All You Need to Know About HELOCs

If you’re a homeowner in need of a bundle of cash, look no further than your own home. By tapping into your home’s equity, you’re eligible for a loan with a, generally, lower interest rate and easier eligibility requirements. One way to do this is by opening up a home equity line of credit, or a HELOC. Let’s take a closer look at HELOCs and why they can be an excellent option for cash-strapped homeowners. 

What is a HELOC?

A HELOC is a revolving credit line that allows homeowners to borrow money against the equity of their home, as needed. The HELOC is like a second mortgage on a home; if the borrower owns the entire home, the HELOC is a primary mortgage. Since it is backed by a valuable asset (the borrower’s home), the HELOC is secured debt and will generally have a lower interest rate than unsecured debt, like credit cards. You will need to pay closing costs for the line of credit, which are generally equal to 2-5% of the total value of the loan.

How much money can I borrow through a HELOC?

The amount of money you can take out through a HELOC will depend on your home’s total value, the percentage of that value the lender allows you to borrow against and how much you currently owe on your home. 

Many lenders will only offer homeowners a HELOC that allows the borrower to maintain a loan-to-value (LTV) ratio of 80% or lower. 

A quick way to find a good estimate of the maximum amount you can borrow with a HELOC is to multiply your home’s value by the highest LTV the lender allows. For example, continuing with the above example, if your home is valued at $250,000 and your lender allows you to borrow up to 80% of your home’s value, multiply 250,000 by 0.80. This will give you $200,000. Subtract the amount you still owe on your mortgage (let’s assume $100,000) and you’ll have the maximum amount you can borrow using a HELOC: $100,000. 

Is every homeowner eligible for a HELOC?

Like every loan and line of credit, HELOCs have eligibility requirements. Exact criteria will vary, but most lenders will only approve the line of credit for homeowners who have a debt-to-income ratio of 40% or less, a credit score of 620 or higher and a home with an appraised value that is at minimum 15% more than what is owed on the home. 

How does a HELOC work?

A HELOC works similarly to a credit card. Once you’ve been approved, you can borrow as much or as little as needed, and whenever you’d like during a period of time known as the draw period. The draw period generally lasts five to 10 years. Once the draw period ends, the borrower has the choice to begin repaying the loan, or to refinance to a new loan. 

How do I repay my HELOC?

The repayment schedule for a HELOC can take one of three forms:  

Some lenders allow borrowers to make payments toward the interest of the loan during the draw period. When the draw period ends, the borrower will make monthly payments toward the principal of the loan in addition to the interest payments. 

For many borrowers, though, repayment only begins when the draw period ends. At this point, the HELOC generally enters its repayment phase, which can last up to 20 years. During the repayment phase, the homeowner will make monthly payments toward the lHELOC’s interest and principal. 

In lieu of an extended repayment phase, some lenders require homeowners to repay the entire balance in one lump sum when the draw period ends. This is also known as a balloon payment. 

How can I use the funds in my HELOC?

There are no restrictions on how you use the money in your HELOC. However, it’s generally not a good idea to use a HELOC to fund a vacation, pay off credit card debt or to help you make a large purchase. If you default on your repayments, you risk losing your home, so it’s best to use a HELOC to pay for something that has lasting value, such as a home improvement project. 

How is a home equity line of credit different from a home equity loan?

A home equity loan is a loan in which the borrower uses the equity of their home as collateral. Like a HELOC, the homeowner risks losing their home if they default on it. Here, too, the exact amount the homeowner can borrow will depend on their LTV ratio, credit score and debt-to-income ratio.

However, there are several important distinctions between the two. Primarily, in a home equity loan, the borrower receives all the funds in one lump sum. A HELOC, on the other hand, offers more freedom and flexibility as the borrower can take out funds, as needed, throughout the draw period. Repayment for home equity loans also works differently; the borrower will make steady monthly payments toward the loan’s interest and principal over the fixed term of the loan. 

A home equity loan can be the right choice for borrowers who know exactly how much they need to borrow and would prefer to receive the funds up front. Budgeting for repayments is also simpler and can be easier on the wallet since they are spread over the entire loan term. Some borrowers, however, would rather have the flexibility of a HELOC. They may also anticipate being in a better financial place when the repayment phase begins, so they don’t mind the uneven payments. 

Your Turn: Have you taken out a HELOC? Tell us about it in the comments.

Learn More:
creditkarma.com
marketwatch.com
thepennyhoarder.com
investopedia.com

Navigating the Current Auto Loan Market

If you’re in the market for a new set of wheels, get ready to experience sticker shock. Prices on new and used cars have soared since the beginning of 2020, and experts aren’t expecting them to fall anytime soon. Here’s what you need to know about the current auto loan market and how to navigate it successfully.

Why are auto prices so high? 

The coronavirus pandemic has touched every sector of the economy, and the auto industry is no exception. According to the U.S. Consumer Price Index, the price of used cars and trucks has jumped a full 9.4% in the last 12 months, while the price of new cars and trucks increased by 1.5%. The drive behind the increase is multifaceted and linked to several interconnected events.

When the pandemic hit American shores, demand for new and used cars increased significantly. This was largely due to the many people who were avoiding public transportation for safety reasons. The mass exodus from big cities and their high rates of infection also boosted the demand for new cars.

At the same time, supply of new and used cars dried up, thanks to these factors:

  • The pandemic put a freeze on the production of new vehicles for nearly a full business quarter. The factory shutdowns reduced output by 3.3 million vehicles and sales dried up, along with subsequent trade-ins.
  • The production freeze prompted chipmakers to focus on the electronics industry instead of creating chips for automakers. Now, the industry is still scrambling to keep up with the automakers’ demand.
  • Business and leisure travel was halted for months. This led to a steep decline in travelers renting cars, which in turn led to rental agencies holding onto more of the cars in their lots instead of selling them to used car dealerships.

The rise in demand and shortage of supply naturally triggered a steep increase in the prices of both new and used vehicles.

Rethink your auto purchase

If you’re in the market for a new car and the price tags are scaring you, you may want to rethink your decision. If your car is in decent condition, consider holding onto it a little longer until the market stabilizes. To go this route, consider the following tips to help make your car last longer:

  • Use a trickle charger to keep the battery in excellent condition.
  • Change your filters regularly.
  • Follow the service schedule. Most cars need to be serviced every 10,000 miles.
  • Keep all fluid levels high. This includes coolant, oil, antifreeze and windshield washer fluid.
  • Drive carefully to avoid sudden braking and prolong the life of your brakes.
  • Replace spark plugs when they begin showing signs of wear or melting. Depending on the vehicle, spark plugs need to be replaced every 30,000-90,000 miles.
  • Check your tires regularly and rotate and inflate them as needed.
  • Pay attention to all warning lights that are illuminated on the dashboard.
  • Have your car rust-proofed to keep the exterior looking new.

Tips for buying a car in today’s market

If you’ve decided to go ahead with buying a car, it’s best to adjust your expectations before hitting the dealership.

First, a seller’s market means many dealerships will not be as eager to close a deal as they tend to be. They have more customers than they can service now, and that can translate into a willingness to move only slightly on a sticker price of a car, or a refusal to negotiate a price at all. Processing a car loan may now take longer, too.

Second, expect to pay a lot more than usual for your new set of wheels. If you’re looking to purchase a new car, prepare to pay approximately $40,000. Also, as mentioned, supply of new cars is down while demand is up, so you likely won’t have as many choices as you may have had in the past.

The used-car market has been hit even harder by the pandemic since prohibitive prices and a short supply has pushed more consumers to shop for used cars instead of new vehicles.  This increase in demand, coupled with the dwindling supply, has driven the prices of used cars up to an average of $23,000, according to Edmunds.com. If you’re thinking of buying a used car, prepare to encounter a highly competitive market where bidding wars are the norm and cars are super-expensive.

If you’re looking to take out an auto loan, consider one with your credit union. The most recent data shows that auto loans at credit unions are a full two points lower, on average, than auto loans taken out through banks. Car prices may be soaring, but credit unions continue to deliver lower rates and customer service you can really bank on.

The auto loan market has been hit hard by the coronavirus pandemic. Follow the tips outlined here to navigate today’s car market successfully.

Your Turn: Have you recently bought a new set of wheels? Share your best tips on navigating today’s auto market in the comments.

Learn More:
chicagotribune.com
marketwatch.com
barrons.com
cnbc.com
yourautoadvocate.com

What You Didn’t Know About Home Loans

A home loan, otherwise known as a mortgage, enables you to purchase a house without paying the full price out of pocket at the time of the purchase.

For most people, buying a home is the biggest financial transaction of their lifetime. For that reason, if you’re in the market for a new home, it’s best to learn all you can about home loans and how they work before you get too deep into the process.

Here are some things you may not know about home loans:

Rates fluctuate daily

Borrowers who are eager to secure a home loan with a low interest rate may get into the habit of checking mortgage rates as often as some people check the weather. Interest rates fluctuate every day, which means the rate you see today may be different than the one you see when you actually are approved for the loan.

The cheapest interest rate does not guarantee the cheapest loan

When choosing a lender, borrowers will often choose the one offering the lowest interest rate, but this can actually be to their detriment. There are other factors to consider, including closing costs and the lender’s policy on releasing equity for a line of credit or a loan. Also, in adjustable-rate mortgages (ARM), the loan featuring the lowest interest rate may not have the lowest rate a few years down the line and may actually cost more in the long run.

A fixed-interest rate mortgage can ultimately cost you more

When interest rates are low, many home-buyers choose a mortgage with an interest rate that is fixed throughout the life of the loan, believing it is the most cost-effective choice. This may or may not be correct. A fixed-rate mortgage might comes with higher exit fees, or fees paid to the lender when the loan is repaid. Also, if rates drop further throughout your loan’s term, you won’t be able to take advantage of the new rates unless you refinance. Finally, interest rates on fixed-term mortgages are generally higher than the initial rate on ARMs.

A lower credit score can cost you tens of thousands of dollars in interest

Most people know that a higher credit score is generally awarded with a lower interest rate, but not many people know to what extent this is true. A high credit score can translate into tens of thousands of dollars in interest payments over the life of a home loan. A credit score difference of 100 points can increase a monthly mortgage payment by $150 or more, depending on the size of the loan and the interest rate.

If you’re thinking of applying for a home loan soon and your credit isn’t in the “very good” category (higher than 740), it may be worthwhile to spend a few months working to boost your score before you apply for a mortgage.

The housing market impacts rates

While the federal funds rate will have the greatest impact on the rise and fall of interest rates, the state of the housing market will affect it, too.  Lenders need to turn a profit from their loans, which means the higher the volume of loans they process, the less they need to earn from each one to remain profitable. Consequently, when the housing market is booming and lenders are granting loans on a frequent basis, they will be more inclined to offer lower interest rates to borrowers.

You can have your mortgage payments automated

Your home loan payments will likely be your largest monthly bill, and missing a payment or paying it late can have serious consequences. Fortunately, you can avoid these scenarios by signing up to have your monthly mortgage payments automatically deducted from your checking account. Most lenders provide this service; check with yours to see if this is an option they offer.

Buying a home will likely be the biggest purchase you ever make. Be sure to find out all there is to know about mortgages and their interest rates before applying for a home loan.

Your Turn: Do you have another lesser-known fact about home loans to share? Tell us about it in the comments.

Learn More:
kloze.com
wyndhamcapital.com
binvested.com
bankrate.com

4 Reasons To Get Preapproved For A Loan

key fob with tiny car laying on top of auto loan paperwork with "Approved" stamped in large red lettersAre you in the market for a large loan-dependent purchase like a new home or a new set of wheels? Don’t forget to get your pre-approval first!

Here’s why
1. You’ll know what you can afford.
A pre-approval will tell you exactly how much house or car you can afford, simplifying and quickening your search.

2. You won’t get taken for a ride.
When you’re unsure how much you can spend on a car, the dealer may try to sell you one that costs more than you can really handle.

3. You’ll be taken seriously.
A car dealer or realtor will take you more seriously when you wave that pre-approval in their face.

4. Secure the rate and financing terms you desire.
When you’re making the deal for your purchase, there are bound to be some confusing moments as things come together. Some dealers use this as an opportune time to upsell warranties, insurances and other add-ons. While these things require consideration, it’s too easy to tack the costs onto a loan without considering how it will impact payment and overall cost.

Your Turn:
Based on your own experiences, why do you think it’s important to get pre-approved for a loan? Share your thoughts with us in the comments!

How to Know if You Need a Cosigner

A look into what a cosigner is, why you might need one and the risks serving as one presents

close-up of a person's hand as they are signing a legal documentLoans are an economic staple in most people’s lives; they can help pay for education, transportation or living arrangements. Of course, getting a good loan from the bank or some other financial institution can be quite difficult for some people. This is especially true for buyers who are just starting out and don’t yet have a sound credit score.

For these individuals, seeking out a cosigner might just be the way to go. A cosigner allows people to receive a loan or transaction they otherwise wouldn’t have access to. Being a cosigner can be quite risky financially, so it’s important to know exactly when you need to ask somebody to serve as one on your behalf.

What is a cosigner?
Investopedia defines cosigning as “the act of signing for another person’s debt which involves a legal obligation made by the cosigner to make payment on the other person’s debt should that person default.” While the person requiring the cosigner isn’t always in debt, a payment due is always involved.

In summary, a cosigner is someone who agrees to make payments on a loan if the primary recipient of said loan is unable to do so. Oftentimes, the person who takes out the loan is more than able to pay it back, but is unable to receive the original loan without someone else backing them.

By having someone serve as a cosigner, individuals can gain access to much larger loans than they would have been able to by themselves. However, the Consumer Financial Protection Bureau notes that interest rates are usually much higher for individuals with a cosigner.

When do you need a cosigner?
Justin Pritchard of The Balance explains that the most common reason people require a cosigner to receive a loan is due to their credit score. If the individual has a poor credit score and history, they will be unable to receive stronger loans without the guarantee that someone with a better credit score is backing them.

Several different transactions often necessitate the need of a cosigner. Some of the most common are purchasing a car and renting or buying a house.

A cosigner is not necessary for just any transaction, though. Consigners should be found for important financial endeavors that are required to meet basic needs, like the aforementioned lodging or transportation.

Who can serve as your cosigner?
The individual who signs up to be a cosigner is required to have a strong credit history more often than not. They should have enough money saved up and have a strong enough credit score that signing up to cosign shouldn’t negatively affect them. Nevertheless, simply by serving as a cosigner, they do run the risk of hurting that credit score. For this reason most cosigners are people close to the person applying for the loan. The Consumer Financial Protection Bureau notes that most cosigners are family members and most often parents.

Your lender does not designate who must be your cosigner, but will accept anyone who meets their credit standard and guidelines.

What are the risks of serving as a cosigner?
Signing up to be a cosigner is a decision that requires a lot of forethought. If something goes wrong with payments, it will be the cosigner’s responsibility to cover those payments. Cosigners are held to an equal amount of responsibility for paying the loan as the original person who applied for it. Despite this, Kristy Welsh noted in USA Today that lenders will often take legal action against the cosigner first if payments are not made, knowing that the cosigner probably has a larger, more reliable amount of money.

Your lender will provide your cosigner with a disclosure that summarizes their obligations.

Before you consider seeking out a cosigner, it’s important to consider whether the loan you are looking to sign up for is for something that’s absolutely necessary. Settling for a smaller loan might mean settling for a smaller home or car, but it often means that neither you nor your potential cosigner will suffer serious financial burdens down the road.

Used with Permission. Published by IMN Bank Adviser Includes copyrighted material of IMakeNews, Inc. and its suppliers.

Why You Should Avoid Personal Lending

A loan from a financial institution is best
Avoiding paperwork and getting low or no interest makes a loan from a friend or family member seem like a great idea, but the complications that arise in personal lending situations make them seldom worth the trouble.

Firstly, if the money is lent interest-free, that can create problems with below-market interest legislation. This is a big deal because avoiding interest is one of the main reasons people seek loans between family members. This is an issue because the IRS wants to ensure that people don’t try to get out of paying taxes on financial gifts by disguising them as loans. In order to remain in compliance with the IRS and make it clear that the transfer of money is a loan and not a gift, it may be necessary to calculate the interest that would hypothetically be paid on the sum at the current applicable federal rate (AFR), even if that interest is never actually paid. This is known as imputed interest.

“Then you get to pay real, live income taxes on the imaginary interest,” states Bill Bischoff of MarketWatch. “The imaginary interest payments can also trigger imaginary gifts from you to the borrower, which may eat into your valuable federal gift and estate tax exemption.”

There are differences in the ways that loans between family members are treated depending on whether the repayment is achieved through a set term schedule or it is considered a demand loan, which means that the lender may demand the money back at any time. The need to calculate imputed interest and make income tax payments on the interest is dependent upon the amount of the loan. Those interested in making a loan between family members should therefore talk to their tax professional to determine if below-interest tax rules may be an issue and if interest needs to be charged or imputed interest calculated.

While these legal and financial issues can definitely create their share of problems, the main reason to avoid lending between family members is the personal and emotional impact it can cause. Money owed between family members can cause tension in the relationships and even tempt people to avoid social interactions and family gatherings. If the borrower is not able to repay on a timely schedule, the relationship can be seriously compromised.

Furthermore, if the loan is for a new business or home, it may be especially problematic to get the money from a family member. When a family member lends money to cover a down payment or business startup costs, he or she may feel entitled to become part of the decision-making process, giving you input on how to run the business or which type of home is the best deal. People may do this because they feel their advice can make it more likely you will succeed in repayment, or because they feel their investment has bought them a stake in the home or business venture.

“One of the disadvantages of owing money to loved ones is that it may open up unwanted dialogue about your spending habits,” states April Maguire, writer for the QuickBooks Resource Center. “Whereas a bank won’t tell you to stop going out to dinner or discourage you from buying a new car, lenders who are also friends or family may criticize you for spending money on extravagances when you have yet to repay your debt.”

It can be hard to set up and maintain a clear separation between the financial agreement and the relationship when dealing with a personal lending situation. On the other hand, once a financial institution deems you worthy of a loan, it gives you autonomy to make your own business, home-buying and budgeting decisions.

Sticking with your financial institution helps you avoid all the hassles associated with personal lending and ensures that your relationships are never put at risk. Furthermore, it allows you to build a solid credit history with your timely repayments.

Used with Permission. Published by IMN Bank Adviser Includes copyrighted material of IMakeNews, Inc. and its suppliers.

The Dangers of Taking a Personal Loan to Finance Your Wedding

Consider the long-term costs of taking a loan to pay for one day of happiness

The cost of weddings has risen in recent years, leading to couples taking out loans or paying for items with credit cards. Yet starting your married life in debt could be a dangerous financial decision for more reasons than one.

Weighing the Costs
According to a survey conducted by renowned wedding resource site TheKnot.com, the average cost of a wedding in 2015 was $32,641. While some will gladly pay this amount for the wedding of their dreams, most Americans do not have enough money saved up to do so without resorting to borrowing.

In an article on TheKnot.com, contributor Rachel Torgerson advises against taking out a personal loan to finance your wedding, agreeing with financial planners on the dangers of taking on such large debt for one day of your life.

“The problem with personal loans is that most often people are taking them out because they’re trying to spend cash they don’t have. I would also lump in credit card spending here, because I think a lot of people pay for wedding-related things with a credit card and they may or may not have the cash to pay it off in full,” says CFP Laura Lyons Cole, personal finance contributor for financial planning website MainStreet.com.

If you’re considering taking out a large-sum loan, it means you probably don’t have the money to afford such a high-cost wedding in the first place. In general, money and financial stress are top issues that couples will argue over. In fact, studies have shown a high correlation between high-cost weddings and divorce rates.

Additionally, Josephon advises to consider how your ability to put money toward other savings, like a retirement savings account or your future children’s college savings, may be hampered when you start your marriage off with serious debt.

Paying Long Term for a Short-Term Event
With a consumer installment loan, you will be required to make payments for both principal and interest through the wedding loan term, Karimi explains. This means you will end up spending more for your wedding day than the actual cost of the event.

Karimi notes that a $32,000 loan at a 7.5 percent APR would take 48 months to pay off, with minimum payments at a bit under $775 per month-and that’s for buyers with excellent credit.

Even if you can afford such high monthly payments, think of the time it would realistically take to pay off this single-day event. Additionally, you would be carrying debt during a time of major change in your life; you may want to buy a home or a new car, or start a family, and such debt could prevent you from being able to open other lines of credit to pay for these expenses.

Don’t forget that creditors and lenders will look at your current financial standings, including other loans and lines of credit you have out. With a majority of young adults saddled with high student loan debt, their loan amount and interest rate offered will be affected by their total debt.

While you can get a loan with a lower credit score, you will ultimately pay more for it because of higher interest rates. Most financial advisors warn against taking such a loan, known as a bad credit personal loan.

Used with Permission. Published by IMN Bank Adviser Includes copyrighted material of IMakeNews, Inc. and its suppliers.

Personal Loans Versus Credit Cards

Advantages and drawbacks of each type of lending

Personal loans andCardsVsLoans_Featured credit cards, should they be used intelligently, can be great ways to finance your wants and needs. As personal finance author Greg McFarlane writes on Investopedia.com, credit in general grants us temporary access to other people’s money, and for a time, it is a win-win for all parties.

“The lenders get interest, the borrowers get leverage and the economy grows. What’s not to love?” he said. “Without credit, capitalism would stagnate.”

But which lending method is better: personal loans or credit cards? Let’s look at some of the high points and low points of each.

Personal loans
This type of credit is unsecured, meaning there is no collateral involved. Because this is a higher risk for the lender, as there is nothing of which they can take possession in the event of default, interest rates are fairly high. And because you will have a balance to be paid from day one, you are paying that interest starting the moment you sign on the dotted line. Still, these interest rates are typically lower than those of most consumer credit cards, giving personal loans an advantage there.

Another advantage of a loan is that it comes with a set term during which you will be repaying it, and a set amount to pay, which helps with budgeting. At the same time, credit card terms are either longer or unspecified, allowing for lower, although inconsistent, payment amounts.

“Many personal loans have a payback period of no longer than 60 months, or five years. Credit cards tend to amortize your payment over eight to 10 years, resulting in a lower payment over a longer time,” said debt adviser Steve Bucci of Bankrate.com.

Credit cards
While credit cards do come with inherently high rates — so high, in fact, that the president and Congress had to artificially cap those rates from outside the free market — for the first month after you purchase something on the card, you are technically getting a zero percent interest rate, McFarlane says.

“Should you choose to take 30 days or longer to pay for an item you bought on a credit card? Well, that’s when you’re failing to take advantage of the inherent benefit of the method of payment,” he explains.

Furthermore, credit card companies often offer a grace period for payments. That means you have more than a month to come up with enough money to pay off your balance and avoid being charged interest — that’s at least two pay periods to gather your own money and use it to pay off the money you borrowed.

Also, not having to wait for paperwork approval when you need or want the money, as you do with loans, is yet another way your credit card acts just like cash (except in plastic form).

Exceptions to these details exist when you are talking about business loans or credit cards, or about personal loans obtained for use of credit card consolidation. Regardless of how you are using your means of credit, make sure you are looking carefully at the terms of the agreement. Let us help you choose the method that best suits your needs, and then take full advantage of its benefits.

Used with Permission. Published by IMN Bank Adviser Includes copyrighted material of IMakeNews, Inc. and its suppliers.

What Is Peer-to-Peer Lending?

And why a financial institution is probably a better idea

Peer-to-peer lending, P2PLend_Featuredalso known as social lending or crowd lending, is a type of debt financing that allows people to borrow and lend money without a financial institution getting involved. It began in the mid-2000s, and we’ve seen peer-to-peer lending platforms such as the Lending Club and Prosper, which pair up borrowers with investors, grow and become greatly successful over the years.

Some people lean toward peer-to-peer lending simply because it removes an intermediary from the process, but what these people might not know is this type of borrowing takes more time and involves more effort and risk than other lending options.

“It’s very risky. It’s like investing in the stock market. Everybody may have great intentions, but when you’re lending this money, you have to be prepared to lose it,” says Beverly Harzog, co-author of “The Complete Idiot’s Guide to Peer-to-Peer Lending.”

First, it’s important to note why people participate in peer-to-peer lending. Peer-to-peer lending can yield great benefits for lenders, as the loans generate income in the form of interest, which is typically much higher than traditional interest percentages from things like savings accounts or CDs. In addition, peer-to-peer lending allows people to take out a loan when they may not have otherwise been able to get approval from standard financial intermediaries.

However, peer-to-peer loans are not insured, so default can be especially painful for investors.

“You might get back a bit more than a bank, but it is more risky because people might default on loans,” says Christine Farnish, chairman of the Peer-to-Peer Finance Association. “Even with responsible credit ratings, you can still get things that go wrong. So you can’t assume you’ll get your capital back.”

In addition, the lender is not able to have full confidence in the borrower. Where a financial institution can reject lending due to a high likelihood of the borrower being unable to pay the money when due, peer-to-peer lending involves much more of a risk factor. This is typically why the interest rate for peer-to-peer loans may be higher than traditional prime loans.

Here are just some of the benefits of borrowing through a financial institution versus peer-to-peer lending:

Trust
Financial institutions go hand in hand with reliability. You know it’s a dependable and consistent place to get a loan simply because they’re regulated by state and federal agencies, and likely have ties to your community.

Loan limits
A financial institution is backed by the Small Business Administration, so it can provide larger amounts — a $5 million maximum on a 7(a) loan — than peer-to-peer lending allows for. Most peer-to-peer loans, depending on their venue and investors, usually have a maximum of around $35,000.

Interest rates
In 2012, small-business loan borrowers at the Lending Club paid an average rate of 13.4 percent, according to a research study by the Federal Reserve Board of Governors. However, according to the National Federation of Independent Businesses, borrowers who took out small-business loans from financial institutions paid an average of 6.3 percent. So an institution may save you money in the loan process.

Depending on your credit history and circumstances, you may benefit from using a financial institution for borrowing over peer-to-peer lending. To learn more, contact us today.

Used with Permission. Published by IMN Bank Adviser Includes copyrighted material of IMakeNews, Inc. and its suppliers.

Loan Co-Signing

What to know before you agree to co-sign a loan

Loan co-signing is a highly charged Cosign_featuredtopic. On one hand, many people who co-sign loans are asked by close family members, so they may feel obligated and don’t think twice before putting pen to paper.

As with any financial decision, it is best to put aside the emotions and look at the facts. You aren’t being a bad family member if you say you need to think about it before agreeing, and you don’t have to say no just because you’ve heard the horror stories. The following information will help you think critically about co-signing so you can start determining what choice is best for you.

It is reasonable to take co-signing a loan very seriously because there are serious repercussions if the person who took out the loan can’t pay. Many people look at the task of loan co-signing as simply acting as a character witness. They have good credit and know that a financial institution trusts them with loans, and by co-signing, they are making it clear that they trust the person they co-sign for.

This is a dangerous way to think about the process, however, because you aren’t simply helping the financial institution make a decision about the borrower. Lenders don’t care about your opinion, they only care that there is someone who will definitely be able to pay. Be sure you understand that you aren’t just adding your credibility to the loan agreement, you are actually lending your assets.

When you co-sign, you are agreeing to pay for the loan, as well as any fees, penalties and other associated costs if the other party cannot. Depending on the specific loan and the state you live in, the lender may even take legal action against you if the loan is in default before attempting to collect from the other party. While this is a scary idea, it makes sense because the co-signer is the one most likely to be able to pay, and the financial institution doesn’t want to waste their time pursuing someone who has already demonstrated an inability to pay.

“By co-signing, you take on all the risk if the loan is not repaid but may only see a modest improvement to your credit score,” states Justin Harelik from Bankrate. “Even worse, the person who you helped most likely has bad credit. So he or she does not care whether another negative mark appears on his or her credit report. Needless to say, you have much more to lose.”

Even if you completely trust the person you agree to co-sign for, there are circumstances that can change your relationship in unexpected ways, so you must be fully prepared to pay when you co-sign. Divorce is an obvious example of good relationships gone wrong, but even co-signing for your children carries risks. There have been many tragic incidents of parents who are left to pay back student loans they co-signed prior to their child’s incapacitation or death. In some cases, financial institutions will negotiate or dismiss loans if a tragic death is involved, but you can’t count on that happening.

Now that you’ve fully considered the seriousness of the subject and the potential consequences, it is important to note that the big risks do indeed confer big rewards on the person you help, so you shouldn’t just say no automatically. Many people would be unable to further their education, get a car or a mortgage without a co-signer and many co-signers never end up paying a dime.

If you would be able to pay in an emergency (this is non-negotiable), and you want to help the other person, there are things you can do to make co-signing safer. First of all, if you are co-signing loans for a child, they can take out a life insurance policy with you as the beneficiary. So, if a tragedy does occur, you have a means of repayment that doesn’t drain your bank account.

You should also speak with the lender to determine the exact amount you might owe, so you can be prepared. You can also try to negotiate the terms so that you are only liable for the principal and not fees and penalties, for example.

“If you’re co-signing for a purchase, make sure you get copies of all important papers, like the loan contract, the Truth-in-Lending Disclosure Statement, and warranties,” recommends the Federal Trade Commission’s website. “Ask the creditor to agree, in writing, to notify you if the borrower misses a payment or the terms on the loan change. That will give you time to deal with the problem or make back payments without having to repay the entire amount immediately.”

Last, make sure you realize that co-signing becomes part of your finances. This means it may impact your ability to take out a loan for yourself. So, if you plan to buy a vacation home or take out another large loan in the future, co-signing may not be feasible even if all the other pieces of the puzzle look good.

Used with Permission. Published by IMN Bank Adviser Includes copyrighted material of IMakeNews, Inc. and its suppliers.