Small-dollar loans pushed in coronavirus economy for consumer relief

How banks can help small businesses get forgivable loans

Small business expert Gene Marks says the coronavirus stimulus package can be an ‘enormous opportunity’ for banks to help small businesses.

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As the federal government and related agencies come together to generate economic relief measures amid substantial economic harm that has resulted from the coronavirus crisis – banks are now being encouraged to offer specific loans to their retail and small business customers.

In a letter to the banking industry on Thursday, agencies, such as the Federal Reserve and the Federal Deposit Insurance Corporation, pushed banks to offer what are known as small-dollar loans to customers subject to coronavirus-related financial need.

“The agencies recognize the important role that responsibly offered small-dollar loans can play in helping customers meet their needs for credit due to temporary cash-flow imbalances, unexpected expenses, or income short-falls during periods of economic stress or disaster recoveries,” the letter read.

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Small-dollar loans – typically between $300 and $5,000 – are taken out by consumers to cover expenses during times of financial hardship.

They can be issued in a variety of forms, including open-end lines of credit, closed-end installment lines or appropriately structured single payment loans. They are typically short-term and repaid through a schedule of equal increments.

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Large financial institutions can offer safe, affordable terms for consumers when compared with alternative options like payday lenders. However, they had largely withdrawn from the market after the financial crisis.

In 2018, the Office of the Comptroller of the Currency issued guidance giving regulatory assurance to large financial institutions regarding their ability to offer such loans.

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During an average year, U.S. consumers take out nearly $90 billion in short-term, small-dollar loans, according to the OCC.

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Personal loans affect your credit — how to maintain a good score

What you need to know about your credit score before and after you apply for a personal loan.

Thinking of getting a personal loan? The most common reasons borrowers apply is to consolidate debt, make improvements to their home, or pay for unexpected expenses and large purchases, according to U.S. News & World Report.

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Available from a bank, credit union or online lender, personal loans can be helpful tools. Just like any form of financing, however, they can impact your financial future. Here’s what you need to know.

How personal loans affect your credit score

Anytime you apply for a loan, a lender will check your credit score to measure their risk. Assigned by reporting agencies such as Equifax, Experian and TransUnion, a credit score is based on your outstanding balances, repayment record and account length. A credit score range falls between 300 and 850, with a higher score being better.

To measure your credit history, a lender can pull a soft or hard inquiry. A soft inquiry is only visible to you and won’t impact your credit score, but a hard inquiry is visible to creditors and stays on your report for two years. Hard inquiries indicate the number of new credit applications you’ve made; they account for around 10 percent of your credit score. If you’re simply checking rates, be sure to choosing lenders that offer soft inquiries, as not all banks and credit unions do.

HOW TO FIND THE BEST PERSONAL LOAN FOR YOUR NEEDS

The other way a new personal loan impacts your credit score is through the average age of your credit. Credit history makes up approximately 15 percent of your score. Having older accounts can improve your score, but adding a new loan will reduce your average age.

Applying for a personal loan can impact your credit, so it can help to be confident that you’ll be approved. Checking your own credit is considered a soft inquiry that won’t impact your score.

How to improve your credit score fast

If your credit score is on the decline, it might be due to late payments. One of the simple ways you can improve your score is to pay your bills on time early. Payment history is the most important factor in your credit history, making up 35 percent of your score. If you’re just a few days late on your payment, it probably won’t affect your score, but payments that go 30 days late or more will likely be reported to the credit bureaus and can lower your score. In fact, negative items such as delinquent payments stay on your report for up to seven years.

DOCUMENTS REQUIRED TO APPLY FOR A PERSONAL LOAN

In addition to establishing a history of on-time payments, personal loans can diversify your credit mix, which can account for 10 percent of your score. A personal loan is an installment loan, paid back in regular monthly installments. Credit cards, on the other hand, are revolving credit. While your credit mix usually isn’t a big determining factor in credit worthiness, it can be helpful if your credit history is relatively new.

The bottom line

When used appropriately, personal loans can become tools that help you improve your credit score. However, it’s important to know your financial situation before you apply so you don’t inadvertently cause damage. The better your score, the better your options.

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Sellers' Amazon loans at risk as company limits warehouses

Coronavirus forces Amazon to prioritize warehouses

Apple launched two new products through a press release, while Amazon is hiring extra workers and prioritizing warehouses to keep up with increased demand during the coronavirus spread.

Some Amazon sellers say the online retailer's abrupt decision to stop receiving non-essential inventory in response to the coronavirus pandemic could strangle the sales they need to make payments on their Amazon loans.

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The challenge illustrates the power Amazon has over merchants whose businesses are heavily dependent on its marketplace.

A spokesman for Amazon told Reuters on Thursday that the company is working to provide relief to the selling community. He declined to provide specifics.

AMAZON HALTS GROCERY ORDERS TO RESTOCK AMID SURGING DEMAND

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AMZN AMAZON.COM INC. 1,846.09 -34.84 -1.85%

On Tuesday, Amazon said it would receive only vital supplies at its U.S., UK and other European warehouses until April 5, in an effort to save warehouse space for medical and household goods that are in high demand during the global coronavirus outbreak. Amazon is among the retailers racing to keep food and hygienic items in stock and have employees on hand for warehouse work or delivery.

Some sellers worry that the suspension on non-essential items like apparel, toys and outdoor gear could dampen their sales as they are unable to restock items, and further affect their ability to repay their Amazon loans in time.

For Jamison Philippi, an Amazon seller based in Hackensack, New Jersey, toys and video games represent 95% of his Amazon business. But those products now are considered "non-essential" so he cannot restock them in Amazon's warehouses.

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As his inventory runs out, Philippi estimates his income could drop by 75% – affecting his ability to make the roughly $3,500 payment due on his Amazon loan on April 1.

"Not being able to ship things in for three weeks – it's going to sting," Philippi said. Amazon automatically pulls loan payments from the account where he receives his bi-weekly sales payments. If that balance falls short, it comes out of his bank account.

"I'm hoping they suspend that for a month and offer a grace period," said Philippi, who believes Amazon is making decisions that it believes are best for the selling community.

"They control everything, we're just playing in their sandbox," Phillippi said.

LOAN PAYMENT DUE

Launched in late 2011, Amazon's lending program makes loans of $1,000 to over $1 million to qualified sellers, and uses seller's inventory in Amazon warehouses as collateral. Repayment terms are three to 12 months, and interest rates typically range from 6-19.9%.

The move to suspend shipping non-essential products has left sellers unable to restock some of their bestsellers.

Some sellers are in a panic because borrowers can be in default if sales in any 30-day period are less than 50% of the lowest level during the 12 months prior, according to a loan agreement reviewed by Reuters.

"The terms of the loan definitely protect Amazon," said a seller based in New Hampshire, who declined to be named. "At this time I have all of my eggs in the Amazon basket. I owe them more than I owe on my home." His loan payment is just shy of $40,000 per month on a 12-month $500,000 loan.

"We have seen sales fall off a cliff. Shoes and clothing at this time is not what people deem essential,” the seller said. “I understand their business decision. It’s going to upset the supply chain down the road."

Some sellers have voiced their concerns to Amazon but have not heard back about any relief. In a statement to Reuters, Amazon said it is working to determine the best ways to quickly assist its lending clients during the coronavirus crisis.

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"Our selling partners tell us our loans are an ideal way to grow inventory, expand product lines, and reach more customers," the company said.

In other cases, sellers are seeing loan offers from Amazon disappear from their accounts.

Molson Hart, a toy seller, says he had always been offered a $1 million loan by Amazon, based on his $4.5 million in annual sales. As he worries that his popular products may run out of stock in Amazon warehouses, he also found the loan offer was gone this week. While Hart says his business does not rely on Amazon's loan to survive, smaller businesses could face a higher chance of bankruptcy during this time of distress.

"It's obvious that Amazon thinks the risks have skyrocketed," said Joe Kaziukenas, founder of Marketplace Pulse, which tracks data on e-commerce platforms.

"Sellers are worried about their cash flow, and Amazon lending was one of the ways to support that. And now as we've seen in some cases, it's gone," Kaziukenas said.

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Refinance student loans now and you'll likely save money — here's why

The Federal Reserve’s emergency rate cut makes now an ideal time to refinance student loans, but refinancing isn’t right for everyone.  (iStock)

On March 3, 2020, the Federal Reserve announced an emergency rate cut in response to the novel coronavirus. The cut, which drops the federal funds rate to a target range of 1.00-1.25 percent, is the first emergency move to lower interest rates since 2008.

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While the purpose of the Fed's move was to stimulate the economy, it could also be a boon to student loan borrowers who take advantage to refinance their student loans.

Why are student loan refinancing rates going down?

When the Federal Reserve announces a rate cut, it doesn't affect the rate of federal student loans.

"These are tied to the 10-Year-Treasury, whereas the federal funds rate that we all hear about — and that was just recently lowered — is simply the overnight lending rate banks charge other banks for borrowing," explained Clint Haynes, a Certified Financial Planner, financial advisor, and owner of NextGen Wealth in Kansas City, Missouri.

Refinance loans, however, are made by private lenders that generally reduce rates they charge consumers when a rate cut occurs. "When the Fed lowers interest rates, banks can borrow at lower interest rates which, hopefully, will entail them lowering interest rates for borrowing for their customers," Haynes explained. Although Haynes warned it's not always a perfect correlation, interest rates offered on refinance loans do tend to go down due to Fed rate cuts.

And while federal student loans always have fixed rates, which means current borrowers won't see their rate change no matter what, private lenders often offer the option of variable rate loans. These are tied to a financial index with many lenders using the 1-Month LIBOR rate, which often moves in the same direction as the federal funds rate.

WHAT QUALIFIES YOU FOR STUDENT LOAN FORGIVENESS

Even before the Fed rate cut in early March, student loan refinance rates were at or near record lows. With this additional rate cut, refinancing may become an even better deal. Borrowers with fixed-rate loans who won't otherwise benefit from current low rates may wish to refinance. And those with variable rate loans may also opt to refinance to a new fixed-rate loan at current low rates to provide more certainty going forward in case rates rise again.

How do you refinance your student loans?

Student loan refinancing is available only from private lenders, although both federal and private student loans can be refinanced. And unlike with federal loans, different private refinance lenders offer varying interest rates and repayment terms and some have more stringent qualifying requirements.

All private lenders consider credit and income when determining loan eligibility, though, and borrowers without a high credit score or sufficient income may need a cosigner or may be denied a loan. And while private lenders often offer very low advertised rates, these rates are generally reserved for the most qualified customers.

Because rates and terms vary, borrowers should get quotes from multiple lenders to find banks with the best rates. Ideally, they'll be lenders offering pre-qualification with a soft credit check, as multiple hard inquiries can have an adverse credit impact. Those able to qualify for a refinance loan at a lower rate than their current educational debt can choose the lender offering the best terms and move forward with the refinance process.

THIS IS WHY STUDENT LOAN REFINANCING RATES ARE GOING DOWN

When a borrower signs a promissory note, the refinance lender repays the existing debt included in the refinance. Borrowers don't have to include every loan they have, although they can. If federal loans are included, this means giving up key protections, including income-driven payment plans, flexibility around changing or suspending payments, and any possibility of loan forgiveness. But refinancing federal loans is the only way to lower their rate.

What to know before refinancing your student loans

Refinancing private loans almost always makes sense for borrowers who can qualify for a new loan at a lower rate. The application process can be completed online and there are often no origination fees or upfront costs. And no borrower protections are typically lost since loans are just changing from one private lender to another.

However, it's important to consider the reputation of the lender and the new loan terms. Extending the repayment timeline can raise total costs, even if the interest rate is lower, while a shorter timeline means higher monthly payments. And some lenders offer better customer service than others. Before refinancing federal loans, borrowers also need to consider whether they're giving up flexibility they may someday need.

Ultimately, while low-interest rates make it an ideal time to refinance, every borrower needs to decide whether conditions are right for them personally before moving forward with a refinance loan to pay off existing student debt.

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Best short-term loans: Compare your options

Short-term loans can provide quick funding for individuals who want to cover sudden expenses or may not qualify for a traditional loan. (iStock)

You can use a short-term loan for nearly anything. Whether you need to cover emergency expenses, fund a vacation, or settle some bills until your next paycheck, a short-term loan can provide a quick influx of cash flow when you’re running low. Short-term loans are commonly used by small business owners and individuals who may not otherwise qualify for a traditional loan. Additionally, people who want to save money on interest rates, like when purchasing a car, may opt for a short-term loan.

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The biggest difference between a short-term loan and a traditional loan is the repayment period. Short-term loans have a smaller repayment window, usually between 3 and 18 months, while long-term loans have a repayment period of 24 months or more.

Typically, individuals with a higher credit score are more likely to qualify for long-term loans. Short-term loans are usually less expensive (less time repaying interest) and have lower limits than long-term loans.

Need a short-term loan? Here are your best options

Friends or family members
If you have the option, asking family or friends for a short-term loan is often the most cost-effective. However, bringing money into any relationship can make things tricky, especially if you are unable to make payments or if your lending-friend is reluctant to ask for payments.

3 PERSONAL LOAN LENDERS THAT ACCEPT COSIGNERSCredit union or bank
One of the simplest options is to visit your local credit union or bank to ask for a short-term loan. Try setting an appointment with a loan counselor in person, and be sure to bring pay stubs and tax statements. If you earn income from a side business, make sure to have the information with you as well. Credit unions are often easier to work with if you’re already a long-term customer.

Your credit union or bank will likely have the best interest rates available, as many offer special promotions to their customers. Make this one of the first places you look if you need a short-term loan.

Note: An alternative option would be to take advantage of overdraft protection. Many credit unions and banks only charge an overdraft fee for each transaction that takes you over your balance. If you can pay back the amount you overdrafted within a few days or a week, this may be a low-cost option. Be mindful that you don’t get into a repeated cycle of overdrafting and repaying your account, as it can be very costly in the long-term.

Credit cards
While most people don’t think of credit cards as loans, you’re technically borrowing money from the credit card lender every time you make a purchase. You may also find it easier to qualify for some credit cards than a loan. If you’re able to pay the balance on your credit card quickly, you can avoid the high-interest rates.

Online lenders
There are hundreds of online companies willing to offer short-term loans. While many companies offer fair interest rates and reasonable fees, there are also many that charge much higher rates than the industry average. Before working with an online company, make sure you read the fine print on their interest rates and repayment terms. It would help if you also looked for customer experiences, so you have an idea of how a company treats its customers.

WHAT TO DO IF YOUR LOAN APPLICATION IS DENIED

A few red flags to look for: poor website security, early repayment penalties, interest rate (some online and quick loan lenders charge interest rates of 300 percent or more), and lack of minimum requirements. Most lenders who have very lax requirements will likely charge a lot of money for their services.

Take a loan from a life insurance policy or retirement

An alternative to traditional loan options is to borrow from your life insurance policy or your retirement fund. This option is last on the list for a reason. In most cases, borrowing from either option is never a good idea. If you borrow money from your retirement accounts, you’ll have to pay taxes on the amount you take and an early withdrawal penalty. Worse, you’ll lose any gains you could have earned had you left the money in your 401(k) or IRA.

If you borrow from a whole life policy, you’ll have to repay the amount you borrowed with interest. If you don’t repay the loan, the insurance company will deduct the amount owed from the payout when the policy matures.

HOW TO GET APPROVED FOR A PERSONAL LOAN

Choose your short-term loan wisely

No matter where you choose to get your loan, make sure you compare offers to ensure that you’re getting the best deal. Before applying for a loan, consider the following factors:

  • How much can you afford to borrow?
  • Interest rate
  • Loan origination fee
  • Monthly payment
  • Repayment terms
  • The reputation of the lender

Short-term loans can be a great way to cover yourself in an emergency, but you’ll get the greatest benefit from them if you can repay the loan quickly and if you avoid predatory lenders.

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