Financial Institutions Open Their Doors to Subprime Lending Again

Banks are starting to open up to subprime lending once again. Equifax spokesperson, Daryl Toor confirmed that in a statement, he further explained that it will not be easy to get a loan if your credit score is below 660 in the FICO credit standards, though consumers are seemingly more responsible and wiser with how they handle their finances.

Bad credit will cost you 5 to 10 percent more when you loan compared to those with stellar credit. Banks would charge you more than the average rates and tie you up with a three year contract that disallows you from increasing your rates in the first year the account is opened.

The ratio of subprime clients have increased this year by 41% compared to 2011 according to Equifax. Credit card insurance for people with VantageScores (those within the 601 to 700 range) has increased to 21% in the first three months of 2012 which is the highest number since 2008.

Those with credit ratings under 600 however are still stuck with limited opportunities. According to Ezra Becker, the vice president of the research and consulting of TransUnion, not everyone is given the chance of a loan because not everyone pays them back, and these high risk clients are among those who are unlikely to pay their loans on time.

The number of credit delinquencies has decreased now and this development greatly contributes to the reason why banks are more comfortable with lending to people with troubled credit standing.the economy in the United States is starting to recover from the great recession it encountered in 2008.

Banks’ credit scores continue to improve and according to TransUnion, the marketing effort is fueling this improvement. Banks and other financial lenders are marketing their services to clients and thus more people are becoming interested in the business.

White Collar Workers Also Apply for Payday Loans

Based on the data from a study, not only low paid workers are applying for high-interest payday loans but also professionals in well-paid jobs, for instance, doctors, lawyers and accountants.

The survey was conducted by a certain payday lender and results showed that 7 percent of payday loan applications in the previous year are by workers receiving high salaries.

A 35-day payday loan allows people to borrow money from £100 to £1,000 until their paycheck arrives, and one half of the applicants are composed of white collar workers. Of the one half white collar applicants, 28 percent are working in the field of management, with 26 percent working in sales and marketing.

Jason Gardiner is the creator of the FridayFriday.com, which is a short-term online lender. Gardiner is also the one who conducted the study and according to him, the results are in contrast with the conventional perspective that low-paid or jobless people are the only ones who apply for payday loans.

Gardiner added that 7 percent of payday loan applicants are lawyers, accountants or doctors. This proves that when income is not taken into account, people will at one time need a short-term loan to carry on until their next paycheck comes.

Furthermore, Gardiner said that these professionals are applying for payday loans because of an unexpected cost increase, which can happen to anyone in spite of the amount of their salary.

Consumer Focus statistics show that payday loans market is becoming widespread, where borrowers increased from 300,000 during 2006 to 1.9 million during 2010. The industry is accused of targeting people with financial problems, provoking the Office of Fair Trading (OFT) to examine whether or not firms pursue consumers ineligible for credit. However, payday lenders claim that they are providing a service that is needed by consumers and that their high interest rates are most of the time clearer compared to those of typical banks.

House and Senate Nearing an Agreement on Student Loan Debt

According to the advisers of President Barack Obama and the Congress, both parties are heading toward an agreement on how to pay the measure’s $6 billion price tag, which is the cause of the argument.

The objective is to move the legislation forward through Congress in the subsequent week so that the existing 3.4 percent interest rate on Stafford loans can be sustained for an additional year. While a 2007 regulation decreased the interest rates on the loans, it was required to increase to 6.8 percent this July 1 in a cost-saving strategy.

In addition, the two parties are closing in on a deal to fix federal transportation programs, said to the House and Senate advisers from the two parties. Discussions are anticipated to go on during the weekend, with votes projected next week on either a transportation bill or an expansion of existing programs.

President Barack Obama said during his weekly radio and Internet address last Saturday that they only have seven days left before thousands of American employees walk out of their jobs because a transportation bill has not yet been passed by the Congress. Moreover, they only have eight days left before approximately seven and one half million students witness their loan rates increase twice as much because Congress has not done something to end it.

Based on data from the Education Department, 7.4 million students are anticipated to receive new Stafford loans in the current year starting July 1, with each having an average debt of $4,226. Increasing the interest rates to twice as much would add more or less $1,000 to average loan costs, which are paid off by students for 10 years or longer.

In the previous month, the Federal Reserve Bank of New York said that student loan debt increased this 2012 to a total of $904 billion, although other types of loans are going down.

Effects of Banks Downgrades

Last Thursday, the credit ratings of 15 of the largest banks in the world were downgraded. While the deposits are completely protected, the downgrades could negatively affect people in other ways, for instance, an increase in the fees charged by the banks and more difficulty in getting a loan. Consequently, mortgages, credit cards and the job market can be affected as well.

According to Jim Nadler, chief operating officer at Kroll Bond Ratings Agency, it is common that people are anxious about their money’s safety before anything else. However, the actual costs might be concealed.

Unfortunately, the downgrades come to banks currently in a fragile situation. Several of the fees that are charged on credit cards and checking accounts have been removed because of the most recent rules adopted after the financial crisis. Moreover, banks are excluded from making profitable bets in the stock and bond market, which eliminates a lot of money in the form of trading income.

Together with the downgrades, current fees might increase even further and new ones could emerge.

The three top rating agencies, Moody’s, Standard & Poor’s, and Fitch, give ratings on a scale that corresponds to the ability of a company and state or local government to pay off their debt.

In addition, the downgrades will direct money into reserves and decrease the amount of capital that banks have to loan.

Americans applying for home mortgages, auto loans, and credit cards will experience the effects. Banks have been very selective regarding lending money, approving only those that have stellar credit or a steady employment history. Also, since people with bad credit are not given cards, the numbers of credit cards issued by banks have decreased significantly.

The effects of the downgrades will be felt even more by small and medium-sized businesses. They provide jobs for people within the country but recently, there are lesser jobs to offer. These businesses are finding it hard to get bank loans as well.

A Little Loan Can Change the Tide

The Community Micro Lending Society based in Victoria is the place where individuals with bad credit, who find it very difficult to get loans from banks and other financial institutions. One of its clients is Rachael Brown, she is a physical therapist who used to own her spa in Gulf Island, she has moved to Victoria in hopes to find a new job and recover from her financial fiasco.

The founder of the institution, and now also a counselor, Lisa Helps, visited Ms. Brown back in 2010 herself in the women shelter she stayed in. the Community Micro Lending has allowed Brown to loan an amount of $5,000 and currently she owns her own spa and Soul Therapies business.

To get a loan, the applicant is going to be featured on the web through communitymicrolending.ca., the identity of those who lend their money  is kept hidden, but according to Helps, three or four people would be financing the loan. The minimum amount that a person can donate is $500.

The owner of Kenmar Flower Farms, Marian Fonter is one of over 20 mentors in the Community Micro Lending, she believes the agency withholds a sense of community in the agency.

The United Ways has been a very effective partner in keeping the agency open. It has been financing one third of the total expenses of the organization.

Helps aims to have 100 partners in their business as part of the “community supported economy” she has been planning for. The business partners would donate about $100 every month to the organization, for now only five companies has signed in with them. One of these businesses is The Cooperators.

The company also has a program for young adults which they call “Launch!” those ages 18 to 30 can be a part of the workshops that talks about developing business ideas. One of the effective scholars of the 10 week program is Sheena Graham, now 29; she was able to start her own Photography business.