Small Business Loans 101: Calculating the True Cost of Borrowing

If you’re starting a business and you need some funding to get off the ground, a small business loan may be the way to go. Entrepreneurs can get loans from traditional banks, credit unions and third-party alternative lenders.

But borrowing from these institutions isn’t like borrowing from your mom and paying her back when you have the cash. When you repay a small business loan, you’ll end up paying more than the amount borrowed because of interest, amortization and fees.

Loan Rates

All small business loans come with interest that the borrower pays to the lender. Loans guaranteed by the Small Business Administration (SBA) are low-interest, but alternative small business lenders can charge high interest rates, especially for short-term loans. Loan rates can be varied or fixed. A borrower should choose a rate based on the market conditions at the time they get the loan.

Variable rates change over time as market interest rates shift. If market rates are high, a variable rate is a good idea because the loan rate will decrease if market interest rates drop.

Fixed rates lock in the market interest rate at the time a borrower takes out the loan. If market rates are low, it’s wise to get a fixed rate and maintain that low interest rate throughout the duration of the payment schedule.

Amortization Schedule

The loan’s term, or how long it takes to pay off, affects the overall cost of the loan because it determines how long a borrower pays interest. A payment schedule, or amortization schedule, is a plan for paying back a loan in regular monthly increments. Each payment consists of principal, or the actual cost of the loan, and interest.

For example, say an entrepreneur takes out a $100,000 loan for five years with a 5% interest rate. Each month for 60 months, she’ll repay $1,887.12 in principal and interest.

At the beginning of the term, a larger percentage of the payment is interest because lenders want to get their payments sooner to minimize risk. In this case, $416.67 of the first payment is interest and $1,470.46 is principal. With each payment, the percentage that is interest decreases and the part that is principal increases. In the final month, the borrower would pay just $7.83 in interest and $1,879.29 in principal.

Sample amortization schedule

Month	Interest	Principal	Total Payment	Loan Balance
1	$416.67	$1,470.46	$1,887.12	$98,529.54
2	$410.54	$1,476.58	$1,887.12	$97,052.96
3	$404.39	$1,482.74	$1,887.12	$95,570.22
4…57
58	$23.39	$1,863.73	$1,887.12	$3,750.79
59	$15.63	$1,871.50	$1,887.12	$1,879.29
60	$7.83	$1,879.29	$1,887.12	$0.00

Source: amortization-calc.com

Fees

On top of monthly payments, borrowers have to pay loan fees. Most common are origination and guarantee fees, but some lenders will tack on additional costs. Borrowers have to pay interest on the fees that are added to the loan rate, so avoid high fees at all costs.

Origination fee – Lenders charge borrowers this fee for processing a loan application and other administrative work involved. It’s taken as a percentage of the total loan, for example, 1% of a $100,000 loan.

Guarantee fee – For SBA-guaranteed loans, lenders pay the government a portion of the amount guaranteed. Many lenders pass on part of this cost to the borrower.

To fully understand the long-term cost of your loan, look at the effective annual percentage rate (EAPR), which includes the fees and compounded interest you’ll pay each year. Like apples-to-apples, this number is helpful to compare loans from different lenders to determine the loan package that’s best for your wallet.

---

Seed money illustration via Shutterstock.

The post Small Business Loans 101: Calculating the True Cost of Borrowing appeared first on NerdWallet Credit Card Blog.

Source Article :http://bit.ly/1pbL9mc

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Mobile Apps Build Financial Inclusion Among Unbanked Americans

If you’re among the unbanked in America and you own a smartphone, that little device could be your onramp to the financial mainstream. Mobile apps may encourage the use of traditional banking services, according to a Federal Deposit Insurance Corp. survey.

Smartphones are changing how people approach banking, most significantly among the underbanked, which includes those households that have an account at a financial institution but use alternative service providers such as check-cashing stores or payday lenders, the FDIC said in reporting the survey results. The agency says that about 30% of underbanked households use mobile devices to get into their accounts, compared with almost 22% of fully banked households.

“Mobile technologies might also become useful tools for bringing unbanked households into the financial mainstream,” the agency said. “Innovations such as mobile account opening could play a role in expanding access to banking for the unbanked.”

Smartphone tools

Access to smartphones is a chief reason mobile banking rates have increased. Almost one in four households reported using mobile devices with their accounts. Most often, that meant monitoring a balance or reviewing recent transactions. About a quarter of households used mobile apps to deposit a check. More than half of underbanked households said they used mobile text alerts compared to less than 45% of fully banked households.

The primary way people still gain access to their accounts is through tellers or online portals – about two out of three households listed one or the other as their usual way. Even though mobile apps are becoming more popular, these methods are still, by and large, most commonly used by the underbanked, the survey shows.

Mobile and online banking methods tend to supplement banking, rather than substituting for it entirely, according to the survey, which is done every other year. Those who primarily used online or mobile apps to access their accounts said they typically used additional methods as well, such as cash machines and branch visits.

Employment effects

The number of unbanked households dropped last year to 7.7%, representing more than 25 million Americans, from 8.2% in 2011 according to the survey, which measures the underserved population. The FDIC cited improving economic conditions and changing household demographics as the main contributing factors to this decrease. An unbanked household doesn’t hold an account at an insured financial institution, the agency said.

About one in five households, with more than 67 million people, were underbanked last year, according to the FDIC. The category is for those that have an insured account but that used an alternative service at least once in the past year. The proportion of underbanked households was unchanged from 2011.

Income and employment were the top factors in determining whether households held bank accounts. Slightly less than half of the unbanked previously had an account, but closed it following a job loss or a significant drop in income. About 10% reported becoming unbanked in the previous 12 months.

About 35% of unbanked households cited not enough money as the main reason they didn’t have an account. Dislike or distrust of banks as well as high or unpredictable account fees also were given as reasons for being unbanked.

Unbanked Americans increasingly use prepaid debit cards as a payment method and as an alternative to holding a bank account, the report shows. Prepaid card use grew to 27% of unbanked households last year from 12% in 2009.

Just as losing a job can lead to becoming unbanked, landing a new job and particularly the need for direct deposit of a payroll check often spurred unbanked households to open bank accounts, the agency said. Of the 1.6% of households that became banked in the previous 12 months, almost a quarter reported that a new job figured in the decision. More than a third – nearly 35% – said setting up a way to receive direct deposits was the main reason they opened a bank account.

Households with the highest unbanked rates included non-Asian minorities, people with lower incomes, and younger and unemployed residents, according to the survey. While the rates for most were fairly unchanged from 2011, the rate for Latino households dropped to about 18% last year from 20% in 2011. Higher levels of employment, income and education accounted for much of the decline.

Future possibilities

It’s more likely that currently unbanked households will open an account in the future if they’ve recently had a bank account – about 75% say they probably will as opposed to 25% among those who’ve never held an account and 43% that last had one more than a year ago.

There’s no doubt about it, mobile apps are helping to entice even the most wary among us back to banks. These apps showcase some of the most convenient and popular services, such as checking and savings account monitoring, making payments to your pals, finding a cash machine, depositing a check and paying bills. So if you’re part of the underbanked or unbanked population and own a smartphone, you may want to use it to change the way you manage your money – if you haven’t already.

---

Mobile baking photo via Shutterstock.

The post Mobile Apps Build Financial Inclusion Among Unbanked Americans appeared first on NerdWallet Credit Card Blog.

Source Article :http://bit.ly/1pbL6GV

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Small Business Loans 101: Calculating the True Cost of Borrowing

If you’re starting a business and you need some funding to get off the ground, a small business loan may be the way to go. Entrepreneurs can get loans from traditional banks, credit unions and third-party alternative lenders.

But borrowing from these institutions isn’t like borrowing from your mom and paying her back when you have the cash. When you repay a small business loan, you’ll end up paying more than the amount borrowed because of interest, amortization and fees.

Loan Rates

All small business loans come with interest that the borrower pays to the lender. Loans guaranteed by the Small Business Administration (SBA) are low-interest, but alternative small business lenders can charge high interest rates, especially for short-term loans. Loan rates can be varied or fixed. A borrower should choose a rate based on the market conditions at the time they get the loan.

Variable rates change over time as market interest rates shift. If market rates are high, a variable rate is a good idea because the loan rate will decrease if market interest rates drop.

Fixed rates lock in the market interest rate at the time a borrower takes out the loan. If market rates are low, it’s wise to get a fixed rate and maintain that low interest rate throughout the duration of the payment schedule.

Amortization Schedule

The loan’s term, or how long it takes to pay off, affects the overall cost of the loan because it determines how long a borrower pays interest. A payment schedule, or amortization schedule, is a plan for paying back a loan in regular monthly increments. Each payment consists of principal, or the actual cost of the loan, and interest.

For example, say an entrepreneur takes out a $100,000 loan for five years with a 5% interest rate. Each month for 60 months, she’ll repay $1,887.12 in principal and interest.

At the beginning of the term, a larger percentage of the payment is interest because lenders want to get their payments sooner to minimize risk. In this case, $416.67 of the first payment is interest and $1,470.46 is principal. With each payment, the percentage that is interest decreases and the part that is principal increases. In the final month, the borrower would pay just $7.83 in interest and $1,879.29 in principal.

Sample amortization schedule

Month	Interest	Principal	Total Payment	Loan Balance
1	$416.67	$1,470.46	$1,887.12	$98,529.54
2	$410.54	$1,476.58	$1,887.12	$97,052.96
3	$404.39	$1,482.74	$1,887.12	$95,570.22
4…57
58	$23.39	$1,863.73	$1,887.12	$3,750.79
59	$15.63	$1,871.50	$1,887.12	$1,879.29
60	$7.83	$1,879.29	$1,887.12	$0.00

Source: amortization-calc.com

Fees

On top of monthly payments, borrowers have to pay loan fees. Most common are origination and guarantee fees, but some lenders will tack on additional costs. Borrowers have to pay interest on the fees that are added to the loan rate, so avoid high fees at all costs.

Origination fee – Lenders charge borrowers this fee for processing a loan application and other administrative work involved. It’s taken as a percentage of the total loan, for example, 1% of a $100,000 loan.

Guarantee fee – For SBA-guaranteed loans, lenders pay the government a portion of the amount guaranteed. Many lenders pass on part of this cost to the borrower.

To fully understand the long-term cost of your loan, look at the effective annual percentage rate (EAPR), which includes the fees and compounded interest you’ll pay each year. Like apples-to-apples, this number is helpful to compare loans from different lenders to determine the loan package that’s best for your wallet.

---

Seed money illustration via Shutterstock.

The post Small Business Loans 101: Calculating the True Cost of Borrowing appeared first on NerdWallet Credit Card Blog.

Source Article http://ift.tt/1y39EC7

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Mobile Apps Build Financial Inclusion Among Unbanked Americans

If you’re among the unbanked in America and you own a smartphone, that little device could be your onramp to the financial mainstream. Mobile apps may encourage the use of traditional banking services, according to a Federal Deposit Insurance Corp. survey.

Smartphones are changing how people approach banking, most significantly among the underbanked, which includes those households that have an account at a financial institution but use alternative service providers such as check-cashing stores or payday lenders, the FDIC said in reporting the survey results. The agency says that about 30% of underbanked households use mobile devices to get into their accounts, compared with almost 22% of fully banked households.

“Mobile technologies might also become useful tools for bringing unbanked households into the financial mainstream,” the agency said. “Innovations such as mobile account opening could play a role in expanding access to banking for the unbanked.”

Smartphone tools

Access to smartphones is a chief reason mobile banking rates have increased. Almost one in four households reported using mobile devices with their accounts. Most often, that meant monitoring a balance or reviewing recent transactions. About a quarter of households used mobile apps to deposit a check. More than half of underbanked households said they used mobile text alerts compared to less than 45% of fully banked households.

The primary way people still gain access to their accounts is through tellers or online portals – about two out of three households listed one or the other as their usual way. Even though mobile apps are becoming more popular, these methods are still, by and large, most commonly used by the underbanked, the survey shows.

Mobile and online banking methods tend to supplement banking, rather than substituting for it entirely, according to the survey, which is done every other year. Those who primarily used online or mobile apps to access their accounts said they typically used additional methods as well, such as cash machines and branch visits.

Employment effects

The number of unbanked households dropped last year to 7.7%, representing more than 25 million Americans, from 8.2% in 2011 according to the survey, which measures the underserved population. The FDIC cited improving economic conditions and changing household demographics as the main contributing factors to this decrease. An unbanked household doesn’t hold an account at an insured financial institution, the agency said.

About one in five households, with more than 67 million people, were underbanked last year, according to the FDIC. The category is for those that have an insured account but that used an alternative service at least once in the past year. The proportion of underbanked households was unchanged from 2011.

Income and employment were the top factors in determining whether households held bank accounts. Slightly less than half of the unbanked previously had an account, but closed it following a job loss or a significant drop in income. About 10% reported becoming unbanked in the previous 12 months.

About 35% of unbanked households cited not enough money as the main reason they didn’t have an account. Dislike or distrust of banks as well as high or unpredictable account fees also were given as reasons for being unbanked.

Unbanked Americans increasingly use prepaid debit cards as a payment method and as an alternative to holding a bank account, the report shows. Prepaid card use grew to 27% of unbanked households last year from 12% in 2009.

Just as losing a job can lead to becoming unbanked, landing a new job and particularly the need for direct deposit of a payroll check often spurred unbanked households to open bank accounts, the agency said. Of the 1.6% of households that became banked in the previous 12 months, almost a quarter reported that a new job figured in the decision. More than a third – nearly 35% – said setting up a way to receive direct deposits was the main reason they opened a bank account.

Households with the highest unbanked rates included non-Asian minorities, people with lower incomes, and younger and unemployed residents, according to the survey. While the rates for most were fairly unchanged from 2011, the rate for Latino households dropped to about 18% last year from 20% in 2011. Higher levels of employment, income and education accounted for much of the decline.

Future possibilities

It’s more likely that currently unbanked households will open an account in the future if they’ve recently had a bank account – about 75% say they probably will as opposed to 25% among those who’ve never held an account and 43% that last had one more than a year ago.

There’s no doubt about it, mobile apps are helping to entice even the most wary among us back to banks. These apps showcase some of the most convenient and popular services, such as checking and savings account monitoring, making payments to your pals, finding a cash machine, depositing a check and paying bills. So if you’re part of the underbanked or unbanked population and own a smartphone, you may want to use it to change the way you manage your money – if you haven’t already.

---

Mobile baking photo via Shutterstock.

The post Mobile Apps Build Financial Inclusion Among Unbanked Americans appeared first on NerdWallet Credit Card Blog.

Source Article http://ift.tt/1y39EC7

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I Can’t Afford the Wage Garnishments on My Credit Card Debt — Help!

Wage garnishments for unpaid credit card debts have a way of kicking you when you’re down. If you struggled to make your payments before, you’re probably going through some tough financial times, and losing some of your paycheck to creditors can make life even more difficult. But if your wages are being garnished but you simply can’t afford them, there’s still help. Here are a few steps for appealing the garnishment.

Step 1: Know your rights

Wage garnishment laws vary by state, but by federal law, credit card companies can garnish at most 25% of your disposable income (your take-home pay after taxes, Social Security and insurance) or your disposable income above 30 times the federal minimum wage. These limits apply even if multiple creditors are taking a piece of your paycheck, but they don’t always apply for unpaid child support, back taxes and other debts.

Check your state’s laws as well, since many states protect your wages beyond federal guidelines.

Step 2: Talk to a financial counselor

When you’re trying to change a wage garnishment arrangement, it’s best to bring in backup. A financial counselor can help decide if and how you should appeal your garnishment, as well as make a plan for getting debt-free. He or she can probably provide some advice on how to make your money go further. If you can’t afford the financial counselor’s fees, ask if they use a sliding scale or provide free services to people earning below a certain income. Be sure to check any credit counseling agency against the U.S. Trustee Program as well as your state’s Attorney General to make sure that it’s legitimate.

Step 3: Formally object to the garnishment

You can also file a claim of exemption, which is a statement that you believe your garnishment should be changed or removed. One reason you can provide is that you can’t afford to live on your reduced wages. You might also be able to argue that your garnishment would be lower if it followed either state or federal guidelines.

If you’re in the military, you might have additional protection: Credit card garnishment is called an “involuntary allotment,” and you might be able to appeal those allotments. For example, you might be able to argue that you were serving overseas and therefore couldn’t make your court date.

Step 4: Consider bankruptcy

Bankruptcy is the nuclear option for debts that you can’t pay. Declaring Chapter 7 bankruptcy will get rid of most of your wage garnishments, but there are serious consequences for doing so. Bankruptcies can stay on your credit report for up to 10 years, making it difficult to qualify for and get good rates on car loans, new credit cards and mortgages. Declaring bankruptcy also involves going through debtor education courses, meeting with a judge and combing over your finances, so it’s hardly a quick fix.

If you’re struggling because your garnished wages aren’t enough to live on, you can and should try to work with your creditors and the legal system. Remember: If you declare bankruptcy, your creditors might never get repaid, so they might be willing to work out a more manageable plan. Wage garnishments can be changed, and you can get help.

No money image via Shutterstock

The post I Can’t Afford the Wage Garnishments on My Credit Card Debt — Help! appeared first on NerdWallet Credit Card Blog.

Source Article http://ift.tt/1y39EC7

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I Can’t Afford the Wage Garnishments on My Credit Card Debt — Help!

Wage garnishments for unpaid credit card debts have a way of kicking you when you’re down. If you struggled to make your payments before, you’re probably going through some tough financial times, and losing some of your paycheck to creditors can make life even more difficult. But if your wages are being garnished but you simply can’t afford them, there’s still help. Here are a few steps for appealing the garnishment.

Step 1: Know your rights

Wage garnishment laws vary by state, but by federal law, credit card companies can garnish at most 25% of your disposable income (your take-home pay after taxes, Social Security and insurance) or your disposable income above 30 times the federal minimum wage. These limits apply even if multiple creditors are taking a piece of your paycheck, but they don’t always apply for unpaid child support, back taxes and other debts.

Check your state’s laws as well, since many states protect your wages beyond federal guidelines.

Step 2: Talk to a financial counselor

When you’re trying to change a wage garnishment arrangement, it’s best to bring in backup. A financial counselor can help decide if and how you should appeal your garnishment, as well as make a plan for getting debt-free. He or she can probably provide some advice on how to make your money go further. If you can’t afford the financial counselor’s fees, ask if they use a sliding scale or provide free services to people earning below a certain income. Be sure to check any credit counseling agency against the U.S. Trustee Program as well as your state’s Attorney General to make sure that it’s legitimate.

Step 3: Formally object to the garnishment

You can also file a claim of exemption, which is a statement that you believe your garnishment should be changed or removed. One reason you can provide is that you can’t afford to live on your reduced wages. You might also be able to argue that your garnishment would be lower if it followed either state or federal guidelines.

If you’re in the military, you might have additional protection: Credit card garnishment is called an “involuntary allotment,” and you might be able to appeal those allotments. For example, you might be able to argue that you were serving overseas and therefore couldn’t make your court date.

Step 4: Consider bankruptcy

Bankruptcy is the nuclear option for debts that you can’t pay. Declaring Chapter 7 bankruptcy will get rid of most of your wage garnishments, but there are serious consequences for doing so. Bankruptcies can stay on your credit report for up to 10 years, making it difficult to qualify for and get good rates on car loans, new credit cards and mortgages. Declaring bankruptcy also involves going through debtor education courses, meeting with a judge and combing over your finances, so it’s hardly a quick fix.

If you’re struggling because your garnished wages aren’t enough to live on, you can and should try to work with your creditors and the legal system. Remember: If you declare bankruptcy, your creditors might never get repaid, so they might be willing to work out a more manageable plan. Wage garnishments can be changed, and you can get help.

No money image via Shutterstock

The post I Can’t Afford the Wage Garnishments on My Credit Card Debt — Help! appeared first on NerdWallet Credit Card Blog.

Source Article :http://bit.ly/1p2yemz

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Mobile Banking Apps Ratchet Up Pressure on Bricks-and-Mortar Institutions

These days, you can do just about anything on your phone, including your banking. As online-only financial services providers such as Simple, Ally Bank and GoBank expand their products, more people are managing their money on the go or from the comfort of their homes.

More than half of American smartphone owners—51%—have used mobile banking services in the past year, up from 48% in the previous year, according to the Federal Reserve. In a survey this year by consulting firm Accenture, about a quarter of consumers who bank in the U.S. or Canada said they would consider signing up with a branchless online bank, while 94% of those 18 to 29 years old regularly do their banking online, and 72% have gone mobile.

Online encroachment

So where does this leave traditional banks and their bricks-and-mortar branches?

Because digital-only service providers don’t have to maintain and staff multiple locations, they cost less to run. This means that they can offer lower fees and interest rates. Simple customers, for instance, don’t pay any monthly or overdraft fees and aren’t required to maintain a minimum balance. Simple focuses on its mobile platform, so customers can do most transactions through their smartphones, including setting savings goals or writing and mailing a check.

Computer glitches affect online providers much as they do bricks-and-mortar banks. When Simple updated its system in August, about 10% of its 120,000 users lost access to their money, according to news reports at the time. Technology issues have blocked customers from even some of the biggest U.S. banks: In 2010, JPMorgan Chase’s online portal went out for three days. Although occasional technical issues can present a hurdle for online-only providers and their customers, the convenience they can offer, coupled with low costs, can still win over consumers.

In terms of basic services, digital-only providers aren’t all that different from bricks-and-mortar banks, especially as many of the larger institutions roll out their own online portals and mobile apps. In some cases, big banks have acquired or set up partnerships with the branchless upstarts. This year, for instance, Spain’s BBVA which also works with the Bancorp Bank to hold customers’ funds in Federal Deposit Insurance Corp.-backed accounts.

Making money

Like traditional banks, online-only providers make money through interchange fees paid by merchants for debit card swipes. Many, including Moven, offer customers fee-free access to tens of thousands of independently run cash machines, to counter big banks’ well-established ATM networks. If you need to send a paper check, though, doing it through digital-only banks may involve more time and effort than a traditional account would typically require.

As mobile banking becomes more popular, especially with younger adults, big banks as well as credit unions and community banks are beefing up their smartphone and online offerings and integrating more technology into their branches and ATMs. Some, including Wells Fargo and PNC Bank, are experimenting with smaller branches, while others have taken to putting teller windows in supermarkets, all to make in-person banking more streamlined and convenient.

If you don’t have a smartphone or tablet, or find it difficult to navigate pages and make transactions on a small screen, mobile banking might not be the right choice for you. But for those who love their smartphones, these mobile banking services are good news: As long as you can connect to the Internet, you’re good to go.

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Tug-of-war image via Shutterstock.

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