that you no longer like or can afford.
Even dumber move: You walk away from the contract and watch your credit score plummet.
Smarter moves: Renegotiate the lease, terminate it early or transfer it.
If you’re having trouble making the monthly payments, ask the leasing company if you can skip a payment or extend the contract’s term. Both options will cost you money, but at least you won’t default. Get any new terms in writing.
Terminating a lease early will also cause financial pain, as you must cough up a termination fee plus all the remaining lease payments in addition to a lease disposition fee, which is due at the end of a lease if you choose not to buy the vehicle.
You can advertise in your local newspaper or on Web sites like LeaseTrader.com or SwapALease.com to find a buyer. But keep in mind that you’ll probably have to offer an incentive of a few hundred to several thousand dollars to attract a takeover candidate.
ANNUITIES
Dumb move: You bought a deferred annuity with high fees and expenses that depress your investment returns.
Even dumber move: You pay a surrender fee to cash out of the contract, and incur tax penalties too. Or you sell your annuity for less than it’s worth.
Smarter moves: Get out of the contract, but take care to avoid or at least minimize surrender fees and tax penalties.
First decide whether you should keep your annuity or ditch it. That’s easy to do if you own a fixed annuity. Just compare the interest rate it’s earning with other annuities or fixed-income investments. It’s much more difficult to decide what to do with an indexed annuity, which pays an interest rate based on the performance of a financial index, such as the Standard & Poor’s 500.
If it makes sense to get out, don’t sell your contract to a so-called factoring firm. It will pay what it determines is the present value of your annuity, meaning the value today of its future payments, discounted at some rate of compound interest.
LIFE INSURANCE
Dumb move: You buy a cash-value life-insurance policy that performs poorly but sticks you with high premiums.
Even dumber move: You let the policy lapse, losing all the money you sank into it.
Smarter moves: Surrender the policy for its cash value, exchange it tax-free for a better policy, or sell it for a fair price.
Don’t dump a cash-value life-insurance policy until you find another investment that’s likely to yield a better return. If you surrender your policy for its cash value, you may have to pay income tax if the amount you receive exceeds the premiums you’ve paid.
You can sell your policy to a life-settlement company where you work with a broker to shop your policy around to multiple companies. The company you choose will typically pay you more for your policy than you could get surrendering it for cash value to the insurance company that issued it.
But keep in mind that the life-settlement market is young and poses some traps for consumers. Transaction costs can be high, and it can be difficult to determine if you’re getting a fair price for your policy.
— Visit the Consumer Reports Web site at www.consumerreports.org.
This story posted by LeaseTrader.com, the automotive service company that lets people transfer out of their Car Leases early. If you're looking to swap a lease or transfer out of your car lease, please visit www.leasetrader.com