Showing posts with label loan. Show all posts
Showing posts with label loan. Show all posts

Thursday 8 December 2011

Payday loans: legal loan-sharking or a better bet than the banks?

Wonga is one of many payday loan providers to argue that unauthorised bank overdrafts are more expensive.

Blackpool's Charlie Adam scores from the spot - Payday loans: legal loan-sharking or a better bet than the banks?
Net gain: Wonga, which sponsors Blackpool FC, said its customers were mainly tech-savvy young professionals who previously used the banks to borrow money Photo: REUTERS
Wonga, the short-term loan business, has long argued that it is more transparent than the banks.
Earlier this year Errol Damelin, the founder of the company, told The Telegraph that customers could not compare the cost of borrowingmoney in the short term when the most common way of doing it was through a bank overdraft.
Wonga is forced to display a representative annual percentage rate (APR) for its loans of 4,214pc. However, Mr Damelin said that, because it offered loans limited to 30 days, the APR was not relevant, and the loan was often cheaper than unauthorised bank charges for the same amount.
"There is a place for an APR, but we don't offer a loan that rolls up for a year so you are comparing an impossible product," he said. "Also, it is not used by the banks so customers cannot compare in a normative way."
It warned that there were no effective price comparison services for current accounts. It added that some experts believed companies "design complex tariffs and pricing structures to decrease the ability of consumers to compare prices".
Mr Damelin said complex overdraft charges and structures meant that the majority of bank customers "never understand what they are going to pay" when they go overdrawn.
In some cases, despite Wonga's expensive 4,214pc APR, it can be cheaper to take out a short-term loan. For example, if you have an Everyday Current Account with Santander and become overdrawn it can cost you dearly. If you go into your unarranged overdraft and are overdrawn for two days in a row, and two payments come out of your account in that time, it will cost you £60. If you borrowed £100 from Wonga for 15 days to avoid slipping into overdraft, you would be charged £21.11. If you borrowed that money for two days, it would cost you £7.50.
However, the problem comes if you cannot pay back your Wonga loan within a short time period. You will incur a missed payment fee of £20 if the money is not available on the day you have nominated to pay it back and they will then charge you a maximum of 60 days' interest at 1pc a day.
Mr Damelin said customers needed to be able to compare the two types of product in order to make a decision, a comment echoed Sir John Vickers banking commission report published this year. The report said price comparison sites did not really work for bank accounts, and consumers did not know whether they could get a better deal elsewhere.
Mr Damelin said there needed to be more competition in banking in order to meet customers' needs, saying that the Government was not encouraging new entrants into the banking market.
Wonga's own model is based on a complex algorithm and credit checking process, rather than a human assessment of payslips and address details, as with many payday loan companies. Each loan application is assessed entirely by a computer.
Wonga, which sponsors Blackpool Football Club, is keen to avoid the sobriquet of "payday loan company", and says its borrowers are not vulnerable customers who struggle to pay back the money that they have been lent. Instead, it describes them as mainly tech-savvy young professionals. Less than a quarter of the company's customers have previously used an equivalent online or short-term loan product before coming to Wonga. Instead, they're coming from the banks and traditional credit products.
Every single Wonga customer has a bank account, debit card, internet access and a mobile phone. The company's loans of up to £400 are available for one day to a month, and interest is charged at 1pc a day. The vast majority of customers can access other forms of traditional credit, such as loans and credit cards. For many, Wonga is an alternative to a long personal loan that they could not pay back early because of repayment penalties, or an overdraft fee.
Mr Damelin said the company allowed people to pay back the money whenever they wanted to without charging them extra. Seven in 10 loan applicants are rejected, and the company credit checks with major agencies before deciding whether to accept applications.
That did not stop Stella Creasy MP from denouncing the company for "legal loan-sharking". She wants interest rate caps on payday lenders, which Mr Damelin said he did not support. Wonga hit back at Ms Creasy's remarks. In a public letter it said that accusing it of being a legal loan shark might make for good press copy, "but it underplays the fact that our company is a legitimate and well regulated one – under legislation overseen by the Office of Fair Trading and the Department for Business, Innovation & Skills".

SHOULD YOU USE WONGA?

Wonga may be transparent, but a loan that costs you 1pc a day is only a good idea if the alternatives are more expensive. If you have a liquidity crisis there may well be cheaper options, especially if you are in good standing with your bank. The scenarios below explain when a Wonga loan, or similar, is a decent option, and when it isn't.
USE WONGA IF
• You have a bill going out that will take you over your limit and the alternative is a hefty overdraft charge. This only applies if you are about to receive the cash to pay the bill from a reliable source.
• You can't convince your bank to give you a cheap authorised overdraft.
• A cheque is about to bounce and you will be charged for it.
• The alternative is a long-term loan which you know you won't need for more than a few weeks.
NEVER USE WONGA IF
• You have a shortfall in day-to-day living expenses and want to cover it.
• You need a loan that will take a while to pay back.
• You have a 0pc credit card that you could put the debt on instead.

Wednesday 7 December 2011

Taking a loan in your golden years

Taking a loan in your golden years
Written by Celine Tan of theedgemalaysia.com
Monday, 31 October 2011 07:48


Banks might be reluctant to lend to retirees but there are ways to increase your chances of getting a loan


For retirees, the best practice is to live on cash. Says Ng Chee Yong, a licensed financial planner at the financial care centre of wealth solutions provider CWA, “Whenever possible, pay with cash. A loan is taken to finance items that you cannot afford, a situation that retirees without a steady income should avoid.”

Nevertheless, unforeseen events or emergencies may compel you to borrow. For instance, an offspring may face financial difficulties and most parents would find it difficult to deny assistance. Or you might want to start a business or invest in properties. “After retiring at 55, many retirees start small businesses.

It is not surprising to find them applying for business or personal loans,” says Thoo Mee Ling, head of secured lending at OCBC Bank (M) Bhd. “Apart from that, those who are active in the property market will continue to buy and sell. They need to turn to banks for home loans.”

Louis Loh, business development manager at VKA Wealth Planners Sdn Bhd, says most of his retired clients take loans to buy new cars or refinance their homes.

“Some retirees may prefer to get a loan when purchasing big-ticket items although they can afford them. They think that they will be audited by the Inland Revenue Board if the items are paid in cash.”


Generally, financial institutions deny loans to those who are not earning an income. However, you can obtain a loan in certain situations, especially if you have planned for it. Here are six tips to maximise your chances of getting a loan in your golden years.

1 Take the loan before you turn 60


Each financial institution implements and adheres to a set of lending guidelines. “The guidelines are essential for the bank to manage its risk and returns. These guidelines include risk criteria set out by regulatory bodies such as Bank Negara Malaysia. Age [of borrowers] is a variable that a bank controls through its lending guidelines,” says Thoo. “If you think that you might want to get a loan during retirement, it is best to take the loan before you turn 60. The most ideal time is between 50 and 55,” says Loh.

2 Cut margin of finance and/or loan tenure


“Nowadays, some financial institutions prefer to give out lower margins of finance because they want to decrease their non-performing loans. Generally, banks will give loans to retirees who ask for a 50% margin of finance,” says Loh.

“If you are 56 and want to get a 15-year loan, the financial institutions may be concerned. But, if you want to get an eight- or 10-year loan, they are more comfortable with it. In addition, this lowers your borrowing cost,” says Ng.


Loh observes that it is far easier for retirees to obtain car loans, which have short tenures of two to five years, rather than home loans. “Note that most financial institutions are reluctant to give out loans to retirees over 60 even if they have repayment capacity or are willing to cut the loan tenure.”

3 Document your sources of income


One of the most important aspects of getting your loan approved is your repayment capacity. “Your income [finances] must be able to prove that you can,” says Loh.

“Make your income ‘official’. For instance, if you sell cakes or babysit, legalise your business by setting up a sole proprietorship. This will need few months of planning,” suggests Ng.

If you are going to use rental income to support your loan application, provide proper documentation. “Get your tenancy agreement stamped and keep all records of payments. Get the tenant to bank the rent into your account,” says Ng. Besides receiving a continuous stream of income from these assets, Loh adds that your chances of obtaining a loan will improve if your existing properties are fully paid up.


But, bear in mind that financial institutions only consider income that is consistent and secured. “Lenders generally do not favour lending to insurance agents, unit trust agents, direct-selling marketers, remisiers or brokers. This is because their incomes are based on renewal of sales and the lenders assume that such income will not last for a long time, unless they have a group of people to continue running their business,” observes Loh.

Therefore, it is essential to build up a sizeable passive income stream prior to your retirement. Passive income can be generated from rental, dividends from shares, bonds and unit trusts, or commissions. “[Passive income] complements our pension fund and supports our repayment capacity,” says Thoo.


4 Get a guarantor or joint borrower

Generally, financial institutions prefer to give loans to retirees who have a guarantor or joint borrower. “By guaranteeing the loan, the guarantor or joint borrower, usually a family member, is legally liable for the repayments as well,” says Thoo.


Loh observes that financial institutions prefer a joint borrower to a guarantor. “This is because a joint borrower is seen as having more commitment than a guarantor. However, where the joint borrower has a high debt-asset ratio, the financial institution may consider him as a guarantor instead.”

If you ask an income-earning family member to support your loan application, document the agreement. “You need to put everything in black and white. Inform those involved and communicate your plans,” says Ng.

If you are taking a mortgage loan, determine if the joint borrower will co-own your property. If not, this arrangement is tricky and can affect your estate. Also, note that the joint borrower or guarantor will have to continue servicing the loan should you pass away. “If the loan is not insured, your child will be burdened if you pass away while servicing the loan. The debt will not stop when you die, but will pass on to your legal beneficiaries,” says Loh.

5 Pledge collaterals



Collateral such as fixed deposits, unit trusts and shares can be pledged when applying for a loan. “As a rule of thumb, fixed deposits are favoured because they are liquid assets. Most banks, if not all, will offer a 100% loan if it is collateralised by a fixed deposit. Unit trusts and shares can be offered as well, although the margin of finance varies, depending on the bank’s risk appetite,” says Thoo.


If you pledge your fixed deposit, you cannot use the funds in the account throughout the tenure of the loan, says Loh. “Usually, banks will ask for a RM20,000 fixed deposit or a sum equivalent to 10% of the property’s value. This is the minimum amount needed to auction off the property if the borrower defaults.”



Financial institutions typically do not ask for property as collateral for a personal loan. “They are not in the business of liquidating such assets,” says Ng. The bank will incur a cost in holding a property auction and the price of the property will usually be lower than the market rate, explains Loh.

6 Stick to the same bank


Where possible, build a relationship with your banker. “If you have a good relationship with your banker, it might be easier for you to get a loan. For instance, if you always get your loans from the same bank, it might be more lenient and go the extra mile for you,” observes Ng.

http://www.theedgemalaysia.com/personal-finance/195379-taking-a-loan-in-your-golden-years.html

Monday 24 October 2011

Two out of five Americans with federal student debt can't make monthly payments and either defer, default or are delinquent


Student Loan Debt Leads to Confusion, Protests and Defaults


Photograph by Stan Honda/AFP/Getty Images

Source: Photograph by Stan Honda/AFP/Getty Images
William Prince, of Rosenberg, Texas, knows just how inescapable student loans can be. The 52-year-old father of two started paying off $51,000 in college debt 15 years ago and now owes $57,000. "I don't expect to pay these loans off in my lifetime," he says. Prince, a criminal justice major who works in private security, had to defer payments during three bouts of unemployment, and the accumulated interest left him deeper in debt.
Americans now owe about $950 billion in student loans —more than their total credit-card debt. The weight of those IOUs is a frequent refrain for Occupy Wall Street protestors and their online supporters. On the "We Are the 99 Percent" Tumblr blog, which features hundreds of pictures of people holding handwritten signs describing their desperate financial situations, student loan concerns exceed those about children, unemployment, and health care, according to an analysis by Mike Konczal, a fellow with the nonprofit Roosevelt Institute.
Desperation may have something to do with that outcry. Two out of five Americans with federal student debt can't make monthly payments and either defer, default or are delinquent, according to Mark Kantrowitz, publisher of Fastweb.com, a free scholarship-matching service, and FinAid.org, a source of student financial aid information. Although the laws are gradually changing, student debtors' odds are still grim. The best means they have of one day growing free of those debts is to know the system.

Eroded Borrowers' Rights

There are very few ways to reduce or renegotiate education debt; unlike credit-card debt, few can do this via bankruptcy. "There has been a steady erosion in rights for student loan borrowers," says Deanne Loonin, an attorney at the National Consumer Law Center. Activists and some congressional Democrats argue that Congress should again allow borrowers to discharge student debts in normal bankruptcy — a right lost in a 2005 law. They also ask for better supervision and limits on debt collection. Such improvements could be years away, if they ever take place.
For federally backed loans, the situation is better, though still far from perfect. The government can seize wages, tax refunds, earned income tax credits and even Social Security. One of Loonin’s clients, an 84-year-old man, once took out a student loan for a relative; the payments now amount to about 40 percent of his Social Security checks, leaving him with a bit more than $750 each month.
The federal government is taking steps that could make the debt burden more manageable. A provision in the 2010 health-care reform law pushed private lenders out of the business of issuing federally guaranteed loans. The 2010 Dodd-Frank financial reform law puts the new Consumer Financial Protection Board in charge of collecting better data and regulating private student lenders. The new agency also is planning to launch an online tool — a "student debt assistant"— to help debtors learn more about their options.

Income-Based Repayment

One option introduced in 2009 is income-based repayment. It allows borrowers to repay federal loans as a percentage of the prior year's adjusted gross income, capped at 15 percent. (If a borrower's circumstance changes from the prior year, he or she can request recalculation.) Under so-called IBR, all federal loans are forgiven after 25 years — 10 years for those in nonprofit or public service jobs. A 2010 change in the law means that for borrowing that begins in 2014, payments are capped at 10 percent of income and all debts are forgiven after 20 years.
Because no payments are required on income below 150 percent of the poverty line, income-based repayment is helpful for such borrowers as 28-year-old Jennifer Sandella. She earns so little that she doesn’t need to pay anything on her $45,000 in graduate school loans. For a single person, 150 percent of the poverty line is $16,335; for a family of three, it's $27,795.
Two years after the program was introduced, few borrowers know about IBR. Only about 1 percent of federal borrowers —out of the 10 percent who could benefit — are enrolled, Kantrowitz estimates. The U.S. Department of Education has been offering information about IBR on its website, through customer-service representatives, and to students when they exit school. It now plans to contact current borrowers to inform them about the program, says spokeswoman Sara Gast.
The program has drawbacks. Persons with private loans, such as Prince, aren’t eligible. And any unpaid interest is added to debt until loans are eventually forgiven. "I'm still accruing interest at a phenomenal rate," Sandella says. If she never manages to pay her loans off and her debt is forgiven after the 25-year mark, the amount forgiven will be taxed as income, perhaps triggering a big bill from the IRS.

Few Options for Private Borrowers

Those with private loans have little leverage when negotiating with their lenders. Student loans can be forgiven in bankruptcy only if debtors take lenders to court and prove an “undue hardship” — a legal step taken by merely 0.1 percent of eligible debtors. Of those, about half got relief, according to a 2011 analysis by Harvard Law student Jason Iuliano. The Consumer Bankers Association, which represents private lenders, said in a statement: “Banks work with borrowers experiencing financial hardship on private student loans” by, for example, allowing borrowers to temporarily suspend payments.
The best way to avoid being trapped by debt is to restrain it from the start. Students need to "shop around for schools to limit how much they need to borrow,” says Lauren Asher, president of the Institute for College Access & Success, a nonprofit advocacy organization that runs the Project on Student Debt. Regulators and colleges could do much more to steer young students toward more manageable debt loads, she says. “Inadequate information and aggressive marketing tactics can have an effect on people,” Asher adds, noting that many students take on private loans even though they are eligible for less-risky federal loans. Dependent students can borrow up to $5,500 in federal loans as college freshmen, while their parents can borrow up to the total cost of attendance, minus other aid.
Colleges are required to provide counseling to student borrowers when they exit school. They "are always looking for ways to do it better," says Terry Hartle, senior vice president for government and public affairs at the American Council on Education. But it's not clear how much of that counseling sinks in. Says Hartle: "I'm afraid an awful lot of college students only learn how much they've borrowed when they begin repayment."

http://www.bloomberg.com/news/2011-10-21/student-loan-debt-leads-to-confusion-protests-and-many-defaults.html