Loan consolidation can be arranged through two ways – either through commercial lenders via the Federal Loan Consolidation program or directly with the federal government using the U.S. Department of Education Direct Federal Loan Consolidation program.
The Direct Federal Loan Consolidation program offers a special income-contingent option to students who have borrowed at a heavy level. This income contingent loan consolidation option is available to all borrowers whether they have taken a Federal Stafford Loan or a Federal Direct Loan. Under this program, all loan obligations are brought together into a new consolidated loan with a monthly payment structure determined according to income level. Thus, students with lower incomes have lower monthly payments for them, and the payments increase when the income increases. The repayment period will last as long as it takes to pay the loan off under this program, but if the borrower is unable to pay off after 25 years, the rest of the loan amount is paid by the government. However, there would be a tax liability assessed for the portion that was paid off by the government. This consolidation program involves high amount of interest that must be paid due to the long repayment period. Thus, the income-contingent repayment option is not recommended unless the student clearly cannot make payment in any other way.
If you have borrowed from more than one source to fund your education expenses and find the total amount borrowed to be burdensome, you have the opportunity of consolidating your loans into a single new loan under the Federal Consolidation Loan program. When you consolidate you may get convenient repayment arrangements such as lower monthly payments, extended length of loan repayments, etc.
The following loans may be included in a Federal Consolidation Loan:
Stafford Loan, subsidized and unsubsidized (or Guaranteed Student Loans)
Perkins Loan (or NDSL)
Supplemental Loan for Students (SLS)
PLUS Loan (in the student's name)
Federal Insured Student Loan
Health Professions Student Loan
The variable rate Stafford loans are often converted to fixed rate loans under loan consolidation program to avail the benefit in times when variable rates descend to a low point.
Sunday, March 25, 2007
Sunday, March 18, 2007
Syndicated loan
A syndicated loan (or "syndicated bank facility") is a large loan in which a group of banks work together to provide funds for a borrower. There is usually one lead bank (the "Arranger" or "Agent") that takes a percentage of the loan and syndicates the rest to other banks. A syndicated loan is the opposite of a bilateral loan, which only involves one borrower and one lender (often a bank or financial institution.)
Reasons for syndicated lending
Like insurance, a loan is an assumption of risk. For a certain class of loan, with certain rules, the bank might believe that it is likely that 5% of all borrowers may go bankrupt. If the banks cost of funds is a hypothetical 5%, it needs to charge more than 10% interest on the loan to make a profit. In general, banks and the financial markets use risk-based pricing, charging an interest rate depending on the risk of the loan product in general or the risk of the specific borrower. The problem with larger businesses loans however, is that there are fewer of them. So if the bank only has one large business loan, if that business happens to be one of the 5% that defaults, then the bank loses all its money. For this reason, it is in the best interest of all banks to split, or "syndicate" their large loans with each other, so each get a representative sample in their loan portfolios.
A second, often criticized reason for syndicating loans is that it avoids large or surprising losses and instead usually provides small and more predictable losses. Smaller and more predictable losses are favored by many management teams because of the general perception that companies with "smoother", or more steady earnings are awarded a higher stock price relative to their earnings (benefiting management who is often paid primarily by stock). Critics such as Warren Buffett, however, say that many times this practice is irrational. If the bank could still get a representative sample by not syndicating, and if syndication would reduce their profit margins, then over the long term a bank should make more money by not syndicating. This same dynamic plays out in the investment banking and insurance fields, where syndication also takes place.
To avoid that the borrower has to deal with all syndicate banks individually, one of the syndicate banks usually acts as an Agent for all syndicate members and acts as the focal point between them and the borrower.
Reasons for syndicated lending
Like insurance, a loan is an assumption of risk. For a certain class of loan, with certain rules, the bank might believe that it is likely that 5% of all borrowers may go bankrupt. If the banks cost of funds is a hypothetical 5%, it needs to charge more than 10% interest on the loan to make a profit. In general, banks and the financial markets use risk-based pricing, charging an interest rate depending on the risk of the loan product in general or the risk of the specific borrower. The problem with larger businesses loans however, is that there are fewer of them. So if the bank only has one large business loan, if that business happens to be one of the 5% that defaults, then the bank loses all its money. For this reason, it is in the best interest of all banks to split, or "syndicate" their large loans with each other, so each get a representative sample in their loan portfolios.
A second, often criticized reason for syndicating loans is that it avoids large or surprising losses and instead usually provides small and more predictable losses. Smaller and more predictable losses are favored by many management teams because of the general perception that companies with "smoother", or more steady earnings are awarded a higher stock price relative to their earnings (benefiting management who is often paid primarily by stock). Critics such as Warren Buffett, however, say that many times this practice is irrational. If the bank could still get a representative sample by not syndicating, and if syndication would reduce their profit margins, then over the long term a bank should make more money by not syndicating. This same dynamic plays out in the investment banking and insurance fields, where syndication also takes place.
To avoid that the borrower has to deal with all syndicate banks individually, one of the syndicate banks usually acts as an Agent for all syndicate members and acts as the focal point between them and the borrower.
Sunday, March 11, 2007
Deciding on a Loan
What is the one thing that all financial advisors tell their clients before committing to any financial agreement?
It is the most basic rule of all commerce; do you homework and shop around. While it may not be the most fun pass time in the world, getting familiar with the different lenders in the market, and the loans they offer, is vital when you are shopping for a loan.
This does not mean that you have to read in detail, all the fine print on every loan agreement you come across, but at least be broadly aware of what’s on the market and look carefully at any loans that you are seriously considering signing up for.
Also, as well as knowing the lender, it is vital that you know yourself and your reasons for borrowing the money. Different types of loans should be used for different purposes.
If it is to buy something that you will enjoy for a long time into the future, such as a car or your home, then a long term loan may be very appropriate. But if you are simply taking your annual vacation, then it is probably unwise to be using a loan that spreads out for more than a year.
Also, regarding the issue of security, while it is reasonable to use a mortgage secured over your home to buy or extend your house, or to conduct improvements, or secure your car loan over your car, it is not always so wise to secure credit card debt and other short term debts in this way. The bottom line, is that the characteristics of the loan should generally match the purpose of the loan.
You should also remember that all of these factors will also be effecting the price of the loan also. Basically speaking, the longer the life of the loan, the more expensive it will be overall, although your monthly repayments will be lower. Also, while you may not wish to secure short term borrowing over your home, doing so is also likely to reduce the cost of the loan considerably.
Once you know the type of loan you are looking for, you will be in a far better position to judge which kind of loans you will be looking for. This makes shopping around that much easier as you can look directly at the types of loans you need. You should also be aware of loan rip offs and stick to the basic rule of thumb that if something seems too good to be true, it probably is.
It is the most basic rule of all commerce; do you homework and shop around. While it may not be the most fun pass time in the world, getting familiar with the different lenders in the market, and the loans they offer, is vital when you are shopping for a loan.
This does not mean that you have to read in detail, all the fine print on every loan agreement you come across, but at least be broadly aware of what’s on the market and look carefully at any loans that you are seriously considering signing up for.
Also, as well as knowing the lender, it is vital that you know yourself and your reasons for borrowing the money. Different types of loans should be used for different purposes.
If it is to buy something that you will enjoy for a long time into the future, such as a car or your home, then a long term loan may be very appropriate. But if you are simply taking your annual vacation, then it is probably unwise to be using a loan that spreads out for more than a year.
Also, regarding the issue of security, while it is reasonable to use a mortgage secured over your home to buy or extend your house, or to conduct improvements, or secure your car loan over your car, it is not always so wise to secure credit card debt and other short term debts in this way. The bottom line, is that the characteristics of the loan should generally match the purpose of the loan.
You should also remember that all of these factors will also be effecting the price of the loan also. Basically speaking, the longer the life of the loan, the more expensive it will be overall, although your monthly repayments will be lower. Also, while you may not wish to secure short term borrowing over your home, doing so is also likely to reduce the cost of the loan considerably.
Once you know the type of loan you are looking for, you will be in a far better position to judge which kind of loans you will be looking for. This makes shopping around that much easier as you can look directly at the types of loans you need. You should also be aware of loan rip offs and stick to the basic rule of thumb that if something seems too good to be true, it probably is.
Sunday, March 4, 2007
Consider getting a home equity line of credit with your home loan.
Credit cards can be a good thing, but a home equity credit line is a better way to use your home equity to finance big ticket items—home improvements, paying off high-interest debt, financing a car, or paying for college tuition.
A credit card is a revolving line of credit that you use when you need it, and make payments only if you use it. But credit cards can charge very high interest rates.
Like a credit card, a home equity line of credit (HELOC) is also a revolving line of credit. You draw from it again and again as you need and make payments only if you use it. But, unlike most credit cards, you get a much lower interest rate with a home equity line of credit.
Using a home equity line of credit is a way of turning “bad debt” into “good debt”. In other words, the interest on the debt on your high-interest credit card cannot be deducted from your taxes. But the interest on your HELOC is usually tax-deductible*.
You can also get some flexibility with home equity loans that you wouldn’t get for say, with an auto loan. There are different home equity programs that have an interest-only option. From month to month with an interest-only loan, you choose to pay only the interest for a pre-determined amount of time or pay interest plus as much principal as you want. You can’t do that with an auto loan. Most lenders offer home equity lines of credit for up to $100,000. But Quicken Loans offers a line of credit for up to $500,000! This is a great option to have if you’re thinking of buying your dream vacation home.
It’s fairly easy to get a home equity line of credit—that’s one of the best things about it! Nowadays, many companies allow you to apply online and close within a very short period of time, typically 7-10 days. There’s less paperwork to deal with, the closing costs are less expensive and the process is just as easy as applying for a credit card. If you get a home equity line of credit at the same time as your first mortgage with the same lender, you only have one closing to go to for both loans.
A credit card is a revolving line of credit that you use when you need it, and make payments only if you use it. But credit cards can charge very high interest rates.
Like a credit card, a home equity line of credit (HELOC) is also a revolving line of credit. You draw from it again and again as you need and make payments only if you use it. But, unlike most credit cards, you get a much lower interest rate with a home equity line of credit.
Using a home equity line of credit is a way of turning “bad debt” into “good debt”. In other words, the interest on the debt on your high-interest credit card cannot be deducted from your taxes. But the interest on your HELOC is usually tax-deductible*.
You can also get some flexibility with home equity loans that you wouldn’t get for say, with an auto loan. There are different home equity programs that have an interest-only option. From month to month with an interest-only loan, you choose to pay only the interest for a pre-determined amount of time or pay interest plus as much principal as you want. You can’t do that with an auto loan. Most lenders offer home equity lines of credit for up to $100,000. But Quicken Loans offers a line of credit for up to $500,000! This is a great option to have if you’re thinking of buying your dream vacation home.
It’s fairly easy to get a home equity line of credit—that’s one of the best things about it! Nowadays, many companies allow you to apply online and close within a very short period of time, typically 7-10 days. There’s less paperwork to deal with, the closing costs are less expensive and the process is just as easy as applying for a credit card. If you get a home equity line of credit at the same time as your first mortgage with the same lender, you only have one closing to go to for both loans.
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