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Is Getting a 401(k) Loan a Good Idea?

Don’t do it!

That’s the conventional wisdom about taking out a 401(k) loan. And as someone who took out one, left her job and found herself shelling out big bucks in taxes and penalties, I’m not about to argue with conventional wisdom.

However, people stretched financially thin may think otherwise. They may see their 401(k) account as a tempting source of cash. To help those of you thinking about dipping into your account, we want to take a moment to review what you need to know about these loans. I also contacted two Certified Financial Planners so you wouldn’t have to take my word for it.

I fully expected both planners to say 401(k) loans are nothing but bad news, and certainly, they both expressed extreme concern about people dipping into their retirement savings. But I was also surprised to hear that a 401(k) loan may make sense in some limited situations. Before we get to those, let’s start with the basics of 401(k) loans.

Basics of 401(k) loans

Named after a section of the tax code, traditional 401(k) plans allow you to put money aside, tax-free, for retirement. After a few years of regular contributions, these plans can carry a nice balance, which may start to look like a handy cash cow.

While there is no requirement that 401(k) plans allow loans, many do. Under IRS rules, those that do allow loans can let participants take out up to 50 percent of their vested account balance, or $50,000, whichever is less. Typically, these loans are paid back over a maximum of five years, although, in some cases, a longer payback period may be arranged. On occasion, the IRS issues special rules, such as after hurricanes Katrina, Rita and Wilma when those affected were allowed to take loans for their entire vested balance.

Loans from 401(k) accounts do charge an interest rate, but that money is paid back into the plan. This is one reason they may appeal to some workers. Rather than paying interest to a bank or other lender, the worker keeps the interest to pad their retirement account. In addition, repayments are made via a payroll deduction, which makes them convenient, another bonus for some workers.

Why they aren’t such a hot idea

Despite being an apparent source of easy cash, some finance experts say you should be keeping your hands off your 401(k).

“Your 401(k) is not a savings account,” says Mark Vandevelde, a CFP and wealth partner with Hefty Wealth Partners in Auburn, Ind. “It is money that should be set aside for long-term goals and never to be touched, in my humble opinion.”

As Vandevelde sees it, there are three problems with 401(k) loans:

  1. Lost investment gains that can reduce your fund balance at retirement.
  2. The risk of defaulting on the loan, which could result in taxes and a penalty.
  3. The chance you may reduce your 401(k) contributions to afford the loan repayment amount, which again could affect your fund balance at retirement.

“It’s not free money,” Vandevelde says. “You have to pay it back with regular payroll deductions. Many people end up reducing their actual 401(k) contributions to compensate for the amount they are having to pay back and, therefore, they actually aren’t saving as much.”

On its website, Principal Financial Group has an example of how this may play out. A 35-year-old who takes out a $5,000 loan and pays it back over five years may find himself with $52,000 less at age 65. The calculation assumes a $150 per-paycheck contribution that is decreased by $44 to accommodate the loan repayment.

Keith Klein, a CFP and owner of Turning Pointe Wealth Management in Phoenix, agrees with Vandevelde that a 401(k) loan shouldn’t be your first choice for cash.

“The key to remember is when you take money out, it has to be paid back in five years,” Klein says. “If you default, that money will be considered income, and you’ll have to pay taxes plus a 10 percent penalty.”

Plus, a lot can happen in five years, and if you find yourself taking a new job opportunity, you’d better be ready to pay up.

“A lot of people don’t realize what happens when you leave [or] get fired from your job and you have an outstanding 401(k) loan,” Vandevelde says. “It becomes immediately due and has to be paid in full. If you cannot pay it back, the remaining balance is considered a distribution and is subject to tax and a 10 percent penalty if [you’re] under age 59½.”

When a 401(k) loan might make sense

Despite the financial perils associated with a 401(k) loan, Klein says there may be times when it makes sense to take one out.

“Now, I’m not recommending you take loans out,” he says, “but there are circumstances when life doesn’t go perfectly.”

For example, an older worker who is losing a job may find taking out a loan and letting it default could be a better option than paying their bills with the credit card until they find other employment or are old enough to claim Social Security. While the money will become taxable income, the 10 percent penalty no longer applies once an individual turns 59½.

Divorce or disability could be other scenarios in which a 401(k) loan may be a better way to bridge an income gap in an emergency situation. Still, Klein says it’s not an ideal option. “Having a [cash] reserve is always the best answer,” he notes.

Both Vandevelde and Klein say that, unfortunately, far too many people rush into a 401(k) loan, or they use them for purchases such as vacations, cars or even big screen TVs. For those sorts of purchases, both financial planners agree a 401(k) is not the right source of money.

So going back to the question in the headline: Is getting a 401(k) loan a good idea? Given the drawbacks listed above, it’s probably not ever a good idea, but in some unique situations, it may be the best of your not-so-great options.

Of course, rather than waiting to find yourself in an emergency with limited options, a better course of action would be to get out of debt and bulk up your savings account now. If you’re not sure how, subscribe to the Money Talks News newsletter to get the best personal finance tips and advice delivered straight to your inbox each day.

For more tips on saving for retirement, watch the video below:

Watch the video of ‘Is Getting a 401(k) Loan a Good Idea?’ on MoneyTalksNews.com.

This article was originally published on MoneyTalksNews.com as ‘Is Getting a 401(k) Loan a Good Idea?’.

More from Money Talks News

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Sitrade Italia-Spa Recognized as Fastest Growing Cash Handling Equipment Manufacturer

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ResearchMOZ

In the fourth segment, the market size data of the 80 largest manufacturers of cash handling equipments in the world are compared.

Albany, NewYork (PRWEB) February 11, 2015

ResearchMoz has announced the addition of a new market study that offers an analysis of the cash handling equipment manufacturers worldwide. The research report, titled “Cash Handling Equipment Manufacturers (Global) – Industry Report”, offers an analytical report with a detailed study of 140 major manufacturers of cash handling equipment across the global cash handling equipment market, including their market strategies and their penetration level in the global cash handling equipment market.

Read The Full Report With TOC @ http://www.researchmoz.us/cash-handling-equipment-manufacturers-global-industry-report-report.html

Cash handling is the procedure of dispensing, tracking, and counting cash in a bank, cheque en-cashing, payday loan/advance, retail, casinos, and other business environments through specially designed software and hardware to prevent losses, theft, and to reduce management time for errors in cash drawer operations. Cash handling equipment include automatic teller machine (ATM), cash dispenser, cash validator, cash recycler, loose coin validator, rolled coin dispenser, and intelligent banknote neutralization system.

This research report on cash handling equipment manufacturers across the world is categorized into various sections and contains both written and graphical information of the global cash handling equipment manufacturers, all of it updated exhaustively.

The first section presents a thorough study on the global cash handling equipment market. This segment consists of manufacturers that are the leaders in the market in both sales as well as financial might. Ingenico GmbH has been ranked as the best trading partner in the global cash handling equipment industry.

The second section analyzes the sales growth and reviews the fastest developing and fastest shrinking manufacturers among the 140 key cash handling equipment manufacturers across the globe. Sitrade Italia-Spa is one of the fastest developing cash handling equipment manufacturers in the world.

The third section evaluates the gross and pre-tax profit statistics over the past ten years. In this section, a profitability synopsis is presented by comparing profits in the global cash handling equipment industry against small, medium, and large cash handling equipment manufacturers over the world.

Request A Sample The Report @ http://www.researchmoz.com/enquiry.php?type=sample&repid=240213

In the fourth segment, the market size data of the 80 largest manufacturers of cash handling equipments in the world are compared. This comparison is carried on the basis of the previous year’s market size and the most recent figure.

Among the next two segments, the first one ranks the top 50 cash handling equipment manufacturers on the basis of their market share, growth rate in sales, and gross and pre-tax profit. The other one determines the best performing cash handling equipment manufacturers according to their strong financial conditions and outstanding sales growth rates during 2014.

The last segment focuses on profile analysis of companies and provides a comprehensive study of the largest global cash handling equipment manufacturers within the industry.

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[…]

How The Post Office Could Take On The Payday Loan Industry

With the idea of postal banking becoming more mainstream in the U.S., the head of the largest union of postal workers says he plans to make a revived banking service part of his union’s upcoming contract talks with the U.S. Postal Service.

Mark Dimondstein, president of the American Postal Workers Union (APWU), told The Huffington Post that postal banking — when post offices also offer simple banking services like checking and savings accounts — is “an idea that should be reborn and whose time has come.”

“Basic postal banking is done in many countries around the world, and in many of those countries it’s a revenue-driver for the post office,” Dimondstein said. “We think it’s a win-win-win situation. It’s great for the public. It’s great for the post office. And it’s great for postal workers.”

Dimondstein’s plans to make postal banking part of contract talks were first reported by Salon’s David Dayen.

The U.S. Postal Service once offered simple banking services to the public, but federal reforms abolished the services in 1966. With the postal service now facing a drop in first-class mail and costly mandates from Congress, the notion of restoring banking has been bandied about as a way to get the agency on more solid footing while extending some basic services to underbanked communities.

In particular, it’s been pitched as a potential alternative to the high-interest payday loans that poorer Americans rely on.

Last year, the postal service’s Office of the Inspector General recommended that the agency consider offering check cashing, money transfers and modest loans to customers who don’t have their own banks. The idea has gained currency not only with postal service boosters, but also with critics of Wall Street, including Sen. Elizabeth Warren (D-Mass.).

In an op-ed last year, Warren argued that the postal service is the one organization with “the public mission, the infrastructure, the experience and the well-trained employees needed to help address this problem” of predatory lending aimed at the poor.

One interested party that hasn’t endorsed the concept of postal banking is the postal service itself. Patrick Donahoe, the postmaster general until earlier this month, “scoffed” at the idea during a press conference late last year, according to the Associated Press. “Our role is delivery,” not banking, Donahoe said.

It isn’t apparent yet how receptive Donahoe’s replacement, Megan J. Brennan, might be to reviving postal banking services. Asked whether the agency’s new management would entertain such a discussion, an agency spokeswoman said, “We’ll just have to wait and see what’s addressed during the negotiation process” with the union.

The divide over postal banking is part of a broader philosophical disagreement over the future of the post office. Heading an agency faced with red ink — most of it due to a requirement imposed by Congress that the agency pre-fund retirement benefits years in advance — Donahoe sought more latitude to streamline the postal service, pushing proposals that would eliminate Saturday delivery and close more mail processing facilities.

Postal unions have staunchly opposed such moves and argued that they will lead to the so-called death spiral, in which reduced services inevitably lead to the agency’s demise.

APWU will begin negotiations for a new contract with the postal service next week, and the union expects the agency to seek concessions in employee health and retirement benefits — a common feature in nearly all union contract talks these days. Though it isn’t clear how postal banking could fit into such a contract, Dimondstein said he believes the negotiations will provide a good opportunity to put the proposal before postal management.

“We think it’s most appropriate that the needs of [postal customers] are talked about at the bargaining table,” Dimondstein said. “And I can tell you this: I haven’t met a single person — though I don’t run into Wall Street bankers often — who think this is a bad idea.”

[…]

Bank's loan sale doesn't end risk

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Posted: Friday, January 2, 2015, 9:58 AM

Despite the retirement of founder Betsy Z. Cohen and a Dec. 31 deal to sell off one-quarter of the Cohen family-controlled loan and cash management company’s $1.1 billion in largely Philadelphia-area business and consumer loans, The Bancorp still has a ways to go before the Wilmington and Philadelphia-based company will have a positive new story for investors, writes analyst Frank Schiraldi in a report to clients at Sandler O’Neill + Partners this morning.

Schiraldi notes the company sold its $268 million “nonperforming/sub-performing” loan book, which had already been marked down by $54 million (plus another $4 milllion during the fourth quarter) to around $210 million, for $194 million in 10-year senior and subordinated notes at around 2.2%, plus $16 million in (probably) cash.

But “unfortunately, the sale does not result in a ‘clean break,'” Schiraldi writes. “We were disappointed” to see that Bancorp is still exposed to losses from the portfolio — because the buyer “is a newly-formed entity, Walnut Street, in which the bank owns a 49% stake.” Plus, most of the proceeds of the sale were paid for in Walnut Street debt, which is backed by those same lower-quality Bancorp loans and collateral (the Philadelphia-area properties whose owners used them to secure their loans from Bancorp).

“We would have thought that minimizing future exposure to this book would have been a priority,” but maybe Bancorp could find no other buyers, Schiraldi adds. Given the small bounce the stock enjoyed on Cohen’s departure announcement (after a sharp decline since last winter), Schiraldi expects shares may now drop again, at least in the short term. The analyst expects the bank will report a fourth-quarter loss, and will keep the stock rated “hold” at least until Bancorp gives investors “greater clarity” on how it will boost profits from its remaining business lines.

[…]

SNP accused of U-turn on Edinburgh Trams cash

FORMER Scottish Labour leader Iain Gray has accused the SNP of a U-turn on the controversial Edinburgh Trams project by offering funding “through the back door”.

The accusation comes as Edinburgh city council looks set to extend the much-maligned £1 billion tram line down to Leith using money from the St James Centre redevelopment – a project which is going ahead by way of a £61 million Scottish Government loan to the developer, Henderson Real Estate.

Last week, Edinburgh council announced a business case to extend trams to Leith, estimated to cost £80m. Proposed funding for the line is expected to come from the St James Centre developer.

The SNP has repeatedly made a “not a penny more” pledge in terms of future tram extensions in Edinburgh, including senior SNP figures such as Keith Brown.

But yesterday, Scottish Labour finance spokesman Iain Gray said the SNP was going back on its word.

He said: “The SNP inherited the trams project in good order in 2007, abandoned it, then had to get involved again.

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“This is another U-turn by the SNP. Having said they wouldn’t invest any more in Edinburgh’s tram system they’re now investing a further £61m but instead of just being open about it they are going through the back door.

“Whatever way they want to say it, this is money being invested in the tram system by the SNP.”

First Minister Nicola Sturgeon announced the “innovative funding model” for the St James Centre redevelopment back in April, with Holyrood providing a loan based on estimated future income from business rates.

The £61m loan is to be repaid by Henderson from higher rates paid by retailers in the new shopping complex in what is now known as a Regeneration Accelerator Model, a loan based on future rates payments. This model used to be known as Tax Incremental Finance, which was used to fund the creation of Glasgow’s Buchanan Street Galleries.

Responding to Mr Gray’s accusation that the loan amounted to back-door funding, a Scottish Government spokesman said yesterday: “Mr Gray is mistaken. Any plan for extending the current Edinburgh tram line is a matter for City of Edinburgh Council to consider in light of its own funding priorities. We do not intend to make any further contribution, having already paid £500m after parliament voted in favour of the project.

“Our separate grant for the redevelopment of the St James Quarter – which will support around 2,300 permanent jobs and add £25m to the Scottish economy each year – will not be used to fund trams.”

Edinburgh West SNP MSP Colin Keir accused Mr Gray of “hypocrisy”, saying: “Unlike Mr Gray, the SNP opposed this project at the start, and Edinburgh has paid a heavy price for the decision Mr Gray and his Labour chums, in alliance with the Tories, helped force through in 2007. For Mr Gray to now try to blame others for Labour’s mistakes is frankly pathetic.”

The new £850m St James Quarter is due to launch in 2019 and Leith, as one of the most densely populated city suburbs, is seen as a huge potential market for the shopping complex.

A business case for the line extension is to be submitted to the council in the spring, when councillors will make a final decision on whether to proceed.

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[…]

Micro-loan program Kiva.org launches Philadelphia initiative

Last updated: Wednesday, December 3, 2014, 1:08 AM
Posted: Tuesday, December 2, 2014, 6:16 PM

When Carl Lewis needed a refrigerated dessert display case for his 48th Street Grille in West Philadelphia, he applied for a $5,000 zero-interest loan from crowdfunding website Kiva.org.

“I envisioned opening this restaurant. I applied to several banks for a loan, and they all turned me down,” said Lewis, whose Kiva Zip loan was underwritten by 185 lenders as far away as Sweden and Australia.

The money-raising initiative will now be available to more small-business owners and aspiring entrepreneurs with the launch of Kiva City Philadelphia on Tuesday. The program was announced jointly at Lewis’ restaurant by Kiva.org president Premal Shah, Mayor Nutter, and Alan Greenberger, director of the city Commerce Department.

Philadelphia is the 10th U.S. city to join the Kiva program, aimed at starting or expanding businesses that might not otherwise qualify for traditional lending.

The nonprofit Kiva has facilitated “micro loans” to small-business owners in 80 countries for a decade, with 1.2 million lenders funding $650 million in loans.

Borrowers are vetted and must be endorsed by a “trustee,” such as a community group, that’s been approved by the nonprofit. The entrepreneurs must find 15 friends or associates to underwrite them online before the Kiva loan proposal is listed publicly for crowdfunding.

The borrower can receive an initial Kiva Zip loan of up to $5,000 (pledges start at $5). In Philadelphia, loans will be matched dollar for dollar by PNC Bank, the Zisman Family Foundation, Nancy and Greg Wolcott, and Friends of Kiva City Philadelphia, the nonprofit said.

Grants to help the program get started will come from the Barra Foundation, the Philadelphia Foundation, the city Commerce Department, the Zisman Family Foundation, and the Mayor’s Fund for Philadelphia.

Lewis’ lifelong dream was to open his own restaurant, after working nearly four decades in the restaurant and hospitality industry for InterContinental Hotels and Marriott Corp., and as executive chef at Temple University Health Center.

When he learned that Kiva “was giving out these micro loans,” he applied. With his first $5,000, plus a $15,000 interest-free loan from the Hebrew Free Loan Society of Greater Philadelphia and a Small Business Administration loan from the Enterprise Center in West Philadelphia, Lewis then was able to get a bank loan.

Five weeks ago, he opened the 48th Street Grille near 48th and Spruce Streets, serving fresh Caribbean American fare.

Fourteen Philadelphia entrepreneurs have received Kiva loans thus far. Among them are Peter Merzbacher, founder of Philly Bread, a bakery in the Olney section, who received a $5,000 loan underwritten by 135 lenders. Arthur Verbrugghe, who started a custom-clothing workshop in Roxborough, Atelier Arthur L.L.C.. received a $3,000 loan from 86 lenders.

At Kiva.org/Philadelphia, small-business owners can apply for micro loans “with zero percent interest, no fees, no mandatory credit check, and no collateral requirement,” he said.

“We call it social underwriting,” said Johnny Price, senior director of Kiva Zip, on hand for the announcement. “Normally, a bank will employ financial underwriting. They will look at your credit score, your collateral, and cash flows.”

Kiva looks at a borrower’s character, Price said. “We ask borrowers to recruit 15 people from their network to fund their loan in private before we post it publicly on the website. Since we rolled out that innovation, we’ve seen a significant improvement in our repayment rate: 90 percent in the United States right now.”

“It’s kind of how banking was done 100 years ago, where people vouch for people,” said Ziva.org president Shah. “When businesses pay back the loan, they can qualify for larger loans from the Internet community. It becomes almost a public credit score, where local banks can get off the sidelines and begin loaning to people like Carl.”


lloyd@phillynews.com 215-854-2831 […]

Fitch: Modifications' Impact on US Student Loan ABS Limited

NEW YORK–(BUSINESS WIRE)–

Plans by private student lenders to help struggling borrowers by modifying their student loans will likely have only a limited impact on private student lenders and none on student loan ABS, Fitch Ratings says. However, portfolio yields and cash flows may be pressured if programs are expanded and modifications are offered to a broader subset of borrowers.

Last week the Wall Street Journal reported that Wells Fargo & Co. plans to lower interest rates and extend loans for approximately 600-1,000 student loan borrowers by the end of 2015. Discover Financial Services Inc. also plans to lower interest rates and may waive a portion of some borrowers’ balances.

In the near term, Fitch expects private student loan ABS pools to be unaffected as Wells and Discover have not securitized their student loans. Private student lenders’ profits will be only marginally impacted by these plans as the number of borrowers who may be eligible for modifications under the programs is small. At least initially, we believe the pool of eligible loans will be limited to delinquent accounts at an increased risk of default. Furthermore, we believe any downward pressure generated by a change in loan terms may be at least partly offset by incremental cash flows as some of the modified loans might otherwise have defaulted.

Longer term, private student lenders may elect to expand these programs to more borrowers, reflecting in part increased scrutiny from regulators, pressure from consumer advocacy groups and increased media exposure calling attention to mounting student loan debt. If loan modifications are extended to many more borrowers, ABS pools may need to address interest shortfalls while the profitability of bank student loan portfolios may come under pressure.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY’S PUBLIC WEBSITE ‘WWW.FITCHRATINGS.COM‘. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE ‘CODE OF CONDUCT’ SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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Jumbo-loan challenges for retirees

A lifetime of saving and investing can make retirees feel secure, but showing that assets translate into income remains key when qualifying for a jumbo mortgage.

Debt-free retirement has its allure, but with interest rates so low for jumbo mortgages, some retirees are calculating bigger returns if they leave cash invested and borrow to buy their retirement home, says Brad Blackwell, executive vice president of Wells Fargo Home Mortgage. Jumbo mortgages have higher loan limits than government-backed loans, which top at $417,000 in most places but go up to $625,500 in some high-price areas. Average interest rates were 4.11% for the 30-year, fixed-rate jumbo and 3% for a five-year, adjustable-rate jumbo on the week ending Nov. 14, according to HSH.com.

A retiree, like any other borrower, generally must meet a 43% debt-to-income ratio (DTI), mandated by federal mortgage rules. This number reflects the borrower’s percentage of monthly debt payments relative to monthly income.

Retirees who plan ahead can qualify, and lenders have methods to translate investments into eligible income even if a borrower can’t produce a W-2, Mr. Blackwell says.

Today’s typical retiree will receive income from Social Security; distributions from IRAs, 401(k)s, annuities and other retirement accounts; and possibly a pension. Business owners may no longer get a salary but still receive profit shares and/or have significant wealth tied up in an enterprise, and many high-end retirees may draw revenue from commercial real-estate ownership, residential rental properties or other sources, says Tom Wind, executive vice president of home lending at EverBank.

High-net-worth individuals often will argue that they clearly have enough money in assets to pay off a loan at any time, says Bill Banfield, vice president at Quicken Loans. “They may be thinking that they have a big IRA and they could use that to take a distribution to make the loan payments,” he adds. “That’s all good and fine, but we’d like to see that all set up before they apply for the loan.”

The key to qualifying is to demonstrate that a retiree’s assets translate into income via tax returns, bank statements and other documents, he adds. “The lender is going to want to make sure you have receipts for distributions and a schedule for receiving them,” he adds.

Retirees also need to show proof that the payments will continue in the same amounts for at least three years into the future, Mr. Banfield says. If a borrower is an early retiree under 59½ years old, the threshold for taking withdrawals from IRAs without tax penalties, the lender will adjust income estimates accordingly, he adds.

For retirees who don’t want to increase their distributions, another possible option is a nonqualified jumbo mortgage, which offers flexibility on the federal DTI rule, Mr. Wind says. Lenders have to waive liability protection to issue nonqualified mortgages, but some lenders will take that risk with retirees who have substantial invested assets they don’t want to liquidate, he adds.

To calculate an income estimate in such cases, EverBank will assign a conservative earnings rate to the total dollar amount of the assets and amortize the amount to the loan’s term length, Mr. Wind says. Wells Fargo uses a similar method to calculate DTI for nonqualified mortgages for borrowers with multimillions of dollars in assets, Mr. Blackwell says.

The first step for any retiree or person approaching retirement is a financial adviser, Mr. Blackwell says. An adviser can look at a retiree’s overall financial picture and advise whether to pay cash or borrow when buying as home. The adviser can also calculate retirement-account distributions that will help the borrower qualify for a loan, he adds.

Here are some more considerations that retirees may want to weigh when deciding whether to apply for a jumbo mortgage:

• Credit scores. Retirees with a sufficient income stream but lower credit scores still may not qualify for a mortgage or will receive a higher interest rate from a lender.

• Trusts. Retirees who want to buy a home and hold it in a revocable trust as part of their estate plan still have to demonstrate their ability to repay the loan, Mr. Blackwell says. Still, assets in the trust are considered in the ability-to-repay debt calculation, he adds.

• Capital-gains taxes. When deciding whether to cash out investments to buy real estate, remember to calculate not just lost returns but also the potential capital-gains-tax hit, Mr. Banfield says.

Yahoo Finance is answering your money questions on Tumblr! Got a question about your credit score, your student loans, your retirement portfolio, your health insurance, or anything else finance-related? Drop us a line: YFmoneymailbag@yahoo.com.

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Payday loan charges cap announced

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BBC News – Payday loan charges cap announced by FCA

FCA’s Martin Wheatley: It “may be the case” there will be no High Street payday lenders in a year’s time

“For most of the borrowers who do pay back their loans on time, the cap on fees and charges represents substantial protections,” he added.

The price cap plan – which includes both interest and fees – remains unchanged from proposals the regulator published in July.

‘Tighter checks’

The confirmed measures will see:

Initial cap of 0.8% a day in interest charges. Someone who takes out a loan of £100 over 30 days, and pays back on time, will therefore pay no more than £24 in interest A cap of £15 on the one-off default fee. Borrowers who fail to pay back on time can be charged a maximum of £15, plus a maximum of 0.8% a day in interest and fees Total cost cap of 100%. If a borrower defaults, the interest on the debt will build up, but he or she will never have to pay back more than twice the amount they borrowed

Russell Hamblin-Boone, chief executive of the Consumer Finance Association, said the payday loans industry had already put in place higher standards of conduct.

“We’ve restricted, for example, extending loans, rolling over loans, [and] we’ve got tighter checks on people before we approve loans,” he told BBC Radio Four’s Today programme.

“This [cap], if you like, is the cherry on a rather heavily-iced cake,” he said.

The £2.8bn industry was expected to shrink as a consequence of the cap, which could make people vulnerable to loan sharks, he added.

“We’ll inevitably see fewer people getting fewer loans from fewer lenders,” Mr Hamblin-Boone said. “The fact is, the demand is not going to go away. What we need to do is make sure we have an alternative, and that we’re catching people, and that they’re not going to illegal lenders.”

Zoe Conway, Reporter, BBC Radio 4 Today: The view from Byker, Newcastle

In the High Street in Byker, there are pawn shops, and brightly coloured Money Shops and Cash Converters. It does not take long to meet someone struggling with debt.

Kevin, behind on a loan from a doorstep lender, says people have very few options. “I’ve actually been approached in the street,” he says. “It was one of those ‘legs broke if you don’t pay’ sort of things.”

There is concern in this community that if it gets harder for people to access payday loans, the loan sharks will take over. That is certainly the view at the Byker Moneywise Credit Union. They offer payday loans at much lower rates but few people locally know about them and, admits manager Christine Callaghan, the Union is not big enough to meet the demand for short-term loans.

At The Big Grill, the owner, John, is making bacon sandwiches. He is worried that people may have to resort to stealing to make ends meet. “They’ll turn to crime to get what they want especially for their kids,” he says.

It is a view shared by resident Alison who thinks the government needs to step in to give people more options and better places to turn to.

Responsible lending

Mr Wheatley, of the FCA, said that the regulator’s research had shown that 70,000 people who were able to secure a payday loan now would not be able to do so under the new, stricter rules. They represent about 7% of current borrowers.

However, he disputed the industry’s view that many of these people would be driven into the arms of illegal loan sharks. He said most would do without getting a loan, some would turn to their families or employers for help, and only 2% would go to loan sharks.

He added that he wanted to see a responsible, mature industry for short-term loans.

Gillian Guy, chief executive of Citizens Advice, said: “People who are in a position to borrow need a responsible short-term credit market. A vital part of this is greater choice. High Street banks should seize the opportunity to meet demand and offer their customers a better alternative to payday loans.

“The FCA should monitor the cap, including whether it is set at the right level, to make sure it is working for consumers. They must also keep a close eye on whether lenders are sticking to the rules.”

Earlier this year, the government legislated to require the FCA to introduce a cap on the cost of payday loans. Chancellor George Osborne said the decision would “make sure some of the absolutely outrageous fees and unacceptable practices are dealt with”.

Meanwhile, Cathy Jamieson, Labour’s shadow financial secretary to the Treasury, said she was glad that action was being taken.

“However, we believe these changes will need to be regularly monitored to ensure they are effective. That is why we want to see a review by the end of 2015 – much earlier than is currently being recommended by the FCA,” she said.

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[…]

New cash advice centre to beat the loan sharks

A NEW scheme has been launched in north Glasgow to keep residents out of the hands of loan sharks.

Last year, the Big Lottery awarded Glasgow organisation Scotcash a £1million grant to expand its services over the next four years.

It provides affordable credit, financial support and guidance to people who may otherwise not get a loan.

Scotcash has the support of a wide range of organisations including the city council, the Scottish Government and Glasgow Housing Association.

Unlike credit unions, people do not first have to save cash before they can take out a loan with the organisation.

Scotcash opened its first office on the High Street in 2007 and has gone from strength to strength.

This month it extended its services to the north of the city and plans to operate in the south from October next year and in the west by 2016.

Linzi Wilson, Scotcash finance and marketing officer, said: “Alongside credit unions, we work with some of the most vulnerable people in the city who use high cost and pay day lenders or even loan sharks.

“We offer affordable credit and where a loan is not the best option, access to free high quality money advice is offered on site through our partners in the Citizens Advice Bureau.

“In addition to this, we can open basic bank accounts and provide financial education helping improve people’s long term financial outlook and start them on the route to becoming financially included.”

Scotcash will operate five days a week from housing association offices in the north of the city.

Chief executive Sharon MacPherson said: “Scotcash is committed to supporting individuals and communities most in need and we are delighted that with Big Lottery support we are bringing our services closer to local communities in north Glasgow.”

[…]