THE DETAILS: Home foreclosures, and the rate of homes entering the foreclosure process, rose to a record in 2007 as homeowners battled slumping house prices and spiking loan payments.

THE DEBATE: Who is to blame? The borrowers – for their questionable financial management and for taking out loans they did not understand and could not afford? Or the lenders – for offering loans that they sold as being less expensive than they really were?

COMMENTARY: The subprime lending debacle has its roots in a combination of factors. Aggressive real estate agents, lenders, home developers, banks and financial institutions got involved in the mortgage lending, management and investing process. The Fed has been criticized at both ends of the issue — for doing too little and too much: for not doing enough to prevent the crisis from happening, as well as artificially assisting homeowners in trouble by providing bail-outs and protections after the fact.

In my opinion, what we should have is a free market in which you’re held responsible for your own decisions. If those decisions are wise, you’ll profit; if they’re reckless, you’ll have only yourself to blame.

We’re Not Tracking Finances, Spending and Borrowing Well Enough

Borrowers willingly took on these mortgages. They are the ones with the most intimate knowledge of their own financial situation, risks, job stability and future prospects. They are the ones who are responsible for their own financial tracking. That’s information no credit score or income statement will ever reveal. As such, it is their responsibility to read and understand the terms of their loan, and determine their loan cost now and into the future. People who make poor financial decisions or speculate carelessly will lose money — and that’s the harsh reality and efficiency of a free market.

To bail-out such borrowers (as the “Anti-Predatory Lending Act of 2007″ does) sends a horrible message to everyone else: that if you borrow to own or speculate in housing that you cannot reasonably expect to afford, and if the market turns against you, then you can count on a government hand-out or a legislated low-rate to soften your fall.

Imagine that we applied the same logic to credit cards. Lenders “ought to know better” than to approve a new card with a $20,000 limit, if the borrower already has significant credit card debt. Is it the fault of the card company, or is it the fault of the consumer who cannot control their spending, who hasn’t spent enough time tracking finances, and has requested yet another card to fuel their shopping sprees?

The Real Culprit of the Subprime Mortgage Crisis?

Surprisingly, few in the media are calling out the original culprit here: a government policy of monetary manipulation that pushed interest rates to artificial lows. This, along with “pro-housing” legislation and tax-breaks, sent a signal to some that housing was a can’t-miss proposition. But when interest rates are decided by the whims of bureaucrats, the party can end at any time…and unfortunately, it looks like it has.
Further Reading:

Expenses Tracking
Debt Planning
Finance Management
Expense Planner
Track Spending

Personal financial tracking and tracking finances are two things that we care about here at Mint. Learn more with great financial tracking tips in our blog article index.

It is said that “people never plan to fail; they just fail to plan.” It can also be said that setting a detailed plan for personal financial tracking is far different than merely aspiring for something. Getting out of debt, buying a new home, or creating a work/life balance requires a clear strategy, actionable tasks and deadlines to accomplish well.

Imagine managing your own personal finance as if it was your own business. Like every (successful) company, each has its own business plan that includes specific financial goals and game plan crafted over a period of time. Think of this business as “Me Incorporated,” where the “Me” is your collective net worth (savings, investments, assets), including various departments that have their own budgets and spending patterns. To grow “Me” over time takes a lot of hard work, determination, online personal financial tracking and a process called goal setting.

Here are some guidelines to setup and achieve your goals:

1. Less is more. Setting fewer goals means you’re far more likely to remain focused and accomplish what you’ve set out to do. For example, paying off your car loan and getting your credit card debt may be admirable, but probably not realistic to happen concurrently. Focus on one significant goal at a time, then move onto the next.
2. Be precise. Setting a goal to buy a house in 5 years is less effective than setting a goal to buy a house by June 2011 with $100,000 saved as a down payment. Detailing the steps to get at a measurable target also provides an opportunity to do a reality check with yourself, and to make some hard decisions along the way.
3. Track regularly. Regular check-ins with yourself helps ensure you’re on the right path. You may need to either tweak a certain aspect of your “Me” business, like cutting some expenses from certain “departments,” or to change strategies altogether. Regardless of your choice, through regular check-ins you’re directing your energy and work toward doing that most important thing: moving “Me” in the right direction.
4. Work up to the Big Goals . Know which goals are short-, versus medium- and long-term. In some cases, the short-term goals are needed to achieve a long-term goal. This process of categorization is an important part of managing “your business” comfortably and not feeling overwhelmed when trying to accomplish the usually bigger and longer-term goals.

Whether your goal is big or small, creating that list and checking it twice is especially useful during the Holiday season, when the business of “Me” sees its busiest season.

Example: Establishing and Achieving a Goal

Let’s assume you want to save for a new iPhone by February ‘08. You’ll need $399 for the phone itself, plus for simplicity about $100 per month for the plan. Now let’s assume that your current plan charges $80 per month, which means you’ll need to cut $20 per month to keep your monthly spending even. (One way to gain it back is by selling some devices for which the iPhone replaces, like your iPod. But again, for simplicity, let’s assume you’re wedded to all things Apple.)

Step 1. The Goal. In this case, you want to save $399 in four months, plus the rate plan price difference for, say, four months — so $480 total.

Step 2: The Plan. Identify how much you need to save to reach your goal. Now, my example is simple. You’ve got four months to save $480. Since the goal is very short-term, investing your savings is not going to help you much. So, I’m just saving $120 every month for four months. (Tip: for more complex and longer term goals, use one of the many nifty calculators on the web which accounts for expected rate of return and inflation. Here’s one such calculator for your convenience.)

Step 3. The How. Now that you know how much to save, it’s going to be helpful to review what you’re spending by category with a online personal financial tracking tool like Mint.com to see what can be cut or reduced. Aim for attainable percentage reductions in specific areas, like Dining Out or Shopping, and then set up a budget level and an alert for your target amount. These alerts are displayed on the Overview page, and you can also tell Mint to send them by email or to your mobile phone.

Step 4. Enjoy your new Phone…and the satisfaction of a goal achieved, and debt avoided!

Do you have your own personal method to achieving your financial goals? Please feel free to share!

Having difficulties with your personal financial tracking to reach your financial goals? Sign up for Mint.com today and refresh your finances!

Further Reading on the Topic:

Personal Financial Tracking

Online Personal Financial Tracking

Tracking Finances

The lower your credit score, the higher the interest on your loans will be. Crunch some numbers to find out how much you can afford in monthly payments before you start browsing eBay Motors. Try to find a car you know you can afford, instead of sealing yourself into a “dream vehicles” that’s beyond your means. You’ll only end up with worse credit if you fall behind on payments.

Knowing your credit score also has another big advantage: getting the leg up on shifty salespeople. When a dealer offers you financing and it’s clear you haven’t checked your score, they might mislead you about the state of your score so they can sneak in higher interest rates. Don’t let them walk over you; they don’t need their commission check as much as you need a straight deal.

Mint’s bottom line: If you have poor credit, you might want to wait a bit before you buy a car, at least until you clear up some of your record blemishes. Although you can have someone co-sign the loan with you, you’ll have to watch out there as well: make sure that the paperwork is correct when you’re signing, as some car dealers put the co-signer as the primary borrower (a practice called a straw purchase). That definitely won’t help your credit improve.

Cash and Financing

Once you’ve done the quick calculations to determine the true cost of your car purchase and subtract the down payment, you can figure out how much you need to borrow to make it work. Car loans aren’t always simple: you’ll want to know if you’re eligible for that loan, and how much you’re allowed to borrow in the first place. As a whole, the Internet is a good place to start researching loan rates at banks and credit unions.

The Mint lesson here is: Get pre-approved for your loan before you stroll into the dealership. Right off the bat, you’ll have an ace up your sleeve: you’ll know what the current interest rates are, and you can compare them to the dealer’s offers. Usually the 0% Annual Percentage Rate offers that car dealers flaunt only applies to people with superb credit scores, so chances are you’ll have to do some comparison shopping to find the best APR possible.

You can go to individual banks (online or in person) to get current rates. MSN Money is a good resource: it lets you compare national averages of auto loan rates for new and used cars. It also lets you calculate local auto loan rates, and provides agency names, rates and fees.

If you get pre-approved for a loan, you receive a no-obligation check that you can take to your dealer and use to buy the car. These pre-approved loan checks are usually good for 45 days, allowing you plenty of time to scout out your new Ferrari… or Honda, as the case may be.

Mint’s Note: Car dealers try to claim car loan shopping can hurt your credit score. They say each time a financial institution makes an inquiry into your score, your score drops. The truth is that they tell you this so you’ll go with their financing department. Buffers are always in place such that any loan inquiries within 30 days of the initial scoring are ignored; and any inquiries within a 14-day period only count as one inquiry on your credit score.

Many dealers try to get you to use their lending office to finance your car. These “loans,” though, aren’t really loans: they’re actually known as Retail Installment Sales Contracts (RISC). The dealer signs it with you, and then sells it to the bank at a good markup (meaning yes, they make money off of your “loan”). The higher the APR they charge you, the more money they make. As a rule of thumb, most should avoid these types of loans unless you have good credit and know a lot about how these RISC “loans” work.

Typically financial lending sites will also have auto loan re-payment calculators. Some allow you to put in how much you’ll owe and the length of the loan. They’ll even tell you what percent of your income you can afford to pay.

Auto loans usually range from three years (36 months) to five years (60 months). Don’t let the dealer talk you into smaller payments over a longer period of time, though: a shorter-term loan will save you a lot more money. Always keep in your mind, “What’s in it for them?” when you are negotiating with car dealers, and don’t let them cause you to spend any more than 15%-20% of your income on your auto loan payments.

Additional Money-Saving Tips

Since your car (unlike a home) will never increase in value over time, you’re going to lose money on any car you buy — it’s the cost of convenience. So unless your local transit systems are stellar or you jet-set around on a Vespa, you’re looking at a lot of money upfront and down the line. It’s good to try to save money anywhere you can — and you can do that by doing your homework.

Know the Market Value of the Car

Wherever you’re looking, whether it’s online (craigslist.com or autotrader.com), in the local newspaper, or from an ad on TV, you’re going to see asking prices. Make sure it’s a fair price according to the current market value, especially if it’s a used car.

Sites like kbb.com and edmunds.com provide step-by-step calculations of the car’s current market value based on its general information (year, make, and model), its features and specifications, and its current condition. If you know enough about the car’s condition, you can calculate the market value and use that when negotiating for a lower price. It’s also a good way to verify their asking price.

Know the Quality of the Brand

Some car models have fewer problems than others. For example, older Pontiac Grand Am’s tend to have major coolant and head gasket issues, whereas the worst complaint on older Dodge Neons was the engine light coming on due to carbon buildup. You can expect that the repairs on that Grand Am are going to cost a whole lot more.

Use reputable site like consumerreports.com to investigate common problems of the car you are interested in. Google the year, make and model of your car with phrases like “common complaints” or “problems” to make sure you’re looking at a reliable car.

Know the Car’s History

You’ve seen the commercial for carfax.com where a seller boasts about “new upholstery” in their car that had suffered flood damage. They’re funny commercials, but they’re also closer to the truth than anyone would care to admit. You don’t know what that car has been through because you weren’t there.

You can check the car’s accident, damage and claims history by using its VIN number at carfax.com. As a secondary precaution, if the owner regularly services their car at a single location, you can ask that location for the car’s repair history and ask if it’s had any problems. As a final step, ask friends with the same car how theirs performs and if they have had any major issues.

Don’t Get Scammed

Not all car dealers are scammers, but a few are — and you should know what to look for to tell the good guys from the bad. Greedy dealers will do anything to nickel-and-dime you and jump as much money out of your pockets as possible. Some outright lie. Some even break the law. Just be warned that these dealers aren’t always Boy Scouts, and reading this article is preparing you for many of the steps you can take to avoid a bad deal. To really get familiar with other scams, visit sites like carbuyingtips.com or scam.com.

When Buying From Individuals

Buying from an individual seller rather than from a salesman can be an easier and less stressful process. Although you’ll still find scam artists, often people are simply selling because they’re shopping for a new car, moving, or just need the cash. They can be in a hurry, so they’re not looking to make a huge profit margin on their sale.

But buying from an individual has more risks when it comes to car quality. They either aren’t going to tell you the true condition of the car, or perhaps they don’t know it. Their opinion of “running fine” may differ from yours; they honestly might not have noticed that engine knock. You’re charged with asking the right questions and making sure you take the car on a thorough test drive before you agree to purchase anything. Take it to your mechanic so he or she can do a quick inspection, and don’t be afraid to negotiate.

You’ll need to ask the owner the right questions to find out anything he or she forgot to mention in the advertisement. Your questions should include:

• Are they the first owner? If not, how many previous owners does it have?
• Why are they selling the car?
• Have there been any major repairs or major parts replaced?
• Has it ever been into an accident?
• Is it currently in need of repairs?
• How old are the tires?
• When was the last oil change?
• When did they last change the brake pads/ rotors?
• Did it pass inspection this year?
• Has it ever failed inspection?
• Do they have the title in their possession? Is it in their name?

When you test-drive the car, put it through a well thought-out driving test to see how it handles. Drive various terrains like highways and steep curves. Keep in mind what the car’s main route will be. If you will be driving up hill to get to work every day, follow a similar route. Test how well it accelerates under pressure, and see if it stops on a dime.

Change lanes, keeping an eye out for unusual blind spots. Listen to the engine at different speeds and make sure you don’t hear any strange rattling. Open up the hood and check to see if any parts look like they are new – they’ll be cleaner than the other parts surrounding it. Check the color of the fluids. Transmission fluid should be red to pink. Coolant should be light green with no more than half water in the mix.

Don’t be Afraid to Negotiate

Car dealers expect to negotiate. They purposely ask for a higher price, knowing that if you think talk them down a bit, you’ll feel like you’re getting a deal and you’ll be more likely to buy. And if you’re buying from an individual, you can still suggest a lower asking price unless they have expressed their wishes for no negotiations.

Use the car’s estimated market value, and what you’ve found on consumer report websites, as negotiation tools. Start with a low offer, but keep it in the ballpark so they come back with another. Know the limits of what you can afford and don’t get distracted by the car’s extra features. Be patient — it may take hours or days for negotiations. And remember, the seller’s best negotiating technique is the ability to walk away, but this technique can work for you too.

Further Reading on the Buying a Car

• Personal Finance Tools
• Personal Budget Management
• Financial Budgeting Software
• Household Budget Software
• Financial Tools