Loan modification is a publicly-funded program that pays lenders to help borrowers get through documented personal financial hardship by restructuring a home loan. Loan modification helps homeowners avoid default or foreclosure. While you typically end up paying more over the life of the mortgage, there are key benefits that make loan modification a good alternative.
You Keep Your Home
In a declining housing market, unemployment rises as does the national foreclosure rate. As borrowers find themselves unable to make loan payments, loans go into default, short sales are difficult because there are fewer buyers and lenders are forced to foreclose. The borrower loses his home and can lose home equity if the foreclosure sale is less than the loan balance. Additionally, in a foreclosure, if the sale of the home is less than the loan amount, and that amount is greater than the equity in your home, you still owe the difference between the sales price, equity and fees and the loan balance.
A loan modification restructures the existing loan with either lower interest rates or longer payout terms or both and lets you stay in your home. The loan modification program pays the lender to take these steps and you must prove the personal financial hardship that makes loan modification necessary.
You Keep Your Credit Standing
In a foreclosure, your credit score is affected three ways, late payments, loan default and foreclosure. However, a loan modification is not even reported to the credit bureaus. Your financial hardship might already have affected your credit score, but a loan modification is a way to keep it from getting worse.
If you see trouble looming for yourself financially, you can increase the benefit of loan modification by applying for it before you become late on your loan payments.
You Help Area Home Values
A foreclosure is public record and affects the values of all homes in your neighborhood. Not only are home prices falling in a declining sales market, foreclosures make values fall further faster because buyers are aware that there may be homes sold at auction in a particular area.
This is really a double benefit. You get to keep your home and your home’s value is not affected and your community values are maintained. You still face the market risk that all homeowners face, but at least the problem is not compounded by foreclosures.
Your Payments Go Down
The purpose of loan modification is a restructuring of your loan so that you can afford to keep up with payments. Typically, interest rates fall in a declining housing market, so your interest rate can be adjusted, or the lender can extended the life of the loan so you are paying the same balance over a longer period of time, which also would reduce your payment.
Be aware, with a longer payout term, the cost of interest means you will be paying a larger total amount over time. But that must be weighed against the expense of losing your home and your credit standing.
Tuesday, July 28, 2009
What is Loan Prequalification?
Loan prequalification is a process that pre-approves a homebuyer for a specific loan amount when purchasing a home. To document the loan prequalification, the homebuyer receives a special letter from the lending institution or loan officer. A loan prequalification can aid a homebuyer in the purchase of a home because it gives the buyer a clearer picture of how much money can be spent toward the purchase of the home. As a buyer with loan prequalification, the homebuyer has the option of negotiating a better price or a reasonable payment plan with the seller.
The loan prequalification process is a simple one. First, the loan officer asks the homebuyer several questions, some of which may require documented proof. For example, the loan officer will ask the homebuyer to provide proof of income and debt in order to determine a debt to income ratio. In order to determine this ratio, the loan officer needs to know the homebuyer's outstanding debts, assets, credit, and employment status.
After evaluating all of this information, the loan officer is able to provide the homebuyer with an estimate of how much money he or she can spend toward the purchase of a new home. With a loan prequalification letter from a lending institution, a buyer has a greater chance of getting the house he or she wants, particularly if there are other buyers interested in the home who have not been preapproved. In addition to helping the homebuyer determine the amount of money that can be spent toward the purchase of a new home, a loan prequalification helps the homebuyer learn how much the monthly installment payments will be. The homebuyer can also decide how much of a down payment is necessary.
Before visiting a lending institution for loan prequalification, a homebuyer can take advantage of numerous online mortgage calculators. These mortgage calculators also make it possible to determine how much the homebuyer can afford to take out in a mortgage loan, as well as how much monthly payments will be for specific mortgage loan amounts. Although the information on these calculators is not as accurate as the information provided by a lender, it does provide the buyer with a ballpark figure before visiting the lender.
As valuable as loan prequalification letters can be, they are not a guarantee of a loan. The actual loan approval process is a long and sometimes tedious one, even if the homebuyer’s income and credit history is impeccable.
What Is Loan Modification?
A loan modification is when a permanent change has been made to an existing loan. In most cases, loan modifications are used for those that have fallen behind in their loan payments.
Loan Modification Options
There are roughly three options you can choose from when modifying a loan. One of these terms or multiple terms can be used to reach a reasonable outcome.
1. Lowering the Interest Rate: The interest rate on the home can be lowered to reflect the current market rate.
2. Lower the Principal: The principal amount on the home can be lowered as the result of negotiating with the lender. This is often times the hardest option.
3. Lengthen the Loan Life: Loan modifications also work to lengthen the repayment period and lower monthly payment. This means you will be paying more interest and a higher price for your home in the long run. It is a tradeoff for being able to have a monthly payment you can afford and still remain in your home.
Each of these options works to make a concrete and permanent fix to your problems rather than put a band aid over them. Loan modification can be completed on your own or with the help of a professional.
Loan Modification Options
There are roughly three options you can choose from when modifying a loan. One of these terms or multiple terms can be used to reach a reasonable outcome.
1. Lowering the Interest Rate: The interest rate on the home can be lowered to reflect the current market rate.
2. Lower the Principal: The principal amount on the home can be lowered as the result of negotiating with the lender. This is often times the hardest option.
3. Lengthen the Loan Life: Loan modifications also work to lengthen the repayment period and lower monthly payment. This means you will be paying more interest and a higher price for your home in the long run. It is a tradeoff for being able to have a monthly payment you can afford and still remain in your home.
Each of these options works to make a concrete and permanent fix to your problems rather than put a band aid over them. Loan modification can be completed on your own or with the help of a professional.
Friday, July 24, 2009
A Basic Guide On Home Loan
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How To Get A Small Business Loan
Sooner or later most small businesses need to get a small business loan, whether to get the operating capital for business startup or to finance an expansion. But whether you're approaching a bank or a friend for a small business loan, the lender will have the same expectations.
You can greatly increase your chances of successfully securing a small business loan by being prepared to meet those expectations.
Put yourself on the other side of the desk for a moment. If someone asked you for a small business loan, you'd want to know exactly why he or she wanted the money and what the chances were that he or she would repay the loan in full and on time.
So the key to getting a small business loan is preparation. First, gather together the documents that will help persuade the lender that a small business loan is necessary and that you are a good risk. You will need:
A business plan - The business plan show the lender not only why you want a small business loan but what you plan to do with the money.
Cash flow projections - What's the first question any lender has? Will you be able to repay the loan. Your business's cash flow projections give lenders concrete financial data that they can use to assess this risk.
A statement of your personal financial status - A list of your personal assets and debts to give the lender a fuller financial picture.
To get a small business loan, you may also need these documents:
Past business tax returns - If your business is established and you have past business tax returns, it's a good idea to take them with you. They'll give the lender a better idea of how your business is doing financially.
A credit rating report - Basically, you establish a credit rating by buying things on credit and paying back the money you owe. Your loan repayment history plays a big part in establishing your credit rating, but all your "credit" dealings make up the history that's used to determine your credit rating.
It's not necessary that you include a credit report with your small business loan application; it's easy enough for potential lenders to check your credit rating. But if you don't know what your credit rating is or suspect your credit rating is tarnished, you may want to get one.
You can get a credit report by contacting one of the three credit reporting agencies in Canada, TransUnion, EquiFax Canada, or Northern Credit Bureaus. To receive your free credit report, you will need to mail or fax one of these companies a request along with copies of two pieces of I.D.
You can greatly increase your chances of successfully securing a small business loan by being prepared to meet those expectations.
Put yourself on the other side of the desk for a moment. If someone asked you for a small business loan, you'd want to know exactly why he or she wanted the money and what the chances were that he or she would repay the loan in full and on time.
So the key to getting a small business loan is preparation. First, gather together the documents that will help persuade the lender that a small business loan is necessary and that you are a good risk. You will need:
A business plan - The business plan show the lender not only why you want a small business loan but what you plan to do with the money.
Cash flow projections - What's the first question any lender has? Will you be able to repay the loan. Your business's cash flow projections give lenders concrete financial data that they can use to assess this risk.
A statement of your personal financial status - A list of your personal assets and debts to give the lender a fuller financial picture.
To get a small business loan, you may also need these documents:
Past business tax returns - If your business is established and you have past business tax returns, it's a good idea to take them with you. They'll give the lender a better idea of how your business is doing financially.
A credit rating report - Basically, you establish a credit rating by buying things on credit and paying back the money you owe. Your loan repayment history plays a big part in establishing your credit rating, but all your "credit" dealings make up the history that's used to determine your credit rating.
It's not necessary that you include a credit report with your small business loan application; it's easy enough for potential lenders to check your credit rating. But if you don't know what your credit rating is or suspect your credit rating is tarnished, you may want to get one.
You can get a credit report by contacting one of the three credit reporting agencies in Canada, TransUnion, EquiFax Canada, or Northern Credit Bureaus. To receive your free credit report, you will need to mail or fax one of these companies a request along with copies of two pieces of I.D.
The credit report you receive several weels later will include information on what to do if you find errors in the report. If you have a poor credit rating, you will want to take steps to repair your credit rating before trying to get a small business loan.
The next step in getting a small business loan is to persuade the lender to give you a small business loan. You need to prepare in advance to make a winning small business loan presentation.
Start by considering the lender's point of view. You want money. But he or she is most interested in the answers to these two questions: "What are you going to do with the money?" and "Are you a good risk?", and to make a winning small business loan presentation, you need to come up with the "right" answers to these two questions.
Answering the first question means being fully conversant with all the details of your business plan and being able to point to the relevant financial statements, charts or graphs that will help convince the lender that you need the amount of money you're asking for to do what you want to do.
Answering the second question means having already given some thought to the credit risk you represent to the lender and being ready to address his or her concerns.
To get a small business loan, be prepared to tell your potential lender:
What collateral you have - Collateral refers to the tangible assets that you are willing to put up to secure the loan. These assets might be equipment, a house, a car - something of value that you own. If you fail to repay the loan, then the proceeds from the sale of the assets is used for repayment.
How much money you're personally willing to put into the business - Being willing to risk your own money shows the lender that you're committed to the enterprise.
Your expertise and/or experience in your chosen field - Because the success of your business is dependent on this to some degree, any potential lender will want to know more about you. Be prepared to talk about yourself when you apply for a small business loan - your background, your expertise, and even your aspirations.
Your chances of getting a small business loan will be greatly improved if you have all your documents in order and are prepared to assuage the lender's concerns about loaning you the money. Think of it as a presentation to an important client or customer, and you'll have a better chance of success.
12 Tips for Getting Your Bank Loan Approved
Finding the money needed to start a new business is almost always one of the most difficult obstacles new owners face. The most likely (and easiest) sources of capital are your families, friends and own savings. However, you should not overlook institutional sources as well.
Without a previous track record in business, securing a bank loan may be difficult. Banks cite risk factors and increasing costs of servicing small accounts as the primary reasons for minimizing their exposure to small businesses. Still, it can be done. Here are the steps that you should take to improve your chances of getting that much-needed bank loan:
1. Keep in mind that to stay in business banks need to make loans. Do not be afraid to ask for one. That is what the loan officer wants you to do. To increase your chances of getting a loan, look for a bank that is familiar with your industry and who has done business with companies like yours. Seek out banks that are active in small business financing. Some banks lend on a conventional basis (lending money without government support), while some banks participate in government programs (in the form of government participations involving direct government funds or loan guarantees). However, be aware that banks often demand stiff collateral requirements for start-ups.
2. As an entrepreneur, make sure that you are thoroughly prepared when you go to your banker's office to request a loan. You need to show your bankers that a loan to you is a low-risk proposition. Have on hand a completed loan application, copies of cash flow and financial statement projections covering at least three years, and your cover letter.
3. Learn to anticipate every question that he or she has. Remember, the combination of information and preparation is the most powerful negotiating tool in the world. A confident and thoroughly prepared borrower is four times more likely to have his or her loan approved than a borrower who does not know the answer to some of the basic questions a banker asks. To show the extent of your preparedness, your business plan should also include answers to your banker's questions. These questions normally are:
How much money do you need? Be as exact as possible; although adding a little extra for contingencies will not hurt.
How long do you need it for? Be prepared to go into detail about what the money will do for you and why your business is a good risk.
What are you going to do for it? Businesses use loans for three things: to buy new assets, pay off old debts, or pay for operating expenses.
When and how you will repay for it? Your cash flow projections should provide a repayment time frame. Convince the banker of the long-term profitability of your business and your ability to repay the loan by using your financial projections and business plan.
What will you do if you do not get the loan?
4. Do not take an apologetic and negative attitude. Keep your negativity in check. Present yourself as an entrepreneur who can and will repay the loan. Boost your image by providing your loan officer with any promotional materials about your business, such as brochures, ads, articles, press releases, etc.
5. Dress in a professional manner for the interview. This is a business transaction, so treat it as such.
6. Do not stretch the truth in your loan application. Broad, unsubstantiated statements should be avoided. The lender can easily check many of the facts on your application. If you cannot support statements with solid data, then don't make them. Do your homework and spend time doing research to be able to support everything you say, including every single number in your projections. It is best to keep projections, assets lists and collateral statements on the conservative side.
7. Be sure all your documents are neat, legible and organized in a cohesive and attractive manner. Type all your loan documents. Handwritten documents look unprofessional. Don't forget to include a cover letter.
8. Do not push the loan officer for a decision. Doing so might result in a rejection. Your banker cannot make a decision until all your documentation is complete. To ensure a speedy decision, make sure that your application is complete.
9. Be confident. An attitude of confidence enhances your chance of getting the loan. Show that you can make a success out of the money that the bank will lend to you. Visualize in your mind the positive results of your bank application.
10. Keep trying one lender after another until you get your loan. To improve your position as you change bankers and banks, the best way is to ask for a referral from a successful entrepreneur. Before you decide to approach a bank directly, find an associate, friend or acquaintance that is in good standing with the bank to give you a good referral. Bankers tend to deal more favorably those who were referred to them by their best customers.
11. Failure to discuss risk in your application. You must remember one thing: there is no business without risk. If you do not discuss risk, the bankers will assume that you haven't thought about risk. Let's face it - try as we might, we cannot plan for everything, for every contingency, for every turn of events. Bankers would want to know if you have planned for the major risks and how you intend to manage it.
Then, there is also the risk of too much success. The demand for your products or service may exceed well beyond your expectations, and they would want to know how you intend to handle success.
12. Remember that the first loan is usually the hardest to get. Bankers prefer to lend money to borrowers who have borrowed at least once and have paid back at least one loan on time. They are not venture capitalists that make high-risk loans regardless of the profit prospects of your business. Bankers prefer to lend to low-risk, low profit ventures than to high risk businesses or those with no record of accomplishment.
Tips on Bagging a Bank Loan
Whether it’s for a down payment on a new house, or to start up a new business, finding the money to get started is one of the most difficult obstacles new owners face. The most likely (and easiest) sources of capital are your family, friends and your own savings. But institutional sources may be a wiser option. That said, without a previous track record, securing a first time bank loan can be tough. Banks often turn down first time loans because of the risk factors, and the costs of servicing small accounts. But that doesn’t mean it can’t be done. Here are ten top tips that you can take to the bank:
1. Banks Must Make Loans - Without loans, banks would not stay in business; loans are their bread and butter. So although banks often demand stiff collateral requirements for first loans, you shouldn’t be apprehensive about asking for one.
2. Research Lenders - Zero in on appropriate targets. Look for a bank that is familiar with your loan type, industry, and geographic locale and has done business with people like you or companies like yours. Don't be afraid to ask competitors and other local, related businesses for referrals. Seek out banks that give loans of the size and type you want. Some banks lend on a conventional basis (lending money without government support), while some banks participate in government programs (direct government funds or loan guarantees).
3. Prepare for the Meeting – Once you have identified a suitable institution, call ahead to find out the name of the bank's resident small business or mortgages specialist, and set up an appointment to meet in person. Ask for a detailed description of all the materials he or she will want to review. Typically, these will include your cover letter, completed loan application, business and personal tax returns, financial statements, and projections. In addition to the financial documentation, you'll need to bring along a two to three page executive summary that details what you will use the money for and how you plan to pay it back. Include any materials that speak to your reputation or your standing in the community. If you’re after a business loan, bring promotional materials about your business, such as brochures, ads, articles, press releases, etc. Before you meet with a lender, prepare a two to four minute presentation. Anticipate their questions. A confident and thoroughly prepared borrower is four times more likely to have his or her loan approved than a borrower who does not know the answer to some of the basic questions.
4. The Banker’s Basics – Bankers will ask you: How much money do you need? How long do you need it for? Be prepared to go into detail about what you will do with the money and why you or your business is low-risk. When and how you will repay for it? Convince the banker of the long-term profitability of your business and your ability to repay the loan. What will you do if you do not get the loan?
5. Image Matters - Present yourself as an entrepreneur who can and will repay the loan. If possible, get a referral from a successful entrepreneur; bankers tend to deal more favorably with those who were referred to them by their best customers. Dress in a professional manner for the interview. Type all your loan documents; handwritten documents look unprofessional. This is a business transaction, so treat it as such. A confident attitude will enhance your chances of getting the loan, so do not be apologetic or negative.
6. Keep It Real - Broad, unsubstantiated statements should be avoided in your loan application. The lender can easily check many of the facts on your application. If you cannot support statements with solid data, then don't make them. It is best to keep projections, assets lists and collateral statements on the conservative side.
7. Don’t Push It – When the meeting wraps, ask the loan officer when you can expect the bank to make a decision, but don’t push too much. Doing so might result in a rejection. All you can do to ensure a speedy decision is to make sure that your application is complete.
8. Embrace Risk – Failure to discuss the risks is a red flag for loans officers. For instance, there is no business without risk, and if you don’t discuss it bankers will assume that you haven't thought about it. They want to know if you have planned for the major risks and how you intend to manage worst case scenarios.
9. If at First You Don’t Succeed… - Keep trying one lender after another until you get your loan. If applying for a loan on your own is just too overwhelming, you might want to contact a local SBA Small Business Development Center, which provides coaching and support to entrepreneurs for free. Or for a fee, you could work with a loan broker who could use his or her contacts to negotiate a loan on your behalf.
10. The First is the Toughest – Bear in mind that the first loan is usually the hardest to get. In general, bankers prefer to lend money to borrowers who have borrowed at least once and have paid back at least one loan on time. They are not venture capitalists that make high-risk loans regardless of the profit prospects of the business. Bankers prefer to lend to low-risk, low profit ventures
1. Banks Must Make Loans - Without loans, banks would not stay in business; loans are their bread and butter. So although banks often demand stiff collateral requirements for first loans, you shouldn’t be apprehensive about asking for one.
2. Research Lenders - Zero in on appropriate targets. Look for a bank that is familiar with your loan type, industry, and geographic locale and has done business with people like you or companies like yours. Don't be afraid to ask competitors and other local, related businesses for referrals. Seek out banks that give loans of the size and type you want. Some banks lend on a conventional basis (lending money without government support), while some banks participate in government programs (direct government funds or loan guarantees).
3. Prepare for the Meeting – Once you have identified a suitable institution, call ahead to find out the name of the bank's resident small business or mortgages specialist, and set up an appointment to meet in person. Ask for a detailed description of all the materials he or she will want to review. Typically, these will include your cover letter, completed loan application, business and personal tax returns, financial statements, and projections. In addition to the financial documentation, you'll need to bring along a two to three page executive summary that details what you will use the money for and how you plan to pay it back. Include any materials that speak to your reputation or your standing in the community. If you’re after a business loan, bring promotional materials about your business, such as brochures, ads, articles, press releases, etc. Before you meet with a lender, prepare a two to four minute presentation. Anticipate their questions. A confident and thoroughly prepared borrower is four times more likely to have his or her loan approved than a borrower who does not know the answer to some of the basic questions.
4. The Banker’s Basics – Bankers will ask you: How much money do you need? How long do you need it for? Be prepared to go into detail about what you will do with the money and why you or your business is low-risk. When and how you will repay for it? Convince the banker of the long-term profitability of your business and your ability to repay the loan. What will you do if you do not get the loan?
5. Image Matters - Present yourself as an entrepreneur who can and will repay the loan. If possible, get a referral from a successful entrepreneur; bankers tend to deal more favorably with those who were referred to them by their best customers. Dress in a professional manner for the interview. Type all your loan documents; handwritten documents look unprofessional. This is a business transaction, so treat it as such. A confident attitude will enhance your chances of getting the loan, so do not be apologetic or negative.
6. Keep It Real - Broad, unsubstantiated statements should be avoided in your loan application. The lender can easily check many of the facts on your application. If you cannot support statements with solid data, then don't make them. It is best to keep projections, assets lists and collateral statements on the conservative side.
7. Don’t Push It – When the meeting wraps, ask the loan officer when you can expect the bank to make a decision, but don’t push too much. Doing so might result in a rejection. All you can do to ensure a speedy decision is to make sure that your application is complete.
8. Embrace Risk – Failure to discuss the risks is a red flag for loans officers. For instance, there is no business without risk, and if you don’t discuss it bankers will assume that you haven't thought about it. They want to know if you have planned for the major risks and how you intend to manage worst case scenarios.
9. If at First You Don’t Succeed… - Keep trying one lender after another until you get your loan. If applying for a loan on your own is just too overwhelming, you might want to contact a local SBA Small Business Development Center, which provides coaching and support to entrepreneurs for free. Or for a fee, you could work with a loan broker who could use his or her contacts to negotiate a loan on your behalf.
10. The First is the Toughest – Bear in mind that the first loan is usually the hardest to get. In general, bankers prefer to lend money to borrowers who have borrowed at least once and have paid back at least one loan on time. They are not venture capitalists that make high-risk loans regardless of the profit prospects of the business. Bankers prefer to lend to low-risk, low profit ventures
How much should you borrow loan?
If you're a student, you should generally limit your debt so that your loan payments after you graduate don't eat up more than 10% of your expected monthly income. Figure you'll pay $12 per month for every $1,000 of federal student loans you borrow if you repay the loan over 10 years. If you take on private student loan debt, figure you'll pay $16 per month for every $1,000, although you could well pay more.
If the math makes your head hurt, you can just use the rule of thumb that you shouldn't borrow more in total for your education than you expect to make your first year out of school. The rule doesn't work for all careers; lawyers, for example, may scrape away at a low-paying government job for a few years before departing for the big bucks in the private sector. But the rule should prevent most students from overdosing on debt.
If you're a parent, try to keep all your loan payments -- for mortgages, cars, credit cards and education -- to 35% or less of your gross monthly income. If you try to borrow more than 40% under some private loan programs, your application will be turned down.
Whether you're a parent or a student, though, you obviously should exhaust your federal loan options before applying for private loans.
An insider's guide to student loans
Like every other aspect of lending, student loans have been dramatically affected by the credit crisis.
But don't believe rumors that you can't get loans for education anymore. They're still available -- and you still need to be careful about how much debt you take on.
Here's the scoop:
- Federal student loans are an even better deal than before. Rates are fixed now, rather than variable, and students with the most need will see rates as low as 3.4% in the future. Limits on how much you can borrow have been raised a bit, and parents who take out parental student loans now can defer payments while their kids are still in school. Although some lenders have exited the federal student loan market, the U.S. government stepped in to make sure the remaining lenders had access to cash to make loans.
"The government averted the crisis," said Mark Kantrowitz, the publisher of FinAid and a co-author of "FastWeb College Gold: The Step-by-Step Guide to Paying for College." "You don't have to worry about getting (federal) student loans. - Don't ask your lender for a consolidation loan. Consolidation allows you to make one payment instead of many, and you may be able to lower your payments by stretching out the repayment term from the usual 10 years to as many as 30. You still can consolidate your federal student loans, but you'll need to do so through the federal government. Lenders that used to make these loans have fled the market, saying they aren't profitable anymore. Visit the U.S. Department of Education's loan consolidation site to get started.
- Private student loans are harder to get. If you want to borrow more than the federal student loan limits (which range from $5,500 to $7,500 a year for college students, depending on their year and type of loan), you typically would turn to private student loans. These come with variable rates that currently average 11% to 12%. But lenders are demanding higher credit scores plus a co-signer these days."You used to be able to get a (private student) loan with a 620 FICO score," Kantrowitz said. "These days you need at least a 650 or even a 700."
Even if you qualify, you need to be extremely cautious about how much private student loan money you borrow. Here's why:
- Those variable rates are only going to shoot higher when the economy recovers and interest rates rise, Kantrowitz cautioned. Typically, private student loan rates aren't capped, so the sky's the limit.
- Private loans don't come with the forgiveness and income-based repayment options now available for federal loans.
- Private lenders will still loan you far more money than you can comfortably repay. They know you can't escape this debt, so they're comfortable piling it on. Student loan debt typically can't be erased in bankruptcy court, and there is no limit on how long private lenders can pursue you for collection.
So it's up to you to set limits on how much you'll borrow and search for the best possible deals.
4 Alternatives Loan Sources to Avoid Loan Sharks
Why more people are turning to loan sharks?
The trend of loan sharking began in the early nineties. But due to the current economic condition, it has become difficult for many people to obtain loans from conventional sources. There has been a significant increase in the number of cases of loan arrears too. These borrowers are considered high risk and thus they either get a loan with very high rate of interest or don’t get a loan at all.
The current market trend is pointing towards more people succumbing to the plots of these loan sharks. And it is not just about the traditionally identified low income group. A new group of jobless people is emerging rapidly who are badly in need of alternative and easy loans. Both these groups are easy victims of loan sharks.
Alternatives that can be used to avoid loan sharks
Have you already been refused a loan by the top tier credit companies? If yes, there is nothing to despair and no need to go to loan sharks. Here are some alternatives:
Sub prime lending
Sub prime lending is a second chance lending that is applicable to borrowers who do not qualify for the prime or generic standards of loan. The prime standards depend on factors like the borrower’s credibility, financial status, current debt and credit rating.
Sub prime lending is typically done in secondary market where these loans are treated as high risk loans for both the creditor and the debtor. These loans come with a very high rate of interest or up-front fees. Sub prime lending is also known as C-paper or non prime lending. This is a legal lending procedure that involves regulated process with relevant paper work. Though they charge very high interest rate, it is still a better option than dealing with loan sharks.
Credit Unions
Credit unions are co-operatives created and owned by a group of people. They use the method of “pool savings” so that they can give out loans to the members as and when required. Every credit union follows some specific rules about who can join that group. Generally members of the same village or community join the group.
Credit Unions are a good place for saving and borrowing money. They also provide advice on budgeting and other basic financial services. The credit unions offer small loans to its members at a very reasonable rate and easy terms.
For more information please read this detailed article on credit Unions.
Council banks/Municipal Banks
Council banks and municipal banks are run by the government. These banks are specially developed to provide financial services to the low income groups in the society. These banks lend money at a cheap rate to people who are unable to qualify for a general loan.
Doorstep lending
Doorstep lending is another alternative to avoid loan sharks. It is given out to people with poor credit rating and very low income. They offer small amount of loan starting from as little as £100. The doorstep lenders charge a high rate of interest that can even go up to 150%. The borrower has to repay every week to an agent who calls at their home.
Doorstep lending is legally obliged and recently the Competition Commission has launched a website lenderscompared.org.uk where a borrower can check out the different deals offered by various doorstep lenders. For more information please read this detailed article on Doorstep Lending.
What is Loan Shark...?
A loan shark is a person or body that offers unsecured loans at high interest rates to individuals, often backed by blackmail or threats of violence.
Throughout history, usury laws made loan sharks commonplace. Many moneylenders skirted between legal and extra-legal activity. In the western world in recent years, loan sharks have been a feature of the criminal underworld, but otherwise rare. Loan sharks are common in the UK, Italian Cosa Nostra and Triads in China.
There are many registered and legal lenders that lend to people who cannot get loans from the most mainstream lenders such as large banks. They often operate in cash, whereas mainstream lenders increasingly operate only electronically, which means that they will not deal with people who do not have a bank account. Terms such as subprime lending and "non-standard consumer credit" are used for this type of lender. Payday loans are one example of this type of consumer finance. The availability of these products has made true loan sharks rarer, though some legal lenders have been accused of behaving in an exploitative manner.
Payday loan operations have also come under fire for charging inflated "service charges" for the service of cashing a "payday advance" — effectively a short-term (no more than one or two weeks) loan for which charges may run 3-5% of the principal amount. By claiming to be charging for the 'service' of cashing a paycheck, instead of merely charging interest for a short-term loan, laws which strictly regulate moneylending costs can be effectively bypassed.
Throughout history, usury laws made loan sharks commonplace. Many moneylenders skirted between legal and extra-legal activity. In the western world in recent years, loan sharks have been a feature of the criminal underworld, but otherwise rare. Loan sharks are common in the UK, Italian Cosa Nostra and Triads in China.
There are many registered and legal lenders that lend to people who cannot get loans from the most mainstream lenders such as large banks. They often operate in cash, whereas mainstream lenders increasingly operate only electronically, which means that they will not deal with people who do not have a bank account. Terms such as subprime lending and "non-standard consumer credit" are used for this type of lender. Payday loans are one example of this type of consumer finance. The availability of these products has made true loan sharks rarer, though some legal lenders have been accused of behaving in an exploitative manner.
Payday loan operations have also come under fire for charging inflated "service charges" for the service of cashing a "payday advance" — effectively a short-term (no more than one or two weeks) loan for which charges may run 3-5% of the principal amount. By claiming to be charging for the 'service' of cashing a paycheck, instead of merely charging interest for a short-term loan, laws which strictly regulate moneylending costs can be effectively bypassed.
Payday loans around the world
Canada
According to the Criminal Code of Canada, any rate of interest charged above 60% per annum is considered criminal. On August 14, 2006, the Supreme Court of British Columbia issued its decision in a class action lawsuit against A OK Payday Loans. A OK charged its customers 21% interest, as well as a "processing" fee of C$9.50 for every $50.00 borrowed. In addition a "deferral" fee of $25.00 for every $100.00 was charged if a customer wanted to delay payment. The judge ruled that the processing and deferral fees were interest, and that A OK was charging its customers a criminal rate of interest. The payout as a result of this decision is expected to be several million dollars.The British Columbia Court of Appeal unanimously affirmed this decision.
According to the Criminal Code of Canada, any rate of interest charged above 60% per annum is considered criminal. On August 14, 2006, the Supreme Court of British Columbia issued its decision in a class action lawsuit against A OK Payday Loans. A OK charged its customers 21% interest, as well as a "processing" fee of C$9.50 for every $50.00 borrowed. In addition a "deferral" fee of $25.00 for every $100.00 was charged if a customer wanted to delay payment. The judge ruled that the processing and deferral fees were interest, and that A OK was charging its customers a criminal rate of interest. The payout as a result of this decision is expected to be several million dollars.The British Columbia Court of Appeal unanimously affirmed this decision.
Beginning November 1, 2009, payday loan regulations will be in force in British Columbia to cap the maximum charges for short term loans to 23% (including interests and fees), borrower can cancel the loan by the end of the following day of signing the agreement without paying any charge, only 1 loan per borrower at a time and to restrict the ability for lenders to access to borrower's bank or employer. All lenders will be required to register and regulated under the Business Practices and Consumer Protection Authority.
UK
he number of payday loans has grown in the UK recently: between August 2007 and June 2008, the number of loans made grew by more than 130%.
Unlike in many US states, in the UK there is no prohibition on "rolling over" lending.[8] There does not seem to be a usury limit either: one UK company offers a "typical APR" of 1355%, although this takes compounding into account; without compounding the APR would be 300%. Advertising of payday lending is subject to the Consumer Credit (Advertisements) Regulations 2004. In particular, the "typical APR" must be stated in adverts which meet certain criteria, such as adverts which indicate that credit will be given to customers who may otherwise find access to credit restricted.
There has been some criticism of these loans in the UK recently. Vince Cable MP said "The growing popularity of these loans highlights the problems stemming from the credit crunch and unsustainable levels of personal debt in the UK.". Chris Tapp, of Credit Action, said in mid 2008: "Over the past year, payday loans have become an issue in the UK, and the growth in people who have problems who have such a loan has been notable in the last six months.".
U.S.
Regulation of lending institutions is handled primarily by individual states, and this growing industry exists atop an active and shifting legal landscape. Lenders lobby to enable payday lending practices, while opponents of the industry lobby to prohibit the high cost loans in the name of consumer protection.
Payday lending is legal and regulated in 37 states. In Georgia and 12 other states, it is either illegal or not feasible, given state law. When not explicitly banned, laws that prohibit payday lending are usually in the form of usury limits: hard interest rate caps calculated strictly by APR.
In the United States, many states have usury laws which forbid interest rates in excess of a certain APR. Some payday lenders have succeeded in getting around usury laws in some states by forming relationships with nationally-chartered banks based in a different state with no usury ceiling (such as South Dakota or Delaware). This practice has been referred to as "rate exportation", the "lender/servicer" model, or the "rent-a-bank" model. Under the legal doctrine of interest-rate exportation, established by Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp. 439 U.S. 299 (1978), the loan is governed by the laws of the state where the bank is chartered, regardless of the borrower's state of residence. This is the same doctrine that allows credit card issuers based in South Dakota and Delaware — states that abolished their usury laws — to offer credit cards nationwide. As federal banking regulators became aware of this practice, they began prohibiting these partnerships between commercial banks and payday lenders. The FDIC still allows its member banks to participate in payday lending, but it did issue guidelines in March 2005 that are meant to discourage long term debt cycles by transitioning to a longer term loan after six payday loan renewals. As a result, no federally insured banks engage in the business of payday lending as of 2007 using an agency model.
For usury laws to be effective, they need to include all loan fees as part of the interest. Otherwise, lenders can charge any amount they want as fees and still claim a low interest rate. State laws in the United States generally preclude charging of fees other than those expressly permitted by law, and the federal Truth In Lending Act requires disclosure of all fees.
Some states have laws limiting the number of loans a borrower can take at a single time. This is currently being accomplished by single, statewide realtime databases. These systems are required in Florida, Michigan, Illinois, Indiana, North Dakota, New Mexico, Oklahoma, and Virginia. These systems require all licensed lenders to conduct a real time verification of the customer's eligibility to receive a loan before conducting a loan. Reports published by state regulators in these states indicate that this system enforces all of the provisions of the state's statutes. Some states also cap the number of loans per borrower per year (Virginia), or require that after a fixed number of loan renewals, the lender must offer a lower interest loan with a longer term, so that the borrower can eventually get out of the debt cycle. Borrowers can circumvent these laws by taking loans from more than one lender if there is not an enforcement mechanism in place by the state. Some states allow that a consumer can have more than one loan outstanding (Oklahoma).
What is Payday loan..?
A payday loan (also called a paycheck advance or payday advance) is a small, short-term loan that is intended to cover a borrower's expenses until his or her next payday. The loans are also sometimes referred to as cash advances, though that term can also refer to cash provided against a prearranged line of credit such as a credit card (see cash advance). Legislation regarding payday loans varies widely between different countries and, within the USA, between different states.
Some jurisdictions impose strict usury limits, limiting the nominal annual percentage rate (APR) that any lender, including payday lenders, can charge; some outlaw payday lending entirely; and some have very few restrictions on payday lenders. Due to the extremely short-term nature of payday loans, the difference between APR and effective annual rate (EAR) can be substantial, because EAR takes compounding into account. For a $15 charge on a $100 2-week payday loan, the APR is 26 × 15% = 390% but the EAR is (1.1526 − 1) × 100% = 3,685%. Careful reporting of whether EAR or APR is quoted is necessary to make meaningful comparisons.
7 Secrets You Need to Know About College Student Loans
1. Financial aid officers at all the major schools are wined and dined by the big student loan companies. These financial aid offices have set-up a "loan process" with a specific lender. In many cases, this is the federal government, but many colleges are now going with private corporations. The paperwork hassle in dealing with a bureaucracy has become too much for these financial aid officers. In some cases, the financial officer is really a "stand-in" rep. for a student loan company. However, what they are selling or advocating may not be the best deal. Consider that when you're trying to get financial aid help from a financial officer at a school.
2. Under the Clinton administration the federal government got involved in the student loan process in a big way. Now the private companies are getting the business back. If you are going to a private college you may not be eligible for federal loans.
3. Always consider your options and talk to a financial aid counselor. If you are applying for graduate school, be aware of the fact that there are few scholarships for graduate school relative to undergraduate programs. You may be able to find a scholarship, but in most cases it will not cover the real costs of graduate school. A graduate student loan may be your only option.
4. It is recommended that you go with a loan company that offers all of the following types of loan services:Private Student LoansPLUS LoansFederal Stafford LoansStudent Loan ConsolidationPrivate Consolidation LoansYou want the largest selection possible.
5. Whenever possible lock in a student loan rate. Some loans are based off the Treasury bill. In these cases, the loan rate fluctuates. This can either be really good or bad. When interest rates go up, you may want to restructure the loan.
6. Pick a fixed student loan rate and start date to do a side by side comparison. Make sure that you are comparing apples to apples when student loan shopping and checkout numerous student loan companies before making a decision.
7. Never borrow more than you absolutely need. Compound interest can make a small student loan turn into a huge amount. Don't take out extra money and play the stock market or try to get rich quick. This scenario almost never works out for college students. Moreover, in most cases it is a violation of the student loan agreement.
2. Under the Clinton administration the federal government got involved in the student loan process in a big way. Now the private companies are getting the business back. If you are going to a private college you may not be eligible for federal loans.
3. Always consider your options and talk to a financial aid counselor. If you are applying for graduate school, be aware of the fact that there are few scholarships for graduate school relative to undergraduate programs. You may be able to find a scholarship, but in most cases it will not cover the real costs of graduate school. A graduate student loan may be your only option.
4. It is recommended that you go with a loan company that offers all of the following types of loan services:Private Student LoansPLUS LoansFederal Stafford LoansStudent Loan ConsolidationPrivate Consolidation LoansYou want the largest selection possible.
5. Whenever possible lock in a student loan rate. Some loans are based off the Treasury bill. In these cases, the loan rate fluctuates. This can either be really good or bad. When interest rates go up, you may want to restructure the loan.
6. Pick a fixed student loan rate and start date to do a side by side comparison. Make sure that you are comparing apples to apples when student loan shopping and checkout numerous student loan companies before making a decision.
7. Never borrow more than you absolutely need. Compound interest can make a small student loan turn into a huge amount. Don't take out extra money and play the stock market or try to get rich quick. This scenario almost never works out for college students. Moreover, in most cases it is a violation of the student loan agreement.
What is Student Loan..?
Student loans are loans offered to students to assist in payment of the costs of professional education. These loans usually carry a lower interest rate than other loans and are usually issued by the government. Often they are supplemented by student grants which do not have to be repaid.
Types of Loan
There are 2 types of loan :
Secured
A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral for the loan.
A mortgage loan is a very common type of debt instrument, used by many individuals to purchase housing. In this arrangement, the money is used to purchase the property. The financial institution, however, is given security — a lien on the title to the house — until the mortgage is paid off in full. If the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it, to recover sums owing to it.
In some instances, a loan taken out to purchase a new or used car may be secured by the car, in much the same way as a mortgage is secured by housing. The duration of the loan period is considerably shorter — often corresponding to the useful life of the car. There are two types of auto loans, direct and indirect. A direct auto loan is where a bank gives the loan directly to a consumer. An indirect auto loan is where a car dealership acts as an intermediary between the bank or financial institution and the consumer.
A type of loan especially used in limited partnership agreements is the recourse note.
A stock hedge loan is a special type of securities lending whereby the stock of a borrower is hedged by the lender against loss, using options or other hedging strategies to reduce lender risk.
A pre-settlement loan is a non-recourse debt, this is when a monetary loan is given based on the merit and awardable amount in a lawsuit case. Only certain types of lawsuit cases are eligible for a pre-settlement loan.[citation needed] This is considered a secured non-recourse debt due to the fact if the case reaches a verdict in favor of the defendant the loan is forgiven.
Secured
A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral for the loan.
A mortgage loan is a very common type of debt instrument, used by many individuals to purchase housing. In this arrangement, the money is used to purchase the property. The financial institution, however, is given security — a lien on the title to the house — until the mortgage is paid off in full. If the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it, to recover sums owing to it.
In some instances, a loan taken out to purchase a new or used car may be secured by the car, in much the same way as a mortgage is secured by housing. The duration of the loan period is considerably shorter — often corresponding to the useful life of the car. There are two types of auto loans, direct and indirect. A direct auto loan is where a bank gives the loan directly to a consumer. An indirect auto loan is where a car dealership acts as an intermediary between the bank or financial institution and the consumer.
A type of loan especially used in limited partnership agreements is the recourse note.
A stock hedge loan is a special type of securities lending whereby the stock of a borrower is hedged by the lender against loss, using options or other hedging strategies to reduce lender risk.
A pre-settlement loan is a non-recourse debt, this is when a monetary loan is given based on the merit and awardable amount in a lawsuit case. Only certain types of lawsuit cases are eligible for a pre-settlement loan.[citation needed] This is considered a secured non-recourse debt due to the fact if the case reaches a verdict in favor of the defendant the loan is forgiven.
Unsecured
Unsecured loans are monetary loans that are not secured against the borrower's assets. These may be available from financial institutions under many different guises or marketing packages:
credit card debt
- personal loans
- bank overdrafts
- credit facilities or lines of credit
- corporate bonds
The interest rates applicable to these different forms may vary depending on the lender and the borrower. These may or may not be regulated by law. In the United Kingdom, when applied to individuals, these may come under the Consumer Credit Act 1974.
What is loan...?
A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower.
In a loan, the borrower initially receives or borrows an amount of money, called the principal, from the lender, and is obligated to pay back or repay an equal amount of money to the lender at a later time. Typically, the money is paid back in regular installments, or partial repayments; in an annuity, each installment is the same amount. The loan is generally provided at a cost, referred to as interest on the debt, which provides an incentive for the lender to engage in the loan. In a legal loan, each of these obligations and restrictions is enforced by contract, which can also place the borrower under additional restrictions known as loan covenants. Although this article focuses on monetary loans, in practice any material object might be lent.
Acting as a provider of loans is one of the principal tasks for financial institutions. For other institutions, issuing of debt contracts such as bonds is a typical source of funding.
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