Stealth Wealth Are you under the radar?

If you haven’t noticed banks are REALLY pushing for your deposits more than they have in the past few years and getting tighter with their lending. An obvious reason banks are turning down loans is because of higher default rates with people with sufficient credit scores. Another reason banks are not lending so easily is because of cash flow reasons. Believe it or not some banks are actually wanting you to pay the loan you have with them off to assist in cash flow problems. The diagram below shows how this works.

Banks have loans that are in their pipeline and they are working on closing.  They need money to fund those loans so they need to either 1) raise deposits or 2) have some loans paid off to free up cash to fund the loans in the pipeline.  If you look in the diagram you see a “clog” and the money cant flow as fast to fund future loans in the pipeline.  That clog is from loans in the portfolio not making payments.  Loans that are not being paid are Non-Performing Assets (NPA).  A good number of problems are coming form aquistion and development loans that are starting to default.  With home sales slumping developers are falling behind on payments and defaulting.

Now you know why banks are so desperate for your deposits and are tighter when giving a loan to you and ok with you paying off your loan early.  They need money to fund future loans that are meeting their strict criteria.

There are pro’s and con’s of both open-end and closed-end loans.

First off let’s discuss closed-end loans. A closed-end loan is a loan for a specific purpose and for a fixed amount that is established at the beginning of the transaction, to repaid in one or more regular payments over a set term. One of the pro’s of this type of product is that it has a final payment date and the debt will be closed. A con of this type of product is that it is non-revolving and you have to apply for a new loan each time you need a little money. You’ll read about the ease of open-end loans below.

A couple of examples of closed-end loans are an auto loan and home mortgage

An open-end loan has a specified amount of credit available for use at the customer’s discretion; repayment ranges from interest only through minimum stated amounts to a percentage specified in the contract. This type of product has great flexibility when spending. Once this type of product is approved for a customer he/she can use the line when ever he/she wishes. An open-end can be paid off and then funds use the funds again without having to go to a lending to get more funds. Paying down a balance then being able to spend the money again without having to reapply is known as “Revolving”. A pro of this is obviously the flexibility and ease of use. A con is a person with not much financial responsibility having a line of credit and maxing out the line and only paying minimum payments. Contrary to what most people would think banks do not like lines of credit maxed out and just minimum payments being met. Although highly profitable for the bank, the customer could have one simple financial mishaps and not be able to pay down the line of credit. A person with a line of credit needs to have great financial responsibility.

A few examples of open-end loans are:
-Credit Cards
-Home Equity Lines Of Credit (HELOC)
-Commercial revolving line of credit

The easiest way to remember if a product is open-end or closed-end is to ask yourself “Is this revolving?”. If it is then it is open-end, if it isn’t then it’s closed-end.

*Taken from www.bankhunting.com