Have you thought about the influence of installment debt to your credit score? It seems like many people are wondering what that is. Like in many things in life, especially with financial matters, the answer to that question depends on many different things as there are many factors to consider and each situation is unique.
Taking out an installment loan may really hurt or help your credit score. That depends on things like how you are utilizing the loan. Installment loans, like most forms of borrowing, can be quite beneficial to your overall financial stability, if managed right. They can improve your rating, put you in a better position when qualifying for other loans, make it easier to get better loan terms and rates and stabilize your finances.
What is an installment loan
Installment loans are loans in which the borrower has to repay in scheduled amounts (installments) over a fixed period of time. It can be five months, five years or longer. Installment loans include mortgage loans, car title loans, personal loans, student loans and many others.
How installment loans can help your credit score
Installment loans can help your credit score when, for example, you use the money to pay off more costly revolving debt or expand the diversity of your consumer report.
Account types diversity
By adding diversity to your borrowing history, taking out an installment loan can really improve your credit score. When a lending company is considering whether or not it should lend you the amount of money you desire, they look at your borrowing experience diversity much like you’d observe someone’s behavior at work or with his friends if he wants you to lend him a certain amount of money. The algorithms that lending company use operate in a very similar way. Taking out different types of installment loans could really expand your diversity.
Taking out a new installment loan in order to consolidate an existing one can decrease the utilization ratio which may then temporarily help with your credit score. 30% of your rating is made up of your revolving credit ratio.
Installment loan borrowers are able to consolidate their installment debt into just one account and by doing so, they get a few benefits. That way the borrower has less accounts to manage every month, the interest rate of the loan lowers, and the utilization ratio on revolving debt improves which temporarily helps the borrower’s credit score.
As long the borrower doesn’t run up new balances on his existing revolving accounts, consolidating debts into one loan helps with the credit score. The utilization ratio of the installment loan is not really considered by credit scores. This variable does not predict future delinquencies but correlates with the age of the account.
How installment debt can hurt your credit score
Installment loans can often be swords with two edges. Borrowers realize that installment debt can actually lower their credit scores when, for instance, they open too many accounts too fast. In most cases, paying off a loan early is considered good. However, many borrowers don’t financially buffer themselves when they do that which often leads to other problems.
Too many loans
If you take out many installment loans within a short period of time, it can really hurt your credit score, as well as your ability to qualify for a mortgage. As we all know, too many in any endeavor does not lead to anything good and the example here makes no exception.
The amount of new installment loans makes up another 10% of your rating.
When the algorithms see too much new loan activity, they usually tend to subtract points as that is a warning sign that a borrower may get into trouble.
The odds of delinquency also increase when you’ve taken out too many installment loans. Doing so also spikes your debt-to-income ratio and increases the total amount of debt. Your chances of falling behind on your loan account increase with every installment loan you take out.
Paying Off loans Early
When you pay off your installment loan earlier than scheduled, it does boost your credit score a little. But in case you haven’t calculated your budget right, it can cause you real problems. Paying off early doesn’t really get you any bonus points. The consumer report will simply say that the loan amount is repaid according to terms and that’s all.
Let’s say you decide to pay the loan in full which leaves you with little cash or none at all. You think is all fine since you’ve calculated your budget. But what if the month after that, an emergency bill comes up, someone gets sick or your car breaks down and you don’t have any money to take care of the situation? You’re going to have to take out a new loan when you could have just stick to your previous when making your fixed monthly payments.
There is probably a solution for this problem and that is building an emergency fund that can cover emergency costs. Once you have your emergency fund, you can start to think how to pay off your installment loan earlier. That way, paying off the loan earlier will not hurt you. It will help you with your credit score instead.
If you are in need of money and you’re thinking of getting a loan, there are plenty of options to choose from. However, if your credit score is poor, your options become much more limited. Having bad credit score does not mean you are out of options since there are few types of loan where your credit score won’t be much of an issue. One of them is installment loans. Below, we’ll take a look at what installment loans are and how they work.
What is an installment loan?
An installment loan is a type of loan which the amount of money you have taken out is repaid in scheduled payments (installments) over an agreed period of time (normally one payment per month) and that payment includes principal and interest.
With installment loans, you can repay the loan over a longer period of time compared to payday loans which are obligatory to pay back by your next paycheck. What determines the amount of each scheduled payment are the amount of the loan, its length and its interest rate. Although installments loans in most cases are repaid with fixed regular installments, the borrower can actually repay their loans earlier than agreed which will eventually save them money on interest and fees.
Installment loans include both personal and commercial types of loans. Mortgages, personal and auto loans are probably the most common installment loans. Unlike most types of installment loans, mortgage loans have variable rates, meaning that the interest rate changes during the life of the loan. With most installment loans, the scheduled monthly payment stays the same throughout the whole period of the loan. That makes it easier for borrowers to calculate their budgets in advance and be able to easily make their payments every month.
How does it work?
To apply for an installment loan, the borrower must submit an application with a lending company. He usually has to specify the reason why he needs the loan. The loan lender will discuss the loan specifics with the borrower, including the loan amount, term and structure of payments. The loan term can vary from five months to five years or longer. The repayment method is usually by deducting the monthly installment directly from your bank account on the due date of the scheduled payment. Some lending companies let you pay via check or online through an app.
Who is eligible for an installment loan?
Although you can still apply for an installment loan even with bad credit rating, there are some requirements you have to meet in order to be approved for one:
You don’t need to be employed to get an installment loan, but you must have a steady source of income that allows you to make your monthly payments comfortably
You must be 18 years old or older to be eligible for installment loan
You must not be in bankruptcy or close to filing for one
You must be a resident of the state which you choose to apply for your installment loan
How much will an installment loan actually cost?
That depends very much on your financial situation and the loan you have been approved for. After you applied for an installment loan, you should receive a contract outlining the loan’s interest rate and fees. Some expenses that may apply are:
Interest rate. This is the interest rate for borrowing the money and it is expressed as a percentage.
Fees. You may be charged with late payment and prepayment fees plus loan origination fee.
APR. The annual percentage rate includes all interest and fees expressed as a yearly percentage
Advantages and disadvantages of installment loans
Installment loans can be really flexible with the terms of the loan amount and length of the loan. This allows them to be a great solution for many borrowers. With installment loans, borrowers can get the loan they need at a much smaller interest rate compared to some other types of loans. This lets the borrowers have more cash in their pockets instead of having to pay high interest with it.
On the other hand, in the case of a longer-term loan, fixed-interest loan payments that the borrower is making may be at a higher interest rate than what other loans on market have to offer. Another disadvantage of installment loans is that the borrower can find himself hooked onto a long-term financial obligation. As the financial situation of the borrower change at some point, he may not be able to repay his monthly installments as easily as he used to. This means that any collateral used for the loan may be at risk.
Choosing a lender
If you are thinking of taking out an installment loan, choosing the right installment loan lending company is essential. Borrowers should do thorough research before choosing a lender and should choose one that complies with all state laws. It should also provide full disclosure of information regarding rates and its lending practices.
Installment loans are thought to be a lot safer than payday loans. Is this really true or are they just as risky for the borrowers?
Payday loans are probably the most popular type of short-term loans out there. Even though there are many different opinions about them, there is always one certain thing – high risk. This fact by itself leads to the growth of another type of loan – installment loans that have the reputation of being a much safer choice. However, lately, different researches showed that this may not be the case or at least not fully the case. It turns out that there are some secrets in installment loans that may pretty much change the way that borrowers look at them. Some lending companies claim that installment loans are better than payday loans due to the fact that they don’t include the final payment that can really make the borrower go over the edge, making him end up with even more debt. But that alone does not necessarily make them a safe service. According to Lauren Saunders who is a an attorney, working at the National Consumer Law Center, “There are installment loans that have very deceitful add-on fees, extravagant rates, and deceptive products, and tricks such as loan flipping, that make them just as, if not even more dangerous than payday loans.”
Installment loans, much like payday loans, don’t start off looking like they involve a big amount of money. A lot of people who are financially vulnerable are easily attracted by what these short-term loans have to offer. Since information is essential when making any financial decision, we’ll uncover 5 secrets about installment loans to help you make better choices.
They are not a one-time solution
Installment loans have the reputation of being an easy, one-time fix to a financial difficulty. Reality is, much like payday loans, installment loans can be renewed into new loans over and over again. And lending companies providing installment loans tend to make their clients do that. A research showed that about 76% of the company’s loan volume consists of renewals of existing loans.
The annual percentage rate can go as high as 500%
A customer participating in an installment loans customer research had an APR of 110% listed on his contract. Even though this sounds bad, there are much worse cases out there. By renewing their loans over and over again, borrowers can end up paying incredibly big amounts in interest rate. The repayments are structured in a way that in the early stages you pay more in interest. Meaning that refinancers keep on paying interest but without putting much of a dent in the principal which doesn’t really help with getting out of debt.
Recently, federal regulators have broken down on some credit card companies which sell add-on products such as ‘credit protection’ plans. That being said, installment loans lending companies are still aggressively trying to sell these services to their clients.
Installment loans are growing
As an indirect result of the negative focus that the media puts on payday loans lending, more and more borrowers are turning to installment loans in times of financial difficulties.
Installment loans lenders use aggressive techniques to collect their money
Some lending companies are really aggressive when it comes to collecting their money. In some cases, they may even start calling you before your due date. If the repeated calls don’t do the trick, they may start calling you at your workplace or even start harassing your friends and family. If you refuse to answer these phone calls, installment loans collectors may show up at your home or your workplace to continue their threats.
All types of loans have their benefits and downsides. It is up to you to decide which option suits you the most, but one thing is for sure – the more information you have, the better you are able to make the right financial decisions.
Even though there a lot of people who probably don’t even know the definition of an installment loan, there’s a pretty good chance they would need to take out one some day.
What is an installment loan?
An installment loan is a type of loan in which you pay back the amount you’ve taken out in a set number of scheduled payments over a certain period of time. A lot of different types of loans fall into the category of installment loans, that includes mortgages and auto loans. Even though credit card requires a monthly minimum payment, it is not an installment loan.
As we already said, installment loans require a number of regular payments over a certain period of time. Compared to payday loans, installment loans normally last longer (they could last several years) with each payment evenly spread over the whole period of the loan with interest included.
No doubt, taking out an installment loan can be quite beneficial, especially if it is for big purchases and also for any other situations where you are in need of cash. Installment loan lending companies not only provide borrowers with much lower interest rates on their loans compared to other types of loans, their clients also build credit if their credit history is poor or if they don’t have a credit history at all.
If you are considering an installment loan, the first thing you should probably do is get information about every type of installment loans to find the one that is best suited for your situation. After that, you should find a reliable installment loan lending company to work with. We are going to share some insights on how to choose an installment loan that works for you.
Different types of installment loans
Before you decide to take out an installment loan you must know the different types you can choose from:
Unsecured Installment Loans
Normally, unsecured installment loans are loans for a small sum with high interest rates. They are some of the most popular types of loans you can find. With unsecured installment loans, you get your money from the lender and you have to pay it back over an agreed period of time. Going for this type of loan makes the most sense when you need money only for a short time period – 4-5 years or less. It is also worth mentioning that if your payments are on time, it can really help you with rebuilding your credit.
Student loans are a type of installment loan where you get a set amount of money for your educational expenses. Once you are out of college, you have to pay back the loan by paying a set amount of money each month. Student loans also give you the option to defer your payments for a period of time when you are unemployed but once you’re employed again, you will have to pick up the repayments again.
When taking out a mortgage loan, what you are able to do is to finance your house and pay back the loan over a set number of years. It is of great importance that you do your repayments on time or you will be at risk of losing your home and badly damaging your credit.
If your car has broken down or you just want to buy a new one but you don’t have the cash, probably a car installment loan is the answer for you. Keep in mind though that much like mortgage loans, if you are not able to pay the money back on time, you risk your car being taken back.
Choosing the right lender
Once you’ve decided what type of installment loan you want to take out, it’s time to choose a reliable lender who is best able to meet your needs and apply for your loan. To do so, here are a few steps you could take:
Make a good financial portfolio
The application process itself does not create as much stress as the documents you have to prepare in order to ensure your application for the installment loan will be approved. What you need to do first is to collect all the data (your credit records and financial status). Perhaps your liabilities and assets are what your potential lending company may be interested in, so you must not forget to take them along with you.
Even though traditional banks are way more strict when it comes to your documents, installment loan lenders also require some paperwork, so you should keep that in mind.
Think the whole thing through
You shouldn’t apply for an installment loan if you are not completely sure that you need one. If you decide to apply for one, you should ask yourself whether you can afford to repay it. Your ability to pay back the installment loan should be your main concern.
Few things you may want to do before you proceed with your loan:
Ask which are the types of installment loans you qualify for
See if there are any hidden fees or charges you’ll have to pay apart from the interest rate
Doing those things will help you find an honest and reliable lender.
Apply for your loan
Once you’ve decided which type of loan you want and you have found the right lender, there’s only one thing left to do – submit your application and get the cash you need.
The main benefit ofloans consolidation is that you just have a single monthly payment to deal with. The consolidation replaces multiple payments on different loans with a single payment on the consolidation loan. For example, a studentmay graduate with as many as a dozen loans. Consolidation will combine them into a single loan with a single monthly payment, thus simplifying the repayment process.
Secondly, there are alternate repayment plans that lead to more manageable monthly payments. Debt consolidation loans provide access to alternate repayment plans, such as extended repayment, graduated repayment and income contingent repayment. Although such plans may be also available to unconsolidated loans, the terms of an extended repayment plan depends on the loan balance, which is higher on a consolidation loan. Turning to alternate repayment plans often reduces the size of the monthly payment by as much as 50% by increasing the term of the loan. This can reduce monthly payments, making them more affordable and manageable. However, it does increase the total interest paid over the lifetime of the loan.
Loans consolidation also reduces the interest rate on some PLUS loans. For example, consolidating an 8.5% fixed rate PLUS loan reduces the interest rate by 0.25% because of the lower 8.25% interest rate cap on consolidation loans. In order to maximize the interest rate reduction, the PLUS loans must be consolidated only by themselves. It is also advisable to consider the impact of consolidation on student loan discounts.
Loan consolidation resets the 3-year maturity of certain deferments and forbearances. A consolidation loan is a new loan with its own deferments and forbearances.
Loan consolidation is a useful tool for medical schoolstudents because they do not get an in-school deferment during the internship and residency periods. They are, however, eligible for an economic hardship deferment for no more than three years. Therefore, if they need more than three years, loans consolidation is a practical and appropriate tool for that purpose.
Consolidation restarts the loan term on loans that are already in repayment. Even if your loans have a standard 10-year repayment period, by consolidating them when they are already in repayment, you will reset their loan terms since a consolidation loan is a new loan. This can give you similar benefits to these of an alternate repayment plan. It may yield a lower monthly payment without extending the term. On the other hand, consolidation should be avoided when you are close to the end of your repayment term because you won’t save much.
Consolidation allows you to change lenders, thus providing better loan discounts. Consolidating your loans allows you to choose between lenders. If you take the time to shop around, you may be able to find a better discount on loan interest rates and better rebates on the fees.
Loan consolidation foreducational loans is sometimes necessary for graduate students when applying for a mortgage on a house.
For some borrowers with poor credit score, there are specialized debt consolidation loans for bad credit. They come in use when those borrowers are denied of standard loans. Also, there is payday loan consolidation for those borrowers who have taken out payday loans.
Extended repayment is not mandatory. On the contrary, it is an option. This means that you don’t have to extend the repayment term because this may increase the total interest paid over the lifetime of the loan. Some lenders even encourage borrowers to extend the repayment on their loans. Therefore, you should be careful when deciding whether to extend the repayment. Moreover, borrowers are not required to choose an alternate repayment term. They can use the standard 10-year repayment even if they consolidate their loans. It is advisable to keep a standard repayment term as this minimizes the total cost of the loan. Extended or alternate repayment term should be chosen only when the borrower experiences trouble with his monthly payments. An alternate repayment term can reduce the size of the monthly payments by as much as 50%. However, this comes at the cost of increasing the total interest should be paid over the lifetime of the loan by as much as 250% or more. Alternate repayment plans can increase the total cost of the loan by thousands or even tens of thousands of dollars.
What will my payments look like each month?
Consolidating your loans can significantly reduce your required monthly payment because they are usually amortized over 10 or 15 years. When you choose to consolidate, you may be eligible for a longer repayment period. The time period during which you have to repay your consolidation loan depends on your consolidation loan balance. This means that you are able to extend the amount of time from 10 years to up to 30 years, allowing you to pay a lower amount each month.
Don’t forget that when you have a longer repayment term, your monthly installment amount may drop down because you will have more time to repay the debt. However, longer repayment terms usually means that you will have to pay more over the life of your loan in interest rate.
If your current loans have variable interest rates, consolidating will allow you to have a single fixed interest rate for the life of the loan.This fixed rate is based on the weighted average of all interest rates on the loans being consolidated. If you are a student, you can review your loan details and interest rates by logging into the National Student Loan Data System (NSLDS) with your federal ID.
Consolidation also affects the way loans are serviced. Loans consolidating makes it easier for the borrower to manage the loan debt. The borrower will receive one bill and make one payment every month for all the loans included in his consolidation.
Most bill consolidation loans offer a lower interest rate than those you’re paying on your existing debts combined. As a potential borrower, you should make sure that it doesn’t change over the life of the loan.
Before signing any agreement, the borrower has to be sure that he knows exactly how much he will have to pay each month and that he can afford it. The monthly payment for the consolidation loan lender should be less than the payments to all other creditors combined.
Sometimes loans consumers who consider taking out a consolidation loan are unable to make all monthly payments. Therefore, the potential borrower should make sure that the new loan offers him savings over his current total monthly payments.
Along with the interest rate, monthly payment amount and monthly savings, the borrower should check the total interest he’ll be paying on the consolidation loan. The amount may seem high but it’s usually much less than the interest he would have paid if he had continued paying all former creditors individually – especially if he’s only making minimum payments. It is possible to reduce the amount of interest through an alternative payment plan which sometimes allows early pay off of the loan.
Some lenders may offer flexibility in the due date of your bill consolidation loan. If you paid twice a month – for example, on the 1st and 15th – you may ask to set a due date that corresponds with your paycheck’s schedule to be able to make your monthly payment.
The lender should tell you the exact terms of your bill consolidation loan. It should typically be provided in months rather than years. For example – 36 months rather than 3 years. Make sure you’re comfortable with the repayment period of the loan.
The lender may offer flexible due dates as well as alternative payment plans, such as weekly or biweekly payments. Many loan borrowers find it easier to spread payments over two or more per month, rather than repaying all at once. This may also help paying off the bill consolidation loan more quickly. Be sure to ask how such an alternative payment schedule may affect the interest you pay over the life of the loan.
Always look for a consolidation loan lender who doesn’t charge a pre-payment penalty for paying off your consolidation loan earlier. A reputable lending company will not charge a fee for an early payoff as their goal is to help their clients get out of debt as fast as possible.
Areputable lending company will offer their clients fast and effective ways to get in touch with them. You should know the ways to keep in touch with the company handling your bill consolidation loan and whether you’re assigned a personal loan representative or not. You should keep all phone numbers, email addresses and websites accessible in case you’ve questions or concerns.
How long will the loans consolidation process take?
A common question borrowers will ask is how long it will take to get a personal consolidation loan.
Typically, it would take between 30 to 60 days from the approval of the loan until the loans consolidation is complete.
Nevertheless, if the borrower provides the lender with all the necessary information, this may help significantly reduce the time required to pay off the old loans.
Borrowers should continue making payments on their loans until the lender notifies them that this isn’t necessary anymore because the loans have been paid off. If an overpayment occurs, it will either be forwarded to the new lender or be refunded to the borrower.
The most important thing is that you are completely aware of your financial situation – how much you earn, how much you owe, when are the bills and debts due. That will help you understand when you are in trouble and need a solution. Loan consolidation is a widely used method for getting out of financial problems. In this article, you can find further information on its characteristics, benefits, how to get one and use it wisely in the article. There is also additional information about the other options available.
Loan consolidation explained
The term consolidation comes from financial accounting and is often referred to consolidation of financial statements when there are subsidiaries reporting under the parent company. In more general terms, it means combining two or more financial items like assets into one. When it comes to personal finances, it is used for merging multiple debts, high interest rates and credit card debts into a single one. That makes the payments far more manageable. The interest rates are usually lower so it is beneficial. Loan consolidation is done through a debt consolidation loan.
A consolidation loan is a loan that you take in order to repay your other loans. You need to consolidate your loans to be able to do that. After consolidating your loans, you no longer owe your previous creditors – you just need to repay your consolidation loan lender. You are supposed to use the money from this loan to pay off the other creditor completely. Consolidation loans are beneficial because they reduce the monthly payments you have to make. That is usually done through extension of the payment period or a reduction of the interest rate.
Payday loan debt consolidation
Payday loans are normally short-terms loans. However, if you are late in your payments, there is a possibility to renew it for another payday period and that can happen a certain number of times. In those cases when you already have a payday loan for a while, the interest rates will start adding to the amount you owe. When you have several payday loans that are overdue and even if they are not, you may want to consider consolidating them. You can get a loan consolidation loan and repay all your payday loans in full. That will help you avoid further complications the high interest of payday loans and the payday loan debt cycle. Payday loan debt consolidation is one of the best ways to reduce the current number of your payday loans. That will save you a lot of time and money since payday loans have one of the highest interest rates.
Other lending options
The two main alternatives to loan consolidation are debt settlement programs and debt negotiations. You need to understand the differences of these methods.
With a debt settlement program, you will also get a reduction in the payment. However, unlike with a consolidation loan, there is a middleman – the debt-settlement agency. Its role is to negotiate on your behalf with your creditor to try to reduce the interest rates. That makes it easier for you since you don’t have to do it yourself. Of course, the debt settlement agency does that for a fee. However, with a consolidation loan, all that is avoided and no fee is charged. Another difference is that with a debt settlement program, you pay the debt settlement company. That can be done in a lump sum or in monthly payments but you don’t pay your creditors off directly.
Debt negotiation is a kind of a settlement. You pay your creditor a certain part of what you owe and he agrees not to seek the rest. It is hard to achieve and there are many possible scams. It is far more secure to simply consolidate your debts and repay them at once. Being debt-free is the best thing you can do and the best way to achieve it is through loan consolidation.
Why choose debt consolidation
Only one debt
Consolidating your debts solves many problems. You no longer have to worry about due dates and creditors. From that moment on, you will only have one debt – the consolidation one loan and it is spread over a relatively long period of time and separated into small manageable payments. That makes it really easy to deal with. In addition, it will help you improve your credit score through having a history of many regular repayments.
Only one creditor
The benefit of having only one creditor is that it drastically reduces the number of calls, letters and emails you receive from your creditors when you are late on the monthly payments. Actually, with loan consolidation, the repayments are so easy to cope with you will probably not have such a problem at all.
Simple and easy to achieve
Debt consolidation is one of the easiest ways to become debts-free. All you have to do is get a consolidation loan and repay everything else you own in full. Receiving such a loan is not that hard in the first place and because of preferable conditions it offers, it is really easy to pay it back afterwards.
How to get debt consolidation
Know your credit score
To get a debt consolidation loan, you will need your credit score. The terms of your future loan will be widely based on your credit history so it is very important that you have it up to date. It is also important that it is accurate. The higher your credit score, the better loan terms you will be able to get. So go over it and make sure everything is correct and updated.
Know your options
Depending on your goal, there are different options you may want to consider. You need to find the balance between your needs and what can be realistically achieved. You need to figure out what is the best way to achieve it.
You want to save money
Loan consolidation offers you a very good chance of saving money through its lower interest rates. If you are not late on many of your payments and you are in not so much trouble, you can try to prioritize your debts and pay off the most urgent ones first. You should be careful because some loans have penalties for early payments. Go over your debts and read the terms once again very carefully. Decide whether to try to balance all the debts or take the highway and consolidate them. Consolidating is a simpler solution than having to keep track of all the details. So if you are not very good in math and you are not highly organized, consolidation may just be the best option to achieve your goal.
You want a lower interest rate
One of the main advantages of debt consolidation is having a lower interest rate. In some cases, it is possible to achieve this goal through another means. You can call your credit company and try to renegotiate your terms with them. You need to have a really good credit score to be successful in such negotiations. In case your offer is rejected, you may then try to switch to a credit card with no interest or at least one with lower long-term payments. Of course, all that is not possible if you don’t owe a credit company but several different creditor. In that case, you would have to try to re-negotiate with all of them which can make the task far more difficult. In addition, they may not be willing to agree and they have no obligation to comply with your requirements. Therefore, it will be much easier to consolidate your loans into a single loan with a single creditor.
You want to be on top of your financial situation
Debt consolidation gives you a rather good sense of control. Once you have your debts consolidated, you can track your payments easily. If you are confused about your finances, you can try contacting a credit counseling agency. They will be able to advise you. However, take note that there should be no charge free and you should also be careful for scammers.
Find the right loan for your consolidation
There are two types of consolidation loans – secured and unsecured. The difference is that the secured ones are backed by collateral. Because of that, secured loans als have lower interest rates. If you have something to provide as collateral (your car) and you are sure you can keep up with your payments, a secured loan is a rather good way to go. You should consider the risks though. If you fall behind on your payments, your lender can foreclose on whatever you have provided to secure your loan.
On the other hand, unsecured loans are safer for you because you don’t have to risk any of your assets. It is also possible to receive a good deal for an unsecured loan but that will depend a lot on your credit score. If you have a good credit history, you should be able to get a good interest rate on your loan.
When choosing a loan, you may also like to compare offers from different lenders. Do a little research, check different websites and see what terms are being offered. Make sure you understand all the terms, including the fees and other related conditions such as penalties. If you have questions, don’t hesitate to ask the lender or other people who have used his services before. You can also find a lot of useful information online.
After you have decided what type of consolidation loan you want to take and which company’s conditions you like the most, don’t forget to estimate the real value of your loan. Don’t only look at the monthly payments. You should also consider all additional fees. It may turn out that you are turning a bad situation into a worse one if you don’t foresee all the possible costs associated with the consolidation loan.
Know your contract
Read your contract very carefully. Read it until you make sure you have fully understood it. If it seems like there is something is wrong, check. Consult a lawyer if necessary. If you sign something that you don’t understand, it can cost you a lot later. Your signature is equivalent to your consent of whatever is stated in the contract. Therefore, read your contract carefully
How to use debt consolidation wisely
Try to repay your consolidation loan as quickly as possible. Keep up with your monthly payments even if it means you have to cut back on some other expenses for a while. The best thing you can achieve is being debt-free and that is only possible after you have repaid that consolidation loan. At some point if you have trouble with the repayments, you may consider borrowing from a trusted family member or a friend. The important thing is to repay the consolidation loan as soon as possible.
Cut back on expenses
To stay out of trouble in the future, try to cut back on unnecessary expenses. That will help you save money for bad days and you won’t need to borrow again. It is better to go without some little luxuries than being in debt.
Keep track of your money
Keep a regular budget to know how you spend your money. That way, you can be in control of your financial situation. It is useful if you list income and expenses on a chart which will give you a clear idea of how you’ve spent your money. Knowing where your money goes is essential.
Keep up the good work
Managing your loans, consolidating them, finding a decent lender…all these take a lot of effort. However, do celebrate the moment when you are debt-free and try to stay on top of your finances in the future.
If you are in debt and have multiple loans, there are some important factors you should bear in mind when deciding how to deal with them. One option is debt consolidation loan. Thesource of your debt may be a payday loan, residential mortgage, car loan, student loan, among others. You may choose a debt consolidation company as well.
Let’s consider the mortgage option. Even with the recent equity erosion in the housing market, you may still have high equity built in your property and should be able to either repay some or all your credit card debt or possibly get a lower interest rate. Of course, there are other factors that may affect your eligibility such as current FICO credit scores, income and other installment debt.
Bigger banks offer various programs and if they cannot offer you the terms you need, you could try consulting an established mortgage broker who has access to less restrictive and are more helpful towards your funding goals.
There is another option but you should consider it only as a last resort. This is debtconsolidation loan provided by a debt consolidation company. You should avoid it because in most cases, it will negatively affect your personal credit. This is due to the fact that debt consolidation firms buy your debt for less than you owe which will leave a mark on your credit report. It is also possible to lose credit score points because not all credit cards may get paid off on time which may lead to having late payments posted.
Debt consolidation loans
Debt consolidation loan is, indeed, a possible solution when you have become financially overburdened with credit card or other debts. The process of debt consolidation means taking out a new personal loan that combines a number of your outstanding debts. The purpose of the new loan is to let you pay off the consolidated debts with having only a single repayment amount to manage every month.
The benefit of debt consolidation loans is that the new single monthly repayment on the consolidated debt is usually significantly lower than the combined monthly payments that were needed to service the previously unmanageable debts. The new loan is usually made at a lower interest rate than the average interest of the previous ones combined. However, all customers are advised to exercise caution and due diligence when considering a debt consolidation company. On the market, there are debt consolidation services that indeed offer lower monthly payments and interest rates. However, at the end of the day, they may turn out to cost you more money as the loan term is extended for a longer period of time.
Debt consolidation company
You should choose your debt consolidation company wisely. Go for the one with a better reputation and with better terms. Reputable debt consolidation companies negotiate with creditors to lower the total amount of debt owed even before putting together a debt consolidation loan rather than only providing a new consolidation loan to cover the existing debt. That way, they manage to provide genuine, substantial savings for the indebted customer.
Based on reviews from various consumer websites, these are the attributes which reputable debt consolidation companies have:
According to number of sites and articles that review debt consolidation companies, the highest ranking company has an A+ rating from the Better Business Bureau (BBB) and is accredited by the BBB, the American Fair Credit Council (AFCC) and the International Association of Professional Debt Arbitrators (IAPDA). This company is recommended because of its high level of transparency. It is transparent about its fees which the consumer is expected to pay which is 18 to 25%. The average debt reduction savings realized are also transparent — a net 30% after deducting the company’s fees. Unlike many debt settlement or debt consolidation companies, this particular lender can help both business and personal debt. Their debt settlement plans are designed to retire debt within a time frame of two to four years. The minimum level of debt required to qualify for their program is $7,500. They operate in 41 states.
The second ranking company offers a level of average net debt savings at 40% while their average fee is 20%. They also offer to consolidate both personal and business loans with a minimum debt requirement of $7,500. They sometimes work with customers with as little as $5,000 of debt, so it’s a good option to explore if you have lower debt levels. It is accredited by the AFCC and the IAPDA, but not by the BBB. It has an A+ BBB rating. Their website is consumer-friendly and provides an online customer service chat feature for those who may wish to ask questions online before making further inquiries with the company. Their debt retirement plans are also designed for a two- to four-year time period and are available in 38 states.
The third highest rated company has no minimum debt level requirement and their average fees range between 14 and 20%, which is approximately 5% lower than the average fee of most other high-rated debt relief services companies. They offer services in 42 states. Their services include personal and business debt consolidation plans with a time frame of 3 to 4 years. They are accredited by the BBB(A+ rating) and the IAPDA. Their website is transparent and easy to use.
Debt consolidation loan can be an efficient solution to sort out problems with existing debt. This solution allows you to repay all your current debts and replace them with one simple consolidation loan. Thus, you’ll have a lower monthly repayment and will repay less on your debt over time.
Like any lending product, loan consolidation does not work for everyone and sometimes it should be avoided because it could actually get you into deeper trouble. For example, you should not take out a debt consolidation loan when the interest rate is so high that your monthly repayment will be more than what you’re currently paying or when you can’t afford the new loan payments. Also, when the loan does not clear all your debts or when your monthly repayments are lower but the loan tenure is longer. The total amount you will repay in this case will be more than the original debt.
Let’s take a look at several things you should consider before choosing loan consolidation:
Don’t opt for loan consolidation if it brings with it higher interest rates than those you are currently paying. You aim at decreasing interest, not increasing it. Sometimes, a lower interest is a given. For example, most debt consolidation loans will come with personal loan rates that are much lower than those you will be paying on credit cards. But, if the debt you want to consolidate has low interest rates or if your credit history is bad and you can’t get low rates, then loan consolidation will not work for you.
Do not take out a consolidation product if it means you will be spending more on servicing your debt monthly than you are already doing. Your goal here should be to decrease your monthly repayment and ease your financial commitments. If a consolidation loan will cost more, you may need to find another solution.
You should not take up a debt consolidation option if you cannot comfortably meet its repayments. This will only lead to more problems and you’ll find yourself in a worse financial situation. You should aim to have cash left every month after you’ve met all your financial obligations. If a debt consolidation loan won’t let you to have spare cash every month, then avoid it.
Look carefully at how long it will take you to repay the debt consolidation loan and how much you will repay in the end. In many cases, you’ll find that this can be a quicker and more cost effective route for paying back your debt. However, a longer loan term can mean lower monthly repayments, it can also mean a higher overall repayment amount.
If you currently have several unsecured debts and are encouraged to take out a secured loan to repay them, think hard before accepting this. It is true that your monthly costs may be lower, but you will need to put up your home or car as collateral. If your existing loans are unsecured, you don’t currently have that risk.
These loan solutions can work really well for some while being completely inappropriate for others.
Things to note when taking out credit card debt consolidation loans
To consolidate your credit card debt may be a good way to solve the challenges of high-interest debt. Thus, you can reduce interest rates and monthly payments, and repay your debt faster and more efficiently. However, when consolidation is not done correctly, it can lead to additional financial trouble.
Therefore, here are ten basic things to consider when using a credit consolidation program:
To stop accruing debt, stop spending excessively
When you consolidate, instead of balancing your budget, you continue to use your credit cards to get by every month. As a result, the credit cards keep adding to the debt instead of reducing it.
When you’re consolidating your credit cards, you should stop spending on credit until you’ve cleared the consolidated debt. Otherwise, you’re just generating more debt and bills. You’ll eventually get to the point where your monthly debt payments need too much money.
If you don’t have good credit, don’t solve your problems on your own
Most people prefer to solve their debt problems on their own so they don’t have to tell anyone else about them. However, this will work only if you have a good enough credit score to qualify for the low interest rates. If you consolidate with a higher interest rate, you won’t be able to pay your debt off efficiently.
You should try to consolidate at an interest rate that’s as close to zero as possible. So, if you’re doing a credit card balance transfer, you should aim for a card with a 0% APR introductory period. If you take out a personal debt consolidation loan, then you should aim at an interest rate around 5% and no higher than 10%.
Don’t secure unsecured debt
This happens with people with a lower credit score consolidate on their own. They don’t qualify for an unsecured debt consolidation loan with lower interest rates because their credit score is too low. Therefore, they apply for something similar to a home equity loan instead, so that the debt is secured with their home as collateral.
Credit cards are unsecured debt. Therefore collectors may threaten to but they can’t actually take your property without a court order. On the other hand, a home equity loan may lead to foreclosure. That is not worth the risk just to repay your credit card debt.
Asking for help is a good idea
One advisable option when consolidating debt with a low credit score is credit counseling. Thus, you can check whether you qualify for a debt management program. That way you can roll all of your debts into a single monthly payment while reducing or eliminating high interest charges. The low rates are guaranteed because the credit counseling agency negotiates with creditors on your behalf.
So, rather than securing unsecured debt with your house, you should look into a consolidation program through a credit counseling agency.
Always consider the fees
There may be hidden fees that add to the cost and it may take more time for you to pay off your debt. Most debt solutions do cost something, but the cost may vary, so check it before consolidating your credit card debt. Let’s say a balance transfer credit card usually has a 3% fee for every balance you move to that card. It may go up when you have higher debts or multiple debts on different cards.
For debt management programs, the fees are based on your budget.
Don’t give up and return to excessive spending
When people find out about consolidating, they’re excited to have a solution. Nevertheless, as time passes, some of them get tired of budgeting and after several months, they go back to excessive spending. This has a negative impact on their ability to avoid bankruptcy and their credit score.
When on a debt management program, they may drop off the program by the sixth month. However, remember that if you leave the program, your original interest rates and penalties can be reinstated. You have to stick with the consolidation program up until the end of it.
Consolidation is not the same as settlement
There are commercials that urge you to “settle your debt for pennies on the dollar”. Don’t let them confuse you – that is different from consolidation. Consolidating credit cards with or without a debt management program and going through a debt settlement program are two separate things.
All consolidation options will pay off the debt in a way that works for your budget, meaning lower interest rates and lower monthly payments. That’s different from settling your debt for less than you owe. Consolidation helps you keep your credit score up as long as you keep up with your plan. Settlement always has a negative impact on your credit score.
Be alert of new financing
When turning to debt consolidation, there is nothing that can stop you from seeking financing – whether it’s for a new house, car or a new credit card. You’ll be able to open new accounts and to get approved for loans you need. Actually, it may be even easier to get approved since consolidation will help with fixing your debt-to-income balance. If you use a debt management program, your credit cards will be frozen and you won’t be able to open new credit card accounts. However, you’ll still be able to get financing for a mortgage or auto loan.
You may be able to get financing, but this doesn’t mean that you should. Any changes to your debt while working to eliminate it should be avoided. You may take out a loan and also want to buy a new home or car, but proceed with caution. Therefore, it is advisable to consult a certified credit counselor. The advice is free and you can get expert opinion on your situation.
Keep track on your credit once the debt is repaid
Once your consolidation plan is completed and all your credit card debt successfully eliminated, you have to check your credit report to make sure it reflects the financial state you achieved. Creditors send the credit bureaus updates when an account has a change, but information transfer can sometimes be slower and you won’t immediately enjoy the benefits of eliminating your debt.
You should check the credit report for the following:
The account information should have been updated to reflect zero balances. If you go through a debt management program, the credit history of each account should reflect that you made all payments on time. If you paid off a collections account, it should be closed. If you negotiated to have that account removed in exchange for repayment, make sure it is actually closed. Check that all your account statuses are listed as current. Once the updates are verified, any outdated information will reflect your actual positive financial standing.
You should learn from your mistakes
To avoid finding yourself in the same situation six months to a year from the moment you repaid your debt, you should not get back to overspending and relying too much on credit cards. You won’t get penalized for consolidating or even consolidating multiple times, but this doesn’t mean that you should not avoid financial distress.
Once you’re out of debt, you should create a budget that allows you to reserve credit cards for strategic use and emergencies only. Also, establish an emergency savings fund to cover unexpected expenses without pulling out a credit card. Another advisable strategy is to keep an eye on your credit card debt ratio. Credit card debt payments should take up no more than 10% of your monthly income. If you spend more than 10% on them, you need to take steps to reduce your debt beforeresorting to consolidate again.
Student debt consolidation is highly advertised, but it may not be suitable for everybody. Although it has 6-month grace period before the first payment on your loans after graduation, remember that if you don’t begin making payments after this timeframe, your interest will accrue and your debt will continue to grow.
The Consumer Financial Protection Bureau estimates that there is currently $1.2 trillion in outstanding student debt in the U.S.A. Around 7 million of the debtors are currently in default. This means a great potential for scammers. As debt grows, most debtors become overburdened, anxious and desperate and therefore very susceptible to trickery.
Most scammers aim at students during this six-month grace period before their first payment is due.
Several scams to avoid:
The upfront fee scam that involves a “company” declaring that they can minimize interest rates for a low fee upfront. Actually, they are charging a premium fee for them to go to your lenders and arrange for some kind of debt forgiveness or consolidation. You can do this on your own without this fee. No legitimate lender will require an upfront fee although some of them may require a percentage payment on your balance in the end. Private lenders might charge an origination fee, but this is negotiable.
The elimination scam involves someone offering to wipe out your student debt. Actually, this is impossible because no one can eliminate your private student debt.
Obama forgiveness scam. Although President Obama has put great efforts to ease the burden of student debt, you should familiarize yourself with his initiatives.
Power of attorney is a dangerous scam and you should not sign papers allowing someone else to hold power of attorney over you without a lawyer present.
If the consolidation company doesn’t provide information on phone numbers or address, this may mean that you are dealing with a fake consolidation company that is hiding behind a website. Every legitimate company should have a way in which consumers can contact them.
Finding a reputable debt consolidation loan company:
Check to see if they’re registered with the Association of Independent Consumer Credit Counseling Agencies and the National Foundation of Credit Counseling. They have lists of companies that offer legitimate debt consolidation services. Not all companies will be registered in either one of these databases, but many are and you can trust that they’re reputable.
Check the Better Business Bureau website that lets consumers rate different businesses and allows users to search for any open court cases against companies. If a company doesn’t appear on the site, this doesn’t necessarily mean they’re not legit. However, those who have built up a reputation for scamming will usually appear there with bad ratings.
Call your current lenders. Most of them are willing to work with you to come up with a plan for repaying because they would rather want their money back than to see you to go into default.
Beware of companies that either make up a program that doesn’t exist, or describe a government program like it’s their own or say they have special methods to access it. Call the companies through whom you already have loans and ask about any forgiveness or consolidation programs they have. Don’t give anyone your social security number or bank account information via email, especially if their emails are written in poor English or deals that sound too good to be true because they are probably scams. A consolidation company should be able to let you feel secure about refinancing. If after dealing with them, you do not feel at ease, you should definitely do a background check on them. Student debt consolidation should be a positive step towards getting out of debt.
For a lot of people, a payday loan is an easy escape from complicated financial situations. In case you are in urgent need of money, you just apply for a loan to cover the bills. However, it is not always that simple. Payday loans have certain legal implications. To better understand some of the problems that may arise from taking out legal payday loans, you may need to understand it from a legal perspective.
The average payback period is 14 days.
The average loan size is $370.
The average fee is $25 per week.
The borrower can pay by a post-dated check for next payday period.
Most borrowers give the lenders electronic authorization to withdraw the money directly from their bank account.
If there is no money in the bank account or the check doesn’t encash, further fees are imposed.
Almost 6% of American adults have used legal payday loans.
The average borrower has the loan for approximately 5 months.
More than 70% of the borrowers take out more than 2 payday loans a year.
Are there legal payday loans?
Yes, they are legal. Payday loans were created to help people cope with some financial difficulties or unexpected emergencies that lead to additional bills. However, there is currently no correct answer to this question. It depends on which state do you live in. The state regulations on legal payday loans vary from State to State. For example, New York has forbidden them altogether. That means that any form of legal payday loans is illegal there. The situation is more or less similar in North Carolina. Of course, there are various approaches to the regulation. Other States try to regulate how high the interest rate can go. In Arizona, it is forbidden for payday lenders to offer interest rates that are higher than 36% while the maximum allowed interest rate is 24% in the District of Columbia.
Online payday loans raise a separate legal problem. Since you can apply and receive an online payday loan from virtually anywhere, what happens when you apply from a State that has certain regulations on the matter. Do the regulations apply? The answer is yes. That means, there is higher chance that your loan is not legal with online payday loans. There is only one way to avoid that – check online for your State regulations. Almost every State Attorney General web page has detailed information on the matter. That is one of the most credible sources you can use. In addition, if you have any doubt, you can always call the authorities and make an inquiry.
In which States are payday loans prohibited?
According to the latest data, payday loans are prohibited in the following States: Arizona, Arkansas, Connecticut, Georgia, Maryland, Massachusetts, New Jersey, New York, North Carolina, Pennsylvania, Vermont and West Virginia. In Hawaii, Kentucky and Utah, on the other hand, payday loans are only legal when it comes to check cashiers. Don’t take payday loans or online payday loans in one in those States. It most cases, it won’t even be possible as online lenders have to confirm your State of residency. Look into other options such as credit cards or lending from a bank or other forms of loans.
What is debt rollover ? Are they legal?
One of the main traps a payday loan can lead you to is a payday loan debt cycle. It occurs when you take out another payday loan to repay the first one and that keeps on repeating. The other option is to get your payday loan renewed for another payday loan period. You may need to resort to that because of the payday loan’s short-term nature. It normally has to be repaid in two weeks and naturally that is not always possible. In some cases, your creditor can automatically renew your debt if he has authorization to take certain amounts of money directly from your bank account. That renewing of course comes with a small fee. It is also known as a debt rollover. It can be dangerous because during the time of your new payday period, the interest rate keeps adding to the amount you owe. That is why in some States, debt rollovers are prohibited.
Debt rollovers are not legal in Arizona, Arkansas, Connecticut, Georgia, Maine, Maryland, Massachusetts, New Jersey, New York, North Carolina, Pennsylvania, Vermont and West Virginia. In the other States they are limited to a certain amount. For example, in Alabama, Colorado, North Dakota, Rhode Island and Wisconsin, your payday loan can be legally renewed only once. The maximum number of times for renewal is 6. However, there is an additional restriction there – the lender must reduce the principal amount of the loan every time there is a renewal by as much as 5 %. Other States that allow many renewals are Delaware and North Dakota, where up to 4 renewals are permitted.
At the National Conference of State legislators, you can find the latest bills adopted in each State as well as their summaries. Those include whether a license is needed for establishing a payday loan business, caps on fees and interest, the maximum number of loans per person and others. You should keep in mind that there is one principle act in each State and it could be changed periodically. It is important that you have checked the latest developments for your home State.
Payday loans are short-term loans for small amounts of money. Therefore, some States have even regulated the maximum amount of money that could be lent as a payday loan. Those amount are regulated either by fixed numbers which vary from $300 up to $1000 or they are pegged to the gross income of the borrower. For example, in New Mexico, it is forbidden for licensees to give a consumer a loan if his debt exceeds 25 % of his gross income.
Apart from the regulation on the number of rollovers, there is also a regulation regarding the maximum loan term. Again, there are different approaches. For example, in Alabama, there is a 10-day minimum period combined with a 31-day maximum period, while in California, there is only a maximum period regulation of 31 days. In Delaware, that is doubled – up to 60 days.
On federal level, the Federal Trade Commission is the regulatory authority. Its main objective is to protect consumers against payday loan scams. From a legislative point of view, the Federal Trade Commission Act, the Truth in Lending Act, the Credit Practices Rule’s, the Electronic Fund Transfer Act are very important. The Fair Debt Collection Practices acts is one of the most important which you should know as a consumer. It is the federal regulation that applies to debt collectors and it stipulates that they cannot resort to harassment and abuse. Moreover, they are prohibited from using unfair practices and misleading misinterpretations to confuse and scare you. Don’t let yourself be bullied and if you have any doubts, check your rights with the authorities. Don’t pay until you are sure what the consequences are. They will be different depending on your circumstances. Plus, the Commission deals with the so-called phantom loans. That means if you think you are victim of them, you can contact the Commission, report to them and get some help.
What are phantom loans and how to deal with them?
Phantom debt or zombie debt are outdated old debts that are no longer owed. There are certain legal provisions that if a debt is older than 2 or 3 years, it is no longer enforceable. It means that if you pay voluntarily, you don’t have the right to ask for your money back because there was an initial reason for your payment. However, you still haven’t paid and your debt is that old, you don’t have to pay it anymore. Furthermore, your lender or collectors don’t have the right to ask for payments from you or bully you into it. If anyone contacts you with such request and tries to bully you into paying, check your debt status first. Consult a lawyer if necessary. Then report the perpetrator to the Federal Trade Commission. The only way to get your rights protected is when you stand up for yourself.
Phantom debts also can be debts that never were yours to start with. Some people sometimes try to collect money from you for a debt that belonged to someone else with the same name or a debt from a deceased relative. However, it is well-known that debts end with death. If debtors can take something from the inherence, they will but under no circumstances should they ask the relatives directly for a full payment of the debts, especially when the debt is an old, long-forgotten one. In some cases, the debt in question has been paid in full or settled. Don’t let yourself to be trapped that way and take some action to protect yourself.
What happens if you don’t pay?
Your lender can impose a further fee because you didn’t have the money in your account or if you have closed it.
The lender can sue you. It is very important that if you get summoned to appear in court, you should do so. Otherwise, your lender may get a default verdict saying you are guilty based simply because of your failure to appear in Court. In any case, if a judgment is obtained, your lender may also be awarded for the costs that come along with the trial, including a reasonable amount for his lawyer’s fees.
If you don’t comply with the due date, the lender may start to accrue more money on the principle amount, thanks to interest rates. Normally, the interest rate is limited to approximately 6% per year.
Your lender has the right to list your past due accounts with credit bureaus. That will have harmful effects on your credit score. In addition, it may prevent you from getting any loan in the foreseeable future and even influence your job opportunities.
Your lender cannot start legal proceeding until 60 days after the due date of your payment. It is highly recommended that you enter into some sort of negotiations to avoid going to court.
Payday loans are not always as simple as they seem and they have multiple legal implications. In case you need legal help with your payday loans, don’t hesitate to consult your lawyer and do thorough research online. There is almost no information you can’t find. When conducting your research, you should start from your State of residency. After that, you need to find the relevant State regulations and see what restrictions are imposed on legal payday loans. Don’t forget that there are also federal regulations. In case you feel you have been a victim of a payday loan scam, look into the federal laws and contact the relevant authorities that can help you. The most important thing is that you don’t take any rush action like paying up when you are not sure whether you should. In many cases, it may turn out that your rights have been violated. To make sure that you avoid any problems with legal payday loans, just repay in full once they are due. That is the simplest thing you can do. If necessary, cut back on expenses and try to repay payday loans in full when they are due.
Lately, the number of payday loan lenders in the United States, and their critics, are growing in number. Many associate the payday lending industry with over-priced and un-regulated loans. However, that is not exactly the case. Very often, it is banking financial institutions (BFI) that have the greatest misconception of payday lenders, believing that they are predatory and take advantage of the borrowers. This mistaken belief can lead to banks considering payday lending firms as a liability rather than a potential valued client.
Proceed with caution when working with a payday loan lender
Payday lenders offer their customers short-term unsecured loans with high fees and interest rates. This type of loans is also referred to as deposit advance loans or payday advances. They are forms of credit that some customers may prefer for a number of reasons, including a situation where they cannot qualify for other credit sources. The borrower usually has to repay the loan back on the next payday. Which is why the loan is quite aptly called “payday loan”. This means that the application process usually includes a history of payroll and related employment records.
A growing number of payday lenders provide payday loans online. Consumers can even obtain a loan and authorize the repayment of its amount and fees during the same online session. A typical online payday loan scenario may go like this: the borrower obtains a loan and provides the lender with authorization to send Automated Clearing House debits to the consumer’s account at a later date for repayment. The payday lender’s bank originates the debits using the ACH network. Other payment options include wire transfer and remotely created checks.
Currently, both state and federalregulators are focusing on the payday lending industry in order to protect consumers from possible illegal payday loans. Payday lending practices are most commonly regulated at the state level. Some states completely prohibit payday lending while others have higher requirements towards lenders such as they have to be licensed and comply with maximum fees, loan amounts and interest rate caps, among other restrictions. The federal level regulations include the Dodd-Frank Act that has given the Consumer Financial Protection Bureau the authority to work against deceptive and abusive practices by payday lenders.
Payday lenders’ banks should bear in mind all the risks involved when working with online payday lenders. And such banks should make sure to incorporate due diligence techniques and to use all the available tools.
Reputation is of utmost importance
A high risk for established banks institutions is the reputational one. A payday lender’s bank should be aware that a business relationship of this type that includes ACH origination activity and a company making illegal payday loans can damage the institution’s image. The bank’s image can suffer even if the institution is not complicit in the illegal activities of its customer. But once the established financial institution determines that facilitating the payments of online payday lenders falls within its risk management model, it should ensure that it follows all applicable laws and regulations. One way to determine whether the AHC customers’ activities remain within the bank’s risk management model is to provide periodic reports on ACH customers to the bank’s board of directors. It is crucial for the bank to protect its own reputation as that affects every part of its business.
It is also important to know your clients and their practices
A bank working with payday lenders should also develop and follow adequate due diligence procedures. Both ACH rules and regulatory guidance require that banks perform “know your customer” (KYC) due diligence. These procedures include a variety of activities such as assessing the nature of the online payday lender’s activities, setting appropriate restrictions on the possible types of entries and exposure limits for the lender, and monitoring origination and return activity.
Due diligence steps usually consist of identifying the business’s principal owners, reviewing ratings for the business from various sources such as the Better Business Bureau, consumer complaint sites and credit service companies. They also include determining whether there have been recent legalactions against the business. Thoroughly reviewing the lender’s website, including the terms of the consumer’s authorization agreement and promotional materials, is advised. These due diligence practices on an ongoing basis for all merchants, not only online payday lenders, help the bank with choosing and using appropriate restrictions for the customer and therefore mitigate the risk of the bank discovering a problem when it is too late.
Being proactive is necessary to avoid problems
Banks can develop all kinds of tools that can flag potential problems in-house or can obtain them from other sources like vendors, ACH operators or NACHA. Additionally, incorporating a process to monitor transactions and returns can be used to identify anomalies, such as, for example, a sudden uptick in returns or an unusual increase in origination levels or average dollar amount. Detecting anomalies can be a sign to conduct further research on a customer.
Other tools can be NACHA’s originator watch list and vendor-terminated originator databases. They can help banks identify customers that may warrant additional scrutiny. Banks also conduct periodic audits in order to identify rules compliance issues.
For a bank, protecting its reputation is of utmost importance when it is considering offering payment services to high-risk originators like online payday lenders. The bank should proceed with caution when performing risk-based due diligence on new customers. After that, it should diligently monitor current customers so it can identify problems early and address them on time.