Monday, September 21, 2009

“Personal loans, with a twist (LA.com)” plus 3 more

“Personal loans, with a twist (LA.com)” plus 3 more

Personal loans, with a twist (LA.com)

Posted: 21 Sep 2009 01:13 PM PDT

As banks continue to tighten the grip on borrowers, canceling home equity loans and cutting borrowing limits on credit cards, Americans are increasingly turning to a timeless source of credit: one another. Person-to-person lending, facilitated by Web-based companies, is quickly coming of age.

"The credit crisis has put a huge crimp in the ability of the average consumer and the average small business to access credit from traditional sources," said Ed Kountz, a senior analyst at Forrester Research in Atlanta. "In a time of tightening credit, person-to-person lending has turned into an attractive alternative."

Borrowing from relatives is as old as the hills, but today's person-to-person lending market makes that loan more formal and accessible.

The market is dominated by three major players — Virgin Money, Prosper and Lending Club — although there are more than a dozen others.

These companies facilitate loans between friends and family by providing loan documents and automatic debits from the borrower's account. They also serve as matchmakers between strangers wanting to borrow and willing to lend.

The way it works varies from site to site, said Curtis Arnold, founder of CardRatings.com and coauthor of "The Complete Idiot's Guide to Person-to-Person Lending." That's largely because the market for this type of transaction — also called peer-to-peer lending — has gotten big enough for the companies to specialize.

Virgin Money concentrates on formalizing loans between people who already know each other. If you want to hit up your parents for a mortgage loan, for example, you can get them on a conference call with a Virgin Money representative and talk through both the interest rates and terms.

If you strike a deal, Virgin Money will then write up the paperwork and collect the payments. The cost for the service varies between $99 and more than $2,000, based on the complexity of the loan and how much you have the company do, said Tim Burke, social lending sales manager at Virgin. If you choose to have it process payments, Virgin Money also collects a processing fee each time a payment is made.

Virgin Money doesn't dictate the terms — although it will provide warnings if the loan's interest rate is so low that it's likely to trigger tax problems or so high that you're likely to run afoul of state usury laws. (If you charge considerably less interest than market rate, the IRS considers the lost interest to be a gift to the loan recipient.) The rate and repayment schedule are set by agreement between the borrower and lender. No credit reports are necessary.

If you don't have well-heeled relatives or simply don't want to ask a relative for a loan, you'd be better off going to Lending Club or Prosper, Arnold said. These sites aim to bring strangers together to finance small businesses, refinance credit card loans and provide loans to students.

Because the borrowers and lenders don't know one another, there are safeguards built in on both sides.

To protect borrowers, lenders are not given access to the borrowers' personally identifiable information. That reduces the chance that an anxious lender will directly contact a delinquent borrower for payment. (Borrowers who go delinquent do need to worry about collection agents, though.) Once lenders agree to fund a certain loan, they're not allowed to back out, so borrowers also don't have to be concerned about having promised credit ripped away.

To protect lenders, the sites pull credit reports on each potential borrower and turn away borrowers whose credit scores don't meet minimum standards. Both Lending Club and Prosper have grading systems to handicap the likelihood that a borrower will default. Lenders use these risk profiles to determine whether to fund a loan and how much interest should be charged. You would, for example, expect a higher return on a C-rated loan than on one that has an A.

Prosper, which revamped its site after a recent registration with federal Securities regulators, actually demands that lenders get returns that are commensurate with the risks they're taking, a company spokeswoman said. To determine interest rates, the company uses the going rate for a low-risk investment such as a certificate of deposit and adds points based on the likelihood that the borrower will default. So if the going CD rate is 2.5 percent and the loan you've bid on is calculated to have a 6 percent potential default rate, the site will not allow the interest rate on the loan to fall below 8.5 percent.

To figure out the risk of default, Prosper uses a formula based on the borrower's history and its own experiences.

"We have a system that we think ensures that both sides get a fair deal," said Chris Larsen, Prosper's chief executive and co-founder.

For those who have money to lend, peer-to-peer borrowing represents an investment — albeit a risky one.

"I could invest my money and get 2 percent in a money market account or I can get 7 percent to 9 percent lending it out," said Arnold, who has invested his own money in person-to-person lending. "And if you're able to lower somebody's credit card rate to 9 percent, that's great for them too."

But making loans is risky business, said Bobbie Britting, research director of consumer lending at TowerGroup.

"Any borrower could have their circumstances change and find that even if they wanted to make their payments, they're not able to," she said. "Most of these are unsecured loans (not backed by collateral such as a house or car) and those are the riskiest."

Since its inception in 2006, Prosper has registered a 19 percent default rate, Larsen acknowledged. The company has significantly tightened its lending criteria in the last few months and no longer accepts subprime loans, so Larsen expects that rate to improve. However, even Virgin Money reports that about 5 percent of its borrowers don't pay on their loans either.

Britting says that defaults shouldn't dissuade lenders from jumping in. But she urges investors to diversify — never lending more than they can lose to one borrower and spreading their loans around.

"You should ask yourself if you can afford to lose 20 percent of your investment," she said. "Lending is inherently risky. You have to be prepared for that."

Contact Kathy Kristof at kathykristof24@gmail.com.



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Several options can help if you're struggling to pay student loans (USA Today)

Posted: 21 Sep 2009 03:34 PM PDT

Defaults on federal student loans rose to 6.7% last year from 5.2% a year earlier, the highest default rate since 1998.

In general, if you fail to make payments on a federal student loan for nine months, the loan will be considered in default. Your loans will probably be turned over to a collection agency, and your credit report will be trashed. Unlike private lenders, the federal government can garnish your wages without going to court, says Margaret Reiter, an attorney and co-author of Solve Your Money Troubles. There's no statute of limitations on collection of federal student loans, Reiter adds, which means the government can go after you for the rest of your life.

Filing for bankruptcy probably won't solve your problem. Under federal bankruptcy laws, it's not enough to show that you can't afford to repay your loans now. You must also convince the bankruptcy court that you'll be unable to repay them in the future. This standard is extremely difficult to meet, Reiter says.

Fortunately, there are steps you can take to avoid default, even if you can't afford your payments. Options include:

• Deferment. This option is available for borrowers who are still in school, unemployed or experiencing other types of economic hardship. Payments are typically deferred for up to three years.

If you have subsidized federal student loans, which are provided to borrowers who demonstrate financial need, the government will pay the interest during deferment. If you have unsubsidized Stafford loans, interest will accrue during the deferment period. Deferment is not automatic. You must apply for it through your lender.

• Forbearance. In this case, your lender will allow you to postpone payments, or pay a smaller amount, for up to three years. Forbearance is granted at the discretion of the lender, and the requirements are generally less stringent than those for deferment, says Robert Murray, spokesman for USA Funds, a company that guarantees student loans.

Interest will continue to accrue during forbearance, so it's important to resume payments as soon as you're able, Murray says. Otherwise, you could end up with a much larger balance.

• Income-based repayment. This new program allows borrowers with federal student loans to have their payments capped, based on their income. Most borrowers who qualify for the program will never have to spend more than 10% of their income on student loan payments. Those whose income falls below 150% of the poverty level won't have to make any payments.

Deferment or forbearance will help you put your loans on hold during a short-term crisis, such as temporary unemployment, says Lauren Asher, acting president for the Project on Student Debt. But if you're facing long-term financial difficulties, income-based repayment is the better choice, she says.

To apply for income-based repayment, contact the lender that is servicing your student loan. You can learn more about the program at www.ibrinfo.org.

Borrowers who are having trouble repaying private student loans have fewer options. The rules governing repayment of these loans are determined by the loan contracts, not federal law. That means private-loan borrowers "are really at the mercy of lenders," says Deanne Loonin, staff attorney for the National Consumer Law Center.

Your loan may be declared in default after you miss just one payment, depending on the terms of your loan contract. Private lenders aren't required to allow borrowers who are unemployed to defer payments. Your lender may grant you forbearance, but the period depends on the terms of the contract, Loonin says.

Private lenders don't have as many collection tools as the federal government, but they can still make your life pretty miserable. They can turn your account over to a collection agency and add the fees to your balance. They can sue to have your wages garnished. And private student loans are identical to federal loans in one critical respect: They're nearly impossible to discharge in bankruptcy.

The National Consumer Law Center offers a list of resources for borrowers who are having trouble managing their federal or private student loans. You can find it at www.studentloanborrowerassistance.org.

Sandra Block covers personal finance for USA TODAY. Her Your Money column appears Tuesdays. Click here for an index of Your Money columns. E-mail her at: sblock@usatoday.com. Follow on Twitter: www.twitter.com/sandyblock



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Federal regulations on employee loans (Pioneer Press)

Posted: 21 Sep 2009 02:42 AM PDT

From Title 26 Code of Federal Regulations 1.7872-5T(c)(1)

§ 1.7872-5T Exempted loans (temporary)"...

(c) Special rules -- (1) Employee-relocation loans -- .(i) Mortgage loans. In the case of a compensation-related loan to an employee, where such loan is secured by a mortgage on the new principal residence (within the meaning of section 217 and the regulations thereunder) of the employee, acquired in connection with the transfer of that employee to a new principal place of work (which meets the requirements in section 217(c) and the regulations thereunder), the loan will be exempt from section 7872 if the following conditions are satisfied:

(A) The loan is a demand loan or is a term loan the benefits of the interest arrangements of which are not transferable by the employee and are conditioned on the future performance of substantial services by the employee;

(B) The employee certifies to the employer that the employee reasonably expects to be entitled to and will itemize deductions for each year the loan is outstanding; and

(C) The loan agreement requires that the loan proceeds be used only to purchase the new principal residence of the employee.

================

The definition of the new principal residence for moving expense purposes is under 26 CFR 1.217-2(a)(8)

§ 1.217-2 Deduction for moving expenses paid or incurred in taxable years beginning after December 31, 1969.

"...(8)

Residence. The term "former residence" refers to the taxpayer's principal residence before his departure for his new principal place of work. The term "new residence" refers to the taxpayer's principal residence within the general location of his new principal place of work. Thus, neither term includes other residences owned or maintained by the taxpayer or members of his family or seasonal residences such as a summer beach cottage. Whether or not property is used by the taxpayer as his principal residence depends upon all the facts and circumstances in each case. Property used by the taxpayer as his principal residence may include a houseboat, a housetrailer, or similar dwelling. The term "new place of residence" generally includes the area within which the taxpayer might reasonably be expected to commute to his new principal place of work.

Source: IRS regulations

— Mercury News







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Ukraine central bank: Non performing loans reach 6.8 percent in August (KYIV Post)

Posted: 21 Sep 2009 05:13 AM PDT

The share of problem loans at Ukrainian banks rose 0.6 percentage points in August to 6.8% on September 1, the National Bank of Ukraine (NBU) reported.

In terms of volume the bad loans rose 11.6% or by UAH 5.363 billion (8.0065 hryvni/$1 on September 21) to UAH 51.418 billion compared with growth of UAH 5.376 billion or 13.2% in July. They have risen 190% or by UAH 33.403 billion since the beginning of the year.

As of September 1 there were 184 banks in active operation in Ukraine out of 198 registered, of which 12 were in liquidation, according to NBU data.



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Posted by Rakhma at 7:18 PM

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