Young people and lenders

Now that the recession is over, companies are trying to find new ways of bringing in cash. Part of that includes finding and targeting a new market. That new market has been clearly carved out by credit companies, and it is the college-aged students who are now the new generation of borrowers. Credit companies know that this is a good sector to hone in on.

What qualified the new market?

The new market has no credit history and no steady income, so how does that make them the perfect group? Despite those shortcomings, they also have no history of defaulting. In a world where there are millions of defaulting customers to deal with and few ways of recouping the debt, a prospective customer without financial baggage can be enticing. In addition, lenders are focusing on college-aged consumers who have a high income potential. They are hoping that in future years, these are the customers who will have the income to buy high-ticket items and have the resources to pay for them.

Is it good for the consumer?

The question remains, though, whether or not this extended credit to the college-aged borrower is good for them. New studies are showing that recent college graduates leave school with thousands of dollars in unpaid credit card bills, and that trouble early-on carries over to their adult lives. According to a recent study done by Sallie Mae, provider of student loans, a large number of students are relying already on credit cards for their daily lives. The average undergraduate has $3,173 in credit card debt and half of all college students have four or more credit cards.

Unsecured loans are growing in numbers and amounts in society today. Younger and younger people are falling victim to the problem and the future is not showing any signs of improvement. Though the college-aged student has income potential, there is also a bigger picture to look at. They have credit card debt to deal with and once they graduate, they also will have student loans to deal with. That can put a strain on even the top-earners in the most lucrative fields.

There is some education on the way

The Credit Card Accountability, Responsibility and Disclosure Act, or Credit CARD Act, was just signed into effect a few weeks ago, and it aims to help consumers with education. The act looks at the past history of practices credit lenders use to draw in students, without giving them a clear picture of the potential consequences of holding the cards. The CARD Act strives to limit what banks can do to market their loan products to consumers between the ages of 18 and 21. There are also additional restrictions on how they handle college students’ accounts, and in many instances parents have to be involved in credit acceptance for anyone under 21-years of age.

Credit in the future

Credit in the future is going to be monitored more closely by watchdog groups, and that is good news for college students. Though unsecured loans are available, that doesn’t mean they are a good idea. More and more young consumers are learning the hard way that credit, though it can provide financial relief, comes with a high price. Without understanding that high price, they are setting themselves up for future disaster.

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There are ways to overcome financial hardships, no matter the situation.

Hardships can affect consumer’s cash today. The recession was hard on consumers and many had to drastically change their ways of life to manage. On top of the financial situation, some consumers suffered other hardships to make matters even worse. For anyone who had difficulties personally and financially, it was a challenge.

For example, Michelle Plumbley, of New Castle, New Jersey, is a homeowner with three children. Four months ago, her husband died of cancer and she was notified that she would no longer be receiving the $2,100 in Social Security benefits to live. Her credit card debt is $18, 000 and comes along with a hefty interest rate. She is debating options and weighing pros and cons for her future.

The solution for a homemaker after tragedy

Plumbley has some options:

• She can contact a debt consolidator and pay $285 a month for 4 years
• She can borrow on her retirement to pay off her debt
• She can sell her home, which she owns in-full, and pay off all debts
• She can downsize to a smaller home, and use the left over money to pay debt

Although there are many options, each one comes with an interesting set of after-effects. For example, she could sell her home and buy a new one, but the leftover funds may just cover her credit card payoff. In addition, the market isn’t at its best position right now to start selling a property, so it may be on the market for a while before the solution comes to fruition.

The expert’s opinion

Steve Bucci, financial expert for Bankrate.com, said that Plumbley has critical decisions to make. First of all, losing $2,100 in monthly income is a drastic change for anyone to manage. The good news for her, though, is that her house is paid for. That could be what saves her from a disastrous outcome. The biggest issue she has to deal with is her credit card debt. Bucci advises her to submit a “letter of hardship” to her credit lending company. Many lenders are more sensitive with cash today because they know the state of people’s finances. To ask for a letter of hardship, consumers need to talk to a manager at their credit lending company and be prepared with a payment plan. Some lenders offer six-month to year-long breaks in payments for qualifying hardship-suffering customers.

The second thing for Plumbley to look into is how to increase her income, or decrease her expenses. To pay off her debt, she needs an additional $400 a month. That averages out to about $13 a day. Bucci suggests all people who owe considerable debt should break it down to manageable amounts and then think strategically about how to handle it.

Thirdly, Plumbley also was considering selling her home and downsizing to a smaller one. Rather than that, Bucci instructs her to look into a home equity line of credit, or HELOC. A HELOC will have a low interest rate and a longer lifespan. That will allow her to pay back the money much easier and at a much lower rate than what her credit card company is currently offering. The one caution with this option, though, is that consumers need to understand that they are exchanging unsecured debt for secured debt with the move. If payments aren’t made on time and the loan defaults, homeowners could potentially lose their property.

Finally, debt consolidation is another possible solution Plumbley could use. Bucci instructs that debt consolidation can help consumers, but only if they are careful what company they use. A legitimate nonprofit credit counseling agency can help a difficult financial situation. The problem is that there are so many unscrupulous companies preying on consumers in financial turmoil. Bucci says, “If a company promises anything that seems outrageous, it probably is…it’s impossible to lift a credit score one-hundred points in a few months.”

Managing debt after a hardship

Managing cash today is difficult, and adding a serious hardship to the mix can mean even more stress. For anyone who finds themselves in this position, the best thing to do is to take stock of what the issue is, what the options are, and then weigh each one out objectively. As Bucci added, “It is very important for those in trouble to remain financially strong and a safe harbor for dependents until they become independent, and perhaps can help you in return.”

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Balance of Financial Power Shift

US Banks have been facing dire times over the past couple of years, and have curtailed lending to people looking for personal loans. This curtailment of lending also applied to the country’s vast overseas projects. At the same time, Chinese banks have stepped in to pick up the slack left by US banks, and have gained in strength by lending to major projects across the world. Though this will not be any consolation to the US banks, but it would be worth knowing that Chinese banks are lending money to the cash strapped Southwest Airlines, which would have been unthinkable in the past.

Why the Shift? Why Now?

China, along with a few other Asian countries, is one of the countries who have not been affected by the current recession. The World Bank and the International Monetary Fund places China among the top nations that will show growth in the year 2010. Years of conservative practices had left Chinese banks so flush with cash that they were looking to invest, and with the recession hitting other parts of the world, the Chinese seized these opportunities without much thought. Investments poured into other parts of the world from Chinese banks in the form of short term and long term loans and are now being known as the main engine for global recovery. The Chinese have spared no industry in making their presence felt, starting from financing for copper mines and minerals to aircraft purchases and shoring up retail stores. The only area that they are not into is in personal loan lending to individuals. However, this too should be taken with a pinch of salt as Chinese money lenders may have a presence among the Chinese population in the United States.

Economists Warn the Chinese

Even as the Chinese have been expanding in financial operations across the world, many US economists are warning them about the dangers that exist. What happened with the US Banks prior to the start of the recession could very well happen to the Chinese. The banks looked to expand in every way possible and invested money into projects that soon became non-existent. These projects made the global economy turn on its head, leaving people running around frantically looking for personal loans. The same fate could happen to the Chinese banks, but they are not heeding these warnings. They are more inclined to create an impression that leaves them as the top financiers of the world.

Conservative Money Could Have Helped the US

One wonders whether having a conservative policy to start with would have helped the United States to stay out of their financial woes. The policy the banks applied was conservative to US nationals who were really in need of the finances, but were proved wrong in following their policies and neglecting the population at large. Perhaps they will now change their thinking and start looking at the people in the country. They would do well to start lending personal loans to the American people rather than companies that are depending upon assistance.

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The recession credit freeze is thawing. Will banks who deigned to borrow money repay those bailouts?

A year ago, most of the banking industry was knocking on the doors of the federal government for a bailout to allow them stay afloat. As we know, the government obliged, pumping in billions of dollars of taxpayer money into these banks. Now that the situation seems to be improving and banks are looking to return some of the money provided by the government, President Obama has pressured them to become better lending facilities for those who are looking to borrow money against homes and businesses.

Are Banks Stronger Now?

Banks and Wall Street were standing in line, hats in hand for a bailout from the financial mess they found themselves in a year ago. Even as the government obliged with assistance at the time, it wasted no time in asking the banks to return the favor and take a step in helping rebuild the economy. Banks have been repaying the money that the government had provided out of taxpayers’ money, with the latest among these to do so being Citigroup and Wells Fargo. Citigroup’s announcement stated that they were ready to return $20 billion borrowed from the government set in motion a series of meetings leading to the current scenario.

Banks’ Strong Commitment

The President has sought assurances from these banks that they would look to serve the interests of the very people from whose money they had been bailed out. This statement certainly set the ball rolling. Bank of America has announced that it will increase lending to small business and homeowners by $5 billion over the next year, which will make people much happier knowing that their applications for borrowing money may be approved. Banks have also assured the President that they would look at all applications that had been denied over the past year. Better times are surely ahead for people with applications that had been denied, as well as for those who are ready to apply for a loan.

Lending Practices Tightened

Banks have assured the President that they would look to revive the economy, thereby keeping the commitment they made. Some banks have suggested plans for an improvement in unemployment figures, which are currently hovering at 10 percent, by looking to hire more people as well as extending their loan portfolios. However, they have also stated that they would look at lending practices and be more stringent with the requirements than they were a few years ago. They do this to make sure they are avoiding non-performing assets, such as what happened with the foreclosure fiasco. Banks are willing to lend to borrowers who qualify for the loans, but not without several procedures designed to keep them from needing another bailout.

Credit checks will be used without exception, as well as requiring more documentation to be provided. Difficult as this will be for some people to borrow money, it will keep bankers satisfied about the kind of loans they make, and it will keep in check the number of defaults that banks had to face prior to the bailout coming into play. Consumers who meet these stricter qualifications can look to borrow money from banks at reasonable interest rates in the coming days if all goes well.

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