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Supporters push for cap on payday loan businesses

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(Source: WBRC video)BIRMINGHAM, AL (WBRC) –

Pay day loan businesses promise to help in hard times and give you cash when you need it most.

But for a lot of people payday loan and cash advance type establishments are doing more harm than good.

“We had a member in our church who had her car repossessed in the middle of the night. Got up the next morning trying to go to work and her car wasn’t there,” said Rev. R.G. Lyons with Church Without Walls.

A number of Lyons’ congregation members have fallen victim to these businesses. In fact, some checks were even stolen from the church and cashed at a cash advance business. Calls from the business became so constant they had to disconnect the lines.

“It’s really frustrating. They’re basically like school yard bullies. They prey on the weak and they try to intimidate people,” said Lyons.

Dozens of people rallied in front of YWCA in Downtown Birmingham on Monday to gain momentum on a movement to cap the interest rate for loan businesses.

Shay Farley is the Legal Director for a group called Alabama Appleseed. She has been pushing for a cap fair trading for eight years.

“We’ve had legislation for three years and so far we haven’t really gotten a lot of attention,” said Farley. “A lot of people don’t know that these title loans in Alabama are 30-day loans and they’re 300% interest. A 14-day loan where you can postdate a check in 456% and we’re tired of it.”

Farley said this isn’t a bipartisan issue nor is about a person’s ideologies or political beliefs. She said this is a moral issue and wants to see a stop to those who prey on the poor.

Senator Jabo Wagner was in Birmingham Monday. He said payday loan type businesses have and continue to have a very strong lobbying force to protect their interests.

That being said, Wagner said there is more movement this year in the legislature to lower the interest rate.

Copyright 2015 WBRC. All rights reserved.

[…]

8 On Your Side: Bill could remove payday loan protections

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LAS VEGAS – Taking out a payday loan is rarely a good idea. Many companies charge high interest rates, and customers can easily get in a trap where they spend years paying off the loans.

If you get a payday loan, be warned. These companies may soon have more leverage over customers. Nevada law offers consumers some protections from payday loan companies, but that could change.

If Senate Bill 123 passes, it would allow payday loan companies that offer long-term loans to sue customers who default on their loans.

“Somebody can get sued after paying for twelve to fourteen months on this loan, and then get sued at the end for more interest,” said consumer advocate Venicia Considine.

Considine says this can hurt payday loan customers who are already strapped for cash.

“The average income nationally of people who go to payday loan lenders is about $22,400 a year,” she said.

Considine says she feels the current laws obligate lenders to ensure anyone they give money to can pay it back. Senate Bill 123 would change that, and it could keep people trapped in a cycle of debt for a long time.

“It’s a lose-lose for the consumer,” she said.

You can voice your opposition to the bill by contacting your state lawmaker.

If you are in trouble with payday loans, the Legal Aid Center of Southern Nevada can help. Their services are free.

If you have a problem you want investigated, contact 8 On Your Side at 702-650-1907.

[…]

A Student Loan Repayment Trick That Can Save You Money

It’s common knowledge you can save money by paying off loans and other debts quickly or ahead of schedule. You can also save money by making monthly payments as planned, if you put in a little extra effort and do the math.

The trick? You can change your repayment period to an extended plan (for example, a 25-year instead of a 10-year repayment period) but continue to pay the amount required to be debt-free within 10 years and request the extra payment go toward the principal balance. The amount you overpay reduces the interest you’ll pay over the life of your loan. Here’s where the extra effort is necessary: You should frequently follow up with your loan servicer and check your statements to make sure the extra payment is applied as you instructed.

Perhaps you’ve heard of this tactic — it’s particularly common among homeowners with mortgages — and wondered if it’s something you could do. A Reddit user recently posted about the strategy, saying, “Am I crazy, or can I actually save money by using the extended payment plan for federal loans?”

Not crazy. It’s a smart plan, you just need to make sure you know what you’re doing.

“That post is completely on target,” said Mitch Weiss, a finance professor at the University of Hartford. He frequently writes about student loan issues for Credit.com and has written about this strategy as a good way to save money but also give yourself flexibility. “You can always fall back on that lower payment when you need it. Managing your cash flow is in your hands, then.”

In the post, the redditor provided a good example. He pays $636 each month on a 10-year repayment plan, and the required monthly payment would drop to $333 a month for a 25-year repayment plan. By continuing to pay $636 a month, the extra money would go toward the principal balance on the loan with the highest interest rate (he checked with his loan servicer, and that’s its policy — you’ll want to check with your own servicer to confirm if this is its policy as well). In the event he can’t afford the $636 some months, he can fall back on the lower required payment, rather than having to go the servicer and explain the hardship and try and work something out (or make a partial payment and get hit with late fees or skip a payment and get a delinquency on his credit report).

The redditor said he used a loan calculator and found that he’d pay off his debt two months faster and save more than $1,000 in interest that the loan would have accrued under the 10-year plan.

“Am I missing something here, or is this a no-risk way of saving $1,100 and 2 months? I mean it gives emergency flexibility AND saves me money?” he wrote.

As dozens of people replied (and Weiss confirmed), the math is correct, but when it comes to student loans, you need to be careful.

“It’s all about execution, and the way that you ensure execution is that you have your directions in writing and you follow up,” Weiss said. Tell your servicer exactly what you want them to do with that extra payment (put it toward the principal balance, and if there are multiple loans, the principal balance of the loan with the highest rate), and make sure they do it. Otherwise, they may take the extra payment as a future payment and just not charge you again until the prepaid amount runs out.

Another Reddit commenter said it took emailing his or her servicer every 48 hours for almost two months to make sure the servicer applied the payment as instructed. Weiss said he’s heard and read about that complaint a lot.

“It was a very constructive string of comments,” Weiss said. “I think this demonstrates how serious an issue this is for so many people and how so many people are taking this so seriously.”

As you pay down your student loans (no matter your strategy), it can help to keep an eye on your credit reports for any inaccuracies or problems that could drag down your credit score. You can get a free credit report summary, updated every 30 days on Credit.com, to track your progress as you get out of debt.

More from Credit.com
How to Consolidate Your Student Loan DebtHow Long Will You Be Paying Your Student Loans?Your Repayment Options for Student LoansFinanceEducationstudent loan […]

Chequed out: Inside the payday loan cycle

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Jillane Mignon just needed cash to pay for day care.

Her job with the City of Winnipeg’s 311 program covered the bills, but not the $1,000 a month it cost to care for her son while she was at work.

“When there are [child care] subsidies, there are no spaces. When there are spaces, there’s no subsidy.”

So it started with a small loan from a payday lender. That took care of that month.

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“And then when you get your paycheque, half your paycheque is already gone to pay the lender. So then you have to borrow again.”

At one point, she said, she owed money to four different payday loan outlets – all the money taken out to pay existing loans, plus their rapidly accumulating interest, and get her through to the next paycheque, which was quickly swallowed up in more loan payments.

When Mignon decided to dig herself out of payday loan debt once and for all, she did so “painfully.”

“The last time I took [out a payday loan] I said, ‘Whatever my paycheque comes back as after I pay them back, I’m going to live on,” she said. “Painfully.

“Food banks. Salvation Army. Swallow your pride.”

Read the series

Instability trap: When you’re income rich, but asset-poorCanadians want work. Why have so many stopped looking?Feb. 17: Life in the temp laneFeb. 23: Retirement lost

Graphic by Janet Cordahi

Fringe finances by postal code

It’s a familiar predicament for many – one that’s earned payday lenders and cheque-cashing outlets a reputation for exploiting people who need cash quickly and have no other option.

Money Mart came under fire shortly before Christmas for its practice of exchanging gift cards for half their value in cash. At the time, Money Mart said it was “offering customers a convenient, value-added product though this service.” It eventually suspended the practice.

Neither Money Mart nor the Cash Store would speak with Global News for this article.

But Stan Keyes, a former Minister and Liberal MP for Hamilton, Ont., and head of Canada’s Payday Loan Association, argues these businesses – licensed and regulated by provinces, he notes – are filling a need no one else is meeting.

“What alternative do borrowers have?” he asked.

Squash or regulate the industry out of existence, he warns, and you leave people who need small cash infusions quickly without other options.

“If licensed payday lenders were forced to close their doors, say due to overregulation, the demand for the small sum short term loan does not dry up,” he said. “So I suppose those who claim to speak for payday loan borrowers, some of them often misinformed, don’t mind forcing those who need the small sum financing to, what? Take their television off the wall and take it to a pawn shop?”

Keyes said the fees and interest rates (about $21 for $100 at Money Mart, for example), often criticized as high, are necessary because of the risk taken on by lenders who don’t do credit checks. He also thinks citing annual interest rates of several hundred per cent is misleading because these are short-term loans.

There are about 1,500 payday lender outlets across the country. They skyrocketed in growth in the early 2000s, then levelled off. A 2005 Financial Consumer Agency of Canada survey found about 7 per cent of Canadians say they’d used the services.

A Global News analysis has found payday lenders overwhelmingly concentrated in low-income neighbourhoods and neighbourhoods with a high proportion of people receiving social assistance.

(Keyes, for his part, argues they’re simply located where the commerce is.)

Global News used tax data obtained from Statistics Canada and business location information from Red Lion Data to map payday loan locations against income and social assistance.

Interactive: Explore the map below to see how payday lending locations correlate with social assistance levels in your neighbourhood. Click a circle or coloured shape for more information; click and drag to move around.

Payday loan stores and welfare rates »

Payday loan stores and welfare rates

Payday loan stores and income »

Payday loan stores and income

Most payday loan customers are lower middle class, says Jerry Buckland, a University of Winnipeg and Menno Simons College professor who’s written a book about the practices of these “fringe” financial institutions.

But the heaviest users – the ones who get trapped in a cycle of high-interest debt – are the poorest borrowers.

“It’s those people closer to the edge who aren’t able to pay that payday loan off.”

So maybe they take out another payday loan to fill the gap. And then they’re stuck.

The problem, Buckland argues, is that payday lenders fill a need that traditional banks aren’t.

“Mainstream banks have, over the course of 30 years, shut down more branches in lower-income neighbourhoods,” he said.

“A big thing right now that I see the feds pushing is this financial literacy. And while on the one hand I think financial literacy is important, it certainly doesn’t solve the problem of financial exclusion.”

Maura Drew-Lytle, spokesperson for the Canadian Bankers Association, says banks have done a lot to make themselves more accessible, including offering low-cost accounts for about $4 a month. And as of January, 2015, she said, they’re offering basic, no-cost accounts for low-income seniors, people on disability assistance, students and youth.

She also notes the number of bank branches in Canada “has actually been increasing.”

“Banks have been very focused on customer srvice over the last decade or so. You’ve seen big changes in branches. … It’s not just a line of tellers any more.”

But Tamara Griffith, Financial Advocacy and Problem Solving Program Coordinator at Toronto’s West Neighbourhood House, says there are still barriers in place – including something as basic as photo ID, the lack of which can limit what a person can do with a bank account.

She and her colleagues will often accompany people when helping them open an account, she said, to help demystify the process and ensure they get what they need.

“Because we know once you walk in, you’re being sold a whole bunch of things,” she said.

“You just want a bank account: You don’t need an overdraft, you don’t need a line of credit, you don’t need a credit card. And every time, it’s the same pitch. And we say, ‘Okay, no we just need a bank account.’”

Many of the people Griffith works with are using credit cards to supplement their income, she said – not for luxuries, but just to get by. They pay the minimum payment as long as they can until the accruing interest becomes financially ruinous.

Vancouver’s VanCity credit union took matters into its own hands a couple of years ago, says Linda Morris, the bank’s Senior Vice President of Business Development, Member and Community Engagement.

“We’d been seeing studies coming out of the States, but also Canada, about people who’d be underserved, or not served at all, by conventional banking,” she said.

So they did their own research – and found even some of the credit union’s own members reported using payday lenders of cheque-cashing facilities.

“That concerned us greatly, because we know the cycle of debt people can get into. … We have people come in who have three different payday lenders they owe money to.”

At the same time,” she added, “when you take a loan with a payday loan, you’re really not developing a credit history. And that’s really important also.”

Last April, VanCity launched its Fair and Fast loan program – essentially, small-scale loans, available within an hour. In July, they added a cheque-cashing component.

“We’re seeing very little delinquency. So far, people are paying back their loans. It seems to be working.

“The larger question, of course, is will we break the cycle.”

San Francisco is asking itself the same question.

In 2005, the city enacted a moratorium on new cheque-cashers and payday lenders.

“We felt at the time we were pretty saturated with those types of organizations,” said Leigh Phillips, director of the city’s Office of Financial Empowerment.

“Our regulatory authority is very, very limited – these are companies that are regulated by the states,” She said. But “we wanted to do something.”

Other cities followed suit with legislation of their own, she said – Los Angeles, San Diego and San Jose among them.

That tackled one part of the problem. It’s still trying to measure how it’s doing on the other half – meeting the need that was driving the growth of these types of businesses in the first place.

The city also launched a Bank on San Francisco program, partnering with existing financial institutions to offer accessible, low-cost accounts.

In many cases, Phillips said, these were “second chance” banking products – for people with poor credit histories or who’d had bad experiences with banks in the past. They also addressed barriers ranging from identification requirements to often-incapacitating overdraft fees.

But while they surpassed their initial goal of getting accounts for 10,000 people in their first year, the program has been tougher to track since then. Phillips said it “looked like” about 80 per cent of those new clients kept their accounts open, which is good.

Just as importantly, she adds, “it’s made financial management a more concrete part of the anti-poverty conversation.”

‘That endless cycle … will drive you insane’

Jillanne Mignon got out of her payday loan debt – ‘painfully.’

Anna Mehler Paperny/Global News

Among the many things on Mignon’s to-do list once she graduates from her community economic development program at Toronto’s Centennial College is work with micro-loans.

“I like the model of microloans because it opens the lending market ot people who are normally shut out,” she said. “People who normally go to these, I call them loan sharks, these payday loan places these pawn shops, to get these monies and then they get caught in these ridiculous circles of high interest rates. …

“I know that endless cycle. It will drive you insane.”

Tell us your story: Have you been trapped in a payday loan cycle?

Note: We may use what you send us in this or future stories. We definitely won’t publish your contact info.

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Singletary: What you should know before you take out a reverse mortgage

When you have most of your wealth tied up in your home, it’s referred to as being “house rich, cash poor.”

Many seniors who find themselves in this position may be enticed by the commercials offering salvation. They are wooed by a chance to tap into their home’s equity with a reverse mortgage. Smooth television ads make it appear to be a no-brainer. It’s actually much more complicated.

Michelle Singletary writes the nationally syndicated personal finance column, “The Color of Money.”

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The most appealing quality of this type of loan is that, unlike a traditional mortgage, you don’t have to make monthly payments. The lender doesn’t collect until the homeowner moves, sells or dies. Once the home is sold, any equity that remains after the loan is repaid is distributed to the person’s estate.

To qualify, you have to be 62 or older. The reverse-mortgage market isn’t huge — about 1 percent of all mortgages — but reverse-mortgage lenders are likely to pump up the volume in coming years as more seniors retire. For a lot of people, the only source of big money for them is the equity in their homes, the Consumer Financial Protection Bureau says.

In 2013, a typical household had only $111,000 in 401(k) or IRA savings, according to the Center for Retirement Research at Boston College. The center found that too many people are dipping into their retirement accounts during their working years, causing what is called a “leakage.”

But a lot of seniors have equity in their homes — about $3.84 trillion, according to one mortgage-industry survey. They can tap into that equity by selling or taking out a home equity loan or line of credit. But selling isn’t an option if they want to stay put, and they would have to make payments on the line of credit or loan. Given those options, it’s no wonder a reverse mortgage can be appealing.

The CFPB, in a report analyzing 1,200 reverse-mortgage complaints received from 2011 to the end of last year, found that many people are confused about this type of loan.

The fact that counseling is required from a government-approved agency for loans made through the Federal Housing Administration’s Home Equity Conversion Mortgage (HECM) program is an indication of the complexity of this financial product. Still, many seniors don’t understand what they are getting into.

People complained to the CFPB about their loan terms, the loan servicing companies and not being able to add a borrower. Adult children complained that lenders refused to add them as an additional borrower or allow them to “assume” the loan for an aging or deceased parent, the report said.

To help, the CFPB has issued some tips about reverse mortgages. Here are the three important things the agency says you or your relatives should know:

?Double check that your loan records accurately reflect who is on the mortgage.

?Be sure to understand the risks of not including a spouse on the loan. Often an older spouse will take out a reverse mortgage in his or her name only, because older homeowners are able to borrow against a greater percentage of the home’s equity.

“Non-borrowing spouses submit complaints distraught that they are facing foreclosure and about to lose their home after their husband or wife dies,” the report said. “Other non-borrowing spouses submit complaints worried about their ability to remain in their home should the older spouse die first.”

If you decide it’s financially better for just one spouse to take out a reverse mortgage, be sure to have a plan for the non-borrowing spouse. Can a surviving spouse stay in the home? The Department of Housing and Urban Development has attempted to address the issue of non-borrowing spouses. Under certain conditions, some spouses may be able to stay, but others may not get that protection.

The CFPB recommends that if only one spouse is on the mortgage, you should find out whether the loan servicer will permit the non-borrowing spouse to qualify for a repayment deferral allowing him or her to remain in the home.

?Talk to your heirs. If you have adult children or other relatives living in the house, be sure they understand what could happen if the reverse mortgage becomes due.

Go to the CFPB Web site at www.consumerfinance.gov and click the link for the agency’s consumer advisory on reverse mortgages.

There are some pros to a reverse mortgage. But the complexity of the product means you better be just as aware of the cons.

Readers may write to Michelle Singletary at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071 or michelle.singletary@washpost.com. To read previous Color of Money columns, go to http://wapo.st/michelle-singletary.

[…]

Federal Regulators to Crack Down on Unaffordable Payday Loans …

Image Shawn-M.-Griffiths_avatar_1381172453-35x35.png

Feb 9, 2015

The New York Times

reported Monday

that federal regulators are expected to draft new rules to govern short-term loans, including car titles and payday loans, which to date have fallen mostly under the jurisdiction of individual state law. While many states have tried to put an end to short-term loans with exorbitant interest rates, payday lenders have found ways to get around these laws or have lobbied state legislatures to soften regulations.

“Such maneuvers by the roughly $46 billion payday loan industry, state regulators say, have frustrated their efforts to protect consumers,” the Times reports.

According to the report, the Consumer Financial Protection Bureau (CFPB) will soon take the first step by federal regulators to reduce the number of unaffordable loans lenders can make. The CFPB, created after the 2008 financial crisis, is an independent agency tasked with protecting consumers in the financial sector. Along with banks and credit unions, payday lenders fall within the agency’s jurisdiction.

In March 2014, the CFPB released a startling report on the realities of payday loans and the effect they have on low-income households and borrowers, the demographic payday lenders target most. The people lenders seek out are in desperate financial situations, and therefore do not thoroughly consider all the facts before signing up for these loans, the fees of which may end up being more than the initial principal.

The initial loan is typically a 14-day loan of no more than $500, though some can exceed this amount. According to the CFPB, these loans carry fees between $10 to $20 for every $100 borrowed.

“A $15 fee, for example, would carry an effective APR of nearly 400% for a 14-day loan,” CNN Money reports.

The CFPB found that over 60 percent of all payday loans are made to individuals who take out 7 or more loans in a row, meaning the accumulated fees end up being more than the initial amount taken out.

“60% of all payday loans are made to individuals who take out 7 or more loans in a row.”@ cfpb

“The bureau found that during a 12-month period, borrowers took out a median of 10 loans,” the Times reports. “Borrowers paid median fees of $458. The median amount borrowed was $350.”

People may recall the Montel Williams commercials for Money Mutual where he makes it sound like short-term loans are the most convenient solution for people who are having money problems and live paycheck to paycheck. Yet, according to the CFPB, these loans are only convenient for people who can pay them back immediately or after no more than one renewal.

For those who can’t, the challenge becomes getting out from under the debt.

“[O]ne Pennsylvania woman who took out a total of $800 in payday loans to help pay for rent after losing her job told the CFPB that she meant for the loan to be only short-term,” the CNN Money article says. “But after rolling over her first loan and eventually taking out another one to help pay for it, she has already paid more than $1,400 towards the debt and still owes more.”

There are currently 35 states that do not have laws regulating short-term lenders. However, even among the states that have made these types of payday loans illegal or have limits in place, lenders have found ways to get around the laws by reclassifying their stores as car-title lenders or using other similar tactics. New rules by the CFPB could make it harder for these companies to get around state regulations and could protect consumers in states that do not currently have these laws.

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Photo Credit: Lori Martin / shutterstock.com

About the Author


Shawn M. Griffiths

Shawn is located in the Dallas-Fort Worth area in Texas and has been actively involved in grassroots efforts in the state since 2005. His political philosophy is founded on the principles of individual liberty, limited government, and fiscal responsibility. He is not affiliated with any political party, and has great appreciation for intellectual independence and objective truth.

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[…]

Community Groups Fight For More Protections From Payday Loan …

In an effort to control the damage being done to individuals and communities by payday lenders, community activists rallied outside payday lending storefronts in 10 states Tuesday to increase awareness of the lack of protection many states offer individuals against purveyors of short-term, high-interest loans. National People’s Action (NPA) helped coordinate the protests along with several other organizations.

There were 11 actions across Idaho, Michigan, Colorado, Iowa, Missouri, Kansas, Maine, Minnesota, Illinois and Nevada calling out the toxic effect payday lenders have on communities. Members wore hazmat suits and taped off payday loan stores as part of a grassroots movement that an NPA statement said was in support of the Consumer Financial Protection Bureau (CFPB) providing “stronger protections against devastating loans.”

Thirty-five states across the country authorize some form of payday lending, and federal laws offer very few restrictions on payday lenders. According to an NPA press release, “Each year, payday lenders make more than $10 billion in fees by trapping an estimated 12 million consumers in a cycle of debt, with annual interest rates near 400 percent. Payday lenders have been known to use tactics like threats, harassment and intimidation in order to push customers to take out more loans.”

Payday lenders’ standard operating procedures are designed to bleed people as much as possible, said Liz Ryan Murray, policy director at National People’s Action. “Their business model is making you a loan and when you can’t pay it back they offer you another loan.”

“We’d also like [the CFPB] to look at where the money’s coming from,” she said, noting how payday lenders “pull the money out of people’s checking accounts whether they have it or not.”

Organizations invested in helping affected people and communities are pushing the CFPB to take concrete steps against predatory lenders. The CFPB is expected to make its first decision to regulate the industry in the coming days.

Participating organizations are against anything “that’s going to say maybe its OK or the first couple loans are OK. That can’t be on the table. Especially in those states where it has been effectively stamped out, a rule like that could open the door for them to get back into those states,” Murray said.

“We look at where payday loans are located and they’re highly concentrated in low income communities of color” Murray said. “I think that they’re preying on the most vulnerable, maybe the lowest political clout and they’re often the most desperate people. They deserve good credit just like everyone else. We often call it back-of-the bus credit.”

If you’re interested in learning more about the issue view NPA’s video on payday loans and view photos from Tuesday’s events. Please sign the petition telling CFPB to offer protections against predatory lenders and email alerts on different steps being taken to combat this issue here.

[…]

China’s PBOC Braces for New Year Cash Demand With Loan Rollover

The People’s Bank of China rolled over a 269.5 billion yuan ($43.4 billion) lending facility to banks and added 50 billion yuan in loans as it seeks to ease liquidity ahead of the Chinese New Year holiday.

The facility, first issued in October with an interest rate of 3.5 percent, was rolled over to keep the money market stable, the central bank said in a statement on its official microblog account. It said the move also aims to smooth liquidity before the holiday, which begins Feb. 18.

The PBOC has sought to shore up liquidity and broaden stimulus efforts in recent months, cutting the benchmark lending rate in November and issuing billions of yuan in short- and medium-term loans to banks. Each year around this time, demand for yuan starts to spike as Chinese give each other red envelopes full of cash for the Lunar New Year holiday.

“There may be some irregular capital inflow and outflow around the world,” PBOC Governor Zhou Xiaochuan said at a World Economic Forum panel in Davos, Switzerland minutes after the central bank announcement. “That may also be a source of volatility.”

The PBOC doesn’t intend to provide too much liquidity, Zhou said in Davos.

China’s money-market rate climbed the most in a month today amid speculation banks will start hoarding funds to meet demands for cash. The central bank hasn’t conducted open-market operations since November. Last month, the PBOC reportedly rolled over part of a separate 500 billion yuan lending facility.

To contact Bloomberg News staff for this story: Xin Zhou in Beijing at xzhou68@bloomberg.net

To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net Nicholas Wadhams

Press spacebar to pause and continue. Press esc to stop.

[…]

China central bank tightens loan, deposit measurement as shadow banking surges

BEIJING (Reuters) – China’s central bank is adjusting the way it measures bank deposits and loans, in a bid to increase supervision of cash in the banking system at a time shadow bank activity has seen a resurgence.

The move comes as freshly-released December loan data shows that the shadow banking portion of what China calls “total social financing” was the highest since January 2014, reversing the trend of shrinking off-balance sheet credit seen in most of last year’s second half.

The steps the People’s Bank of China (PBOC) are taking also show that its recent tweak to how loan-to-deposit ratios banks are calculated was not a form of monetary easing, but instead a preliminary step to applying further pressure on shadow banking.

According to a transcript of an official briefing to domestic media seen by Reuters on Thursday, the PBOC will include deposits by non-deposit-taking institutions made in accounts at banks deposit-taking institutions in calculations of deposits, and will include lending by deposit-taking institutions to non-deposit-taking institutions in loan calculations.

BROKERAGE MARGIN DEPOSITS

The transcript made particular mention of margin deposits from brokerages at banks. Regulators have signalled concern that a massive stock market rally set off in November is at risk of over-heating, given large quantities of cheap leverage provided through brokerage margin accounts.

The transcript quoted comments by Sheng Songcheng, the head of the PBOC’s statistics department, during a question-and-answer session to which foreign media were not invited.

“The changes in calculating deposit and loan items are aimed at making (Chinese standards) gradually be in line with usual international practices,” Sheng was quoted as saying.

“As these changes are aimed at more accurately reflecting the reality of social deposits loans, as well as liquidity conditions, people should not read too much into them on the policy front.”

Despite the crackdown, off-balance sheet lending led by entrusted loans and trust loans shot up in December, official data showed on Thursday, even as traditional yuan loans fell far short of expectations.

“Shadow banking is back with a vengeance, and I’m not sure why the year ended this way but it’s clear that there is a lot of money creation outside of the banking system,” Dariusz Kowalczyk, an economist at Credit Agricole CIB.

In December, Chinese banks extended far less credit than expected in December, despite instructions by the PBOC to lend more in the last months of 2014 to support the slowing economy.

(Reporting by the Beijing Newsroom; Additional reporting by Lu Jianxin and Pete Sweeney in SHANGHAI, and Jake Spring in Beijing; Editing by Richard Borsuk)

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Should You Get a Loan Instead of a Credit Card?

Whether it’s an emergency or a planned expense, you’re likely going to want to finance a large purchase at some point. Among the handful of options consumers have in these situations, a credit card is the most common way people spread out a large expense over several months, but not everyone has that option, and it may not be the best one for those who do. Instead of using or opening a credit card to finance something, you may want to consider taking out a personal loan.

No Room for Excuses

When you charge something to your credit card, you might end up paying for it for a long time. One of the nice things about credit cards is their flexibility — if you don’t have the cash you need to pay your entire bill this month, you can pay any amount above your minimum payment and face relatively minimal consequences for doing so. The balance will accrue interest, but as long as you make your payment on time and keep your balance low, relative to your credit limit, it won’t have do major credit score damage.

People often abuse that flexibility, and the lack of urgency in paying down credit card debt can allow the balance to snowball into an intimidating sum. With a personal loan, you have to repay it within a specified time frame, forcing you to prioritize the payments.

“It’s sort of forced discipline,” said Gerri Detweiler, Credit.com’s director of consumer education. Some people need that extra push to stick to their get-out-of-debt plans, Detweiler noted, which is why the personal loan route may appeal to some people over credit cards. Additionally, because it’s an installment loan, you’re not going to add to your burden, like you might with a credit card. That’s another issue a lot of people encounter with credit cards: It’s hard to stop spending.

Prevent Credit Damage

Before you can decide what’s better for you, you’ll need to have an idea of where your credit stands. If you have poor credit, you may not be able to qualify for a new card or loan. On top of that, you won’t be able to estimate how your choice will affect your credit. You can get a free credit report summary on Credit.com every 30 days to help you with these and other financial decisions.

If you see your credit utilization is high — meaning you use more than 30% of your available credit — adding a large purchase to your credit card is probably going to damage your credit score. There are a few things you can do to avoid that: Ask for a credit limit increase, open a new credit card for the purchase (increasing your overall credit limit and keeping utilization down on other cards) or seek an alternative financing method.

Going for a personal loan could help you build credit, too, because your mix of accounts has an impact on your credit score. It’s not as influential as your payment history or debt use, but if you only have credit cards, adding an installment loan to your credit portfolio can boost your score, Detweiler said. It’s important to note that applying for new credit will cost you a few score points in the short term, but as long as you do it infrequently, applying for a new card or loan won’t hurt you in the long run.

Save Money

Before using a credit card to finance a large purchase, check your card’s APR. If you have a high or variable interest rate on that debt, you should look into personal loans. With good credit, you’re likely to qualify for a personal loan with a low interest rate, making the purchase more affordable over time. There’s another option for borrowers with good credit: 0% financing promotions. If you can qualify for a credit card with a 0% promotional finance period and you can pay off the purchase within the promotional period, you won’t have to pay interest on the purchase at all (although you may have to pay a balance transfer fee). If you don’t stick to that plan, though, you may see your APR skyrocket, negating the purpose of getting that card in the first place.

Explore your options. Depending on your credit score and your current access to financing tools, one route may have many more advantages than the other, but if you don’t consider all your choices, you can’t be sure you’re making the best one. It doesn’t matter if you’re using the card or loan to pay for an emergency car repair or a much-wanted home improvement — just make sure you have a plan to pay for it.

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