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Saturday September 23rd 2017

How Banks Make Money when They Can’t Lend


Many people don’t understand how banks make money. Essentially, they are money stores. They buy and sell money, rather than retail items. They sell loans, investment vehicles and various financial products, many of them invented by the banks themselves. Banks earn interest on loans and use that income to pay for interest on accounts and CDs. They also charge fees on financial products and services.

Because banks are in the business of lending, they can’t make money until they have money on hand. That’s why they use enticements like free checking and savings interest to gain new customers. It almost seems obscene that a bank can charge 11 percent interest on a $200,000 loan and then pay customers 1% on a $1,000 checking account, but that’s how banks make such incredibly high profits. Even in the down economy, when everyone else is struggling, banks are thriving and growing.

How Banks Earn When they Can’t Lend

Loaning money is a risky business. If the bank doesn’t get paid, it can’t pay its customers. That’s why banks have been looking for other ways to make money. One huge source of income for banks in a time when fewer Americans have the funds to borrow has been overdraft fees. According to the Center for Responsible Lending, the total cost of unauthorized overdrafts is about $23.7 billion per year.

Overdraft Fees

New regulations intended on protecting consumers from overdrafts, has actually made them more likely. While consumers can opt out of certain overdrafts, point of sale overdrafts often don’t go into effect until a month after an account is open. If the bank does not contact consumers to tell them it’s time to opt out, they may end up paying overdrafts inadvertently.

Recently, Bank of America and Citibank changed their policies on overdrafts for debit accounts. Now, the banks will refuse them unless instructed otherwise. Bank of America and Citibank will only cover debit card and ATM overdrafts if customers sign up to link their savings or line of credit to the checking account. The fees for these kinds of overdrafts are much lower.

Pay Day Loans

Another practice finding its way into banking is the Pay Day Loan. These loans must be paid back quickly, making them much more likely to result in default, then exorbitant fees. Borrowers become trapped in a cycle of debt that essentially amounts to legal loan sharking. Consumers flip the loan continually to extend the time they have to pay. In the end, the average pay day loan costs a 400% annual percentage rate.

Banks are an important convenience for consumers and an important part of our financial system. Unfortunately, they can also destroy the lives of those who fail to use banking responsibly.


Small Business Lending Basics

Businesses of all sizes frequently acquire loans for numerous needs. Before journeying into the world of company management and ownership, individuals require some knowledge of small business lending basics. Some lenders prefer to work with companies established for 3 to 5 years, while others readily assume the risk of new business ventures. Lenders provide various loan types to accommodate different business aspects including start-up expenses, cash flow, expansion, investments and inventory.

Small business owners must understand that each loan application, regardless of intention, automatically transfers to the individual’s credit report. Here, other creditors have the opportunity to view a company’s borrowing and payment history. For this reason, ensure loan acceptance by filling out applications thoroughly, providing all the necessary documentation and detailed business plan or records requested.

Pre-loan Preparedness

Company owners and potential owners must prepare appropriate documentation prior to the loan application process. An applicant must prove the ability to repay the loan and the commitment to the business. Part of the paperwork a first-time business owner requires includes personal financial statements, and 3 years of tax returns.

Financiers desire a well-constructed, detailed business plan, featuring monetary requirements, cash on hand, necessary equipment and facilities, collateral, projected income and expenses, in addition to contingency plans. Include personal experience and qualifications and the experience and qualifications of associates or employees. Established business loans require similar documentation, but also include profitability and loss records in addition to the company‘s tax returns.

Choosing a Business Partner

Consider a loan officer or creditor as a business partner. During every part of the company’s lifespan, this person or institution invests in the venture and expects a return on that investment, albeit the loan amount plus fees and interest. Include a personal bank as the first place of loan inquiry. As an established client, potential or established business owners already have a relationship with the facility. Acquiring a loan from a familiar environment may improve chances of acceptance.

Before choosing a specific financier, ask the lender for references or interview other business owners. Determine which facility treats clients fairly, provides assistance with applications and documentation, supplies entire loan amounts, and how the institution handles small business hurdles. Loan brokers evaluate the needs of small businesses and provide suggestions regarding other lending institutions. Higher rates accompany these loans for services rendered. However, in many instances, the firms supply approvals not otherwise easily acquired.

Loan Types

Small business applying for loans can expect interest rates ranging from 8% to 14%, plus application fees (typically <$100) and other stipulations. Beware of low cost loans that add hidden fees that in effect cost the proprietor more in the end. Loan types vary in the amounts available and the time of repayment. If desiring to pay off a loan in its entirety prior to the projected period, ensure no early repayment penalties apply.

Term loans require monthly payments over a specified length of time. Proprietors use short-term loans for needs that ensure a quick return. Companies repay the loan in one lump sum in a year or less. Line of credit loans provide small increments of money to generate constant cash flow. Many businesses acquire and pay off these loans annually.


How Does a Short Sale Affect Your Credit?

Many people often believe that a short sale does not affect their credit at all. For this reason, they choose this option when they are having difficulty making payments on their home. They believe that this is going to be better for them than an actual foreclosure. What most do not realize is there are negative effects to choosing this option, as well. In fact, the damage to your credit score may be just as harmful as a foreclosure.

First, it must be stated that a short sale, while it is not a foreclosure, will still put a mark against your credit. After all, the lender is going to be on the losing end of the deal and, with the high rate of foreclosures and short sales, they are taking too many big hits. In fact, the combination is why the government stepped in to bail out some of the lenders out. These lenders, when it comes to retribution, are not going to let the borrower get away without any concerns.

With this in mind, borrowers must realize there will be a consequence to their credit when choosing a short sale to sell their home. In fact, a recent study that was completed by VantageScore, a credit scoring company, revealed that there is only a difference of an approximate 10 to 20 point drop between someone going through a foreclosure and one going through a short sale. Both drops are significant, foreclosure causing a credit score to lower as much as 130 to 140 points, while a short sale was between 120 and 130 points drop.

Along with a lowered credit score, individuals who choose the short sale may also be responsible for paying the difference to the lender. This depends on which state you live in and whether or not the lender is pushing to get the money back. In truth, many lenders are choosing not to employ this option. However, this is something that you should not count on. If it is demanded and it is not paid back, this, too can mar the credit score and prevent one from financing another home in the future.

Borrowers will also find they are responsible for paying taxes on the difference between what the home sold for and the amount they owed on their loan. In many cases, the difference could be as much as $100,000. If not prepared for this outcome, individuals could find themselves in trouble with the IRS, as well as their lender. This is the last thing that anyone in this circumstance needs to add to their situation.

Anyone who finds themselves suddenly having difficulties trying to keep up with their mortgage payments may immediately think their home is going to be foreclosed on. This process actually takes several months to get underway and this may leave you time to consider a short sale on your home. While the short sale will cause some damage to your credit score, and even less if you keep your payments current, the records will also state that you did try to prevent your home from being foreclosed on. This, of course, will look much better than sitting back and doing nothing to stop it.

Whether the bank cares about that later on is anyone’s guess. Many advisors say that as long as you pay your bills on time for 24 months after any major credit damage, you should be able to get a loan. As your credit score plays a very important role in your life, do the research on your own particular situation to help you make the right decision for you and your family. As around to friends who have gone through similar problems and speak to a financial advisor.


Mortgage Rates at All Time Low…Expected to Continue

The mortgage market has been going through a deflationary cycle recently. Since the housing bubble first started to burst in 2007, interest rates on mortgage loans have been falling like rocks.  Mortgage rates have hit fifty-year lows. Demand, however, remains very weak.

There are various questions about this phenomenon running through the financial and business sectors. There is much confusion about how demand could be so low with such attractive rates. According to the standard supply-side formula, low interest rates should spur borrowing and investment. What’s really happening is that the savings rate has risen higher in the past eight years. In fact, in the second quarter of 2009, the personal savings rate hit five percent.

Low mortgage rates plus an increased sense of frugality combined with tighter lending standards results in homeowners who either cannot refinance or buy a home, or they are afraid to take the risk on buying a new home and prefer to live frugally within their current dwellings. The tighter lending standards mean that even borrowers who would have previously qualified for refinancing may not be able to do so. Many borrowers have found their financial situation worse off, due to factors such as a reduced credit rating, lowered income, and other negative factors that make it more difficult for homeowners to refinance because they cannot meet the stricter standards.

It is not surprising that the credit crunch brought down mortgage rates. The fact that the Federal Reserve was purchasing mortgage-backed securities from Fannie Mae and Freddie Mac helped to keep rates down. During the height of the financial crisis, the money market was suddenly gutted as depositors withdrew their funds. Since banks essentially create credit by lending out large loans such as mortgages, the expansion of credit was abruptly halted and in fact drastically reversed within a short period.

The sudden contraction of credit resulted in interest rates nose-diving because there was a sudden decrease in the amount of mortgage debt owed as the rate of defaults rose. The defaults were largely the result of falling home prices and high levels of consumer debt. Mortgage defaults decreased the overall debt load because the massive waves of foreclosures effectively wiped out hundreds of mortgage loans. This made the credit contraction even worse, and the rapidly shrinking money supply spurred the Federal Reserve’s lowering interest rates in order to keep the money supply from shrinking even further.

Unfortunately, the money supply continues to shrink due to deflationary trends despite the Federal Reserve’s efforts. The newly risk-averse banks simply do not lend out the money generated by the Reserve. Nationally, especially in the hard-hit areas of California and Florida, mortgage defaults continue to increase. Although the money market has appeared to recover, the contraction of credit continues to shrink the overall availability of currency.

This has resulted in low mortgage rates because of incredible deflationary pressures, not necessarily because of decreased risk. Even once the Federal Reserve stopped buying mortgage-backed securities from Fannie Mae and Freddie Mac, interest rates continued to fall. The deflationary trends have resulted in positive effects, however; the increased savings rate combined with the tighter standards have resulted in more consumers paying off their debts, with the salutary result that overall consumer debt levels in the United States have started decreasing.

In addition, there is a talk of a second wave of recession on the horizon. Whether the predictions are true or not, the negative sentiment makes already nervous lenders even tighter with their money. Why lend money at a risk when they can invest in government bonds and have a guaranteed profit?

All of the above notwithstanding, the low mortgage rates are continuing to stay low due to the continued credit contraction. Once the contraction bottoms out, mortgage rates should level off. They expected to remain low because of continued deflationary trends as the accumulated citizen and government debt is slowly paid off.


FHA Versus Conventional Loans

There are many differences between getting an FHA (Federal Housing Administration) loan and choosing to get a conventional loan, and yet at the same time, there are many similarities as well. In the total scheme of things, it is far easier for a potential homeowner to qualify for an FHA loan than it is for them to get rewarded with a conventional loan. An individual’s qualifying standards are put into play when deciding between the two loans. In a nutshell, a 3 to 5% down payment [of the homes asking price] is necessary for an FHA loan — versus — a 5 to 25% down payment when getting a conventional loan. Which one is going to be right for you, is what we would like to outline in assisting you in making the proper decision.

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Debt Boot Camp: 5 Things You Must Do Now!

Credit cards. Car payments. Home equity loans. No matter what kind of debt you have, working yourself out of it can seem overwhelming, especially as your balances grow.

It is possible to reduce and eliminate your debt. Don’t expect it to be a quick fix, though; paying off debt requires patience and perseverance. Below are five essential steps that will put you on the path to a debt-free lifestyle.

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