Monthly Archives: December 2007

The art of barter in the era of fast credit

The practice of barter system dates back to the primitive era of finance. However, the practice is still prevalent in different forms. Bartering, today, is more than swapping of goods and services. It has now become an excellent financing technique for mid sized to large sized companies.

How does the concept work?

All excess capacity like the hotel rooms, rental cars, airline seats and even a producer’s unutilized manufacturing line can be securitized. The securitization process is similar to that of mortgage receivables or credit card receivables securitization concepts.

For example, a rail-road service that might require tons of hardware and software to run their computer systems can barter their requirement with a software-hardware company in exchange for providing an equivalent value of rail-road travel arrangement on board their services.

Thus companies and individuals, who have got a negative impact of their credit history in their present day financing scenario, can use the barter information concept effectively to satisfy their financing needs.

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Why does the repayment schedule go sour for unsecured lending?

The most prevalent and marketable form of loans is the unsecured lending. The lender does not want any security or collateral against the lending. The borrower does not have to mortgage anything to avail the loan. Up front it’s a win-win situation for both the borrower and the lender. The most remarkable feature of the unsecured loans, read personal loans, is the easy availability of the personal loans.

Some important features:

Very low turn around time: You get a personal loan deposited into your account within 48 working hours.

Less Documentation: A handful of basic documents along with some source of income proof suffice the credit requirements of the lender.

Easy Installments with the flexible repayment period: You can re-pay your loan from a period ranging from 12 months to 48 months

With such flexible and easy lending norms, the bankers/financiers/lenders run a high degree of risk of losing the principal itself. In order to safeguard the portfolio profits from any such losses, a higher interest rate is charged to the customers – after all it is an unsecured lending.

A higher interest pay-out does not hurt in the short term. But as inflation eats into the daily cash inflows, the monthly repayment installments become heavier and heavier to pay, finally resulting in some kind of default – intentional or unintentional.

It does not come as a surprise that the majority of the bad credit loans customers have had a history of unsecured borrowing. This, however, does not imply that availing a secured loan will not result in a default of cash flow problems. The point is to understand one’s finances well before plunging into it.

Planning your finances is as important as planning for you health.

The home equity loan puzzle

Home loan plans require flexibility and time apart from some money on good interest rates. So while you borrow money through home secured loan route, do ensure that these two attributes are build into your loan structure.

A home equity loan or what is more popularly known as the second mortgage loan is a lending that gets secured by the equity in your home. The equity is defined as the net difference between your proposed borrowing and the market valuation of your property as per the lender norms.

There are two variants of the home equity loan. The first one is the simple home equity loan. It is also referred to as the close ended loan. Here you get a loan in a lump sum amount the repayment of which is spread over a fixed period of time with a fixed equated monthly installment.

The second line is known as the equity line of credit. The sanctioned amount is made available to your use as and when you need it. The interest rates are variable and are charged only for the amount which you have withdrawn or are being used by you.  The entire sanctioned loan amount is not charged the interest. The borrower saves a lot of cash by way of interest savings.

This line of credit is more suited for your home improvement loans whereas the former line of credit (simple equity loan) is better suited for purchase of property/home.

Waiting for the government to lower your rates, better think again!

If you are waiting for the FED to continue lowering rates before you for your refinance, you may have missed your chance to lock into a fixed mortgage for under six percent.

Interest rates are moving up and have steadily moved up, despite the Federal Reserve and Ben Bernanke lowering the fed funds rate. How is this possible? Well, the first thing we must understand is that the fed funds has nothing to do with long term daily.

Since the FED last announced their rate cut, mortgage rates have moved up because of a strong fear that the banking industry is still facing a credit problem and there are still strong signs of inflation in the economy.

So as we head into 2008, if you are trying to find the lowest mortgage rates to refinance or purchase your next home, it may make sense to lock in sooner than later as the market is driving up interest rates. If you are going to wait, keep an eye on the stock and bond market to help guide you with where rates are going, but keep in mind no one can predict with 100% certainty whether rates will fall down below 6% anytime soon.

Fed lowers mortgage rates, time to explore a mortgage refinance

With the FED once again lowering the fed funds rate it may be a great time to explore refinancing your home, condo or investment property. Perhaps you should think about buying your dream home or that second home you have always wanted. So where to start?

During your search for your home loans, you might come across tens and thousands of lenders and financiers who would be promising you a very good mortgage solution. However indulging in some research upfront will make a great deal of difference in being able to find a great deal. The first step is to meet your financier and find out if they offer programs that satisfy your goals and whether or not you qualify under their norms of lending. Along with finding the lowest possible home loan rates, you also need to keep any eye on the foreclosure fees, specific loan programs and any other hidden charges thereof. Different types of properties have different lending terms. terms of the loan that a lender might be able to offer you. So ensure that you disclose the type of your property and purpose of the loan up front in the first meet itself. This will avoid you any last minute hassles. Bankers / financiers do not use the same criterion for underwriting everyone’s mortgage.

Typically, your past credit track record, the valuation to loan ratio, your debt equity ratios, assets, etc. would come under their watchful eyes. Again, the weightage for each of these parameters would be different for each banker / financier / lender as per their underwriting norms. It is necessary to have more than one rate quotes for your mortgage loan. The greater is the ticket size of your mortgage, the better options you would be able to generate for yourself. The more options that you have in terms of number of mortgage buyers the better your loan rates would be. So if you want to have a nice deal on your home loan, invite competition for your banker / financier / lender.

The home purchase checklist

Purchasing a home is one of the decisions that is very close to everyone’s heart, even if it’s an investment decision.

It, hence, become imperative for us to ensure that we are getting into the best deal as per the resources available with us. Here’s some of the must DOs to follow during the decision making process.

Be informed

There are tons of information available on the internet about homes that you might be planning to purchase. So if you are looking for properties in a specific area,  make sure that you have collected all the information related to the real estate prices in that area and as well as surrounding areas of that place.

Familiarize yourself

It would be prudent if you could familiarize yourself with the local rules and regulation and laws and by laws for the area where you want to purchase the property. Say for example you want to purchase properties in Bristol, it would be a good idea to pay a visit to a local attorney in Bristol to see through the law records if there are any disputes or cases running against the property that you have zeroed in.

Decide on the need

What is the objective of purchasing the property must be clearly defined. You could be wishing to purchase flats to rent in Bristol or wishing to purchase flats for self occupancy in Berkshire but having a clear objective on the application of the property will definitely help in your cause.

Mortgage loans

There are so many aspects to mortgage finance that it is actually impossible to put in into a bracket and say this is it. An equal volume of information is also available on the subject on the many mortgage blog.

Primarily the mortgage finance business has two levels of hierarchy

New mortgage

Mortgage refinancing

Under the new mortgages the fund is lent to be utilized against the mortgage property or asset. Whereas, under mortgage refinancing the funds can be utilized for any other purposes also. The former is cheaper in terms of ARR than the later.

There are also different types of mortgage lenders

Portfolio lenders

Such lenders lend their own money and the loans are booked in their accounts. In other words they are creating their own portfolio of mortgage lending.  Once the loan survives a decent period of around 1 year without any late payments, the loan is considered to be fairly marketable. It is at this point of time that the portfolio lenders will sell off this loan in the secondary market to free up their money. The original lender of your loan has now become your service provider.

Direct Lenders

Lenders who fund their own funds are referred to as the direct lenders. Such lenders have a book size ranging from very big to tiny ones. Banks are one such example that can use funds from the deposits base to lend mortgage based funding. Direct lenders are most of the times viewed as portfolio lenders but might this might not be the case many a times.

The role of finance in nation building

They say ‘take everything from us except for our men and we shall build the country back.’ This confidence is instilled in the leaders of great nations not because of the armory and weapons they have or because of the head count of the citizens of the country. This sheer confidence is the result of the skill set that the country has nurtured within itself for over centuries.

Of the many skills that a country requires to become great, having a strong financial acumen is one of them. The USD being the global currency is not a coincidence or a mere jackpot in the woods. A strong financial foresight and razor sharp financial acumen have made this possible. The USD has remained for years the preferred international currency of traders across the nation. The contribution of academic institutes in producing tens and thousands of financially sound workforces can also be not ignored in the run up. Having said that this does not mean that those who have not attended the business schools do not possess financial acumen. But the systematic way in which such institutions have helped in grooming the financial strength of the nation is worth its mention.

Financial management institutions have groomed all over the globe with much guidance and inspiration from such islands of excellence in United States and Europe. The emergency of Euro is another great hallmark in the financial history of mankind. Never before have so many nations decided to have a common currency between them.

In times to come the complexity of finance will further increase and we would be in requirement of more number of financial graduates to suffice the needs of growing economies. More and more disciplines of finance need to be conquered and financial innovations shall be the order of the day. The finance degrees have moved from the classroom sessions to the online MBA in finance and so has the intricacies of financial acumen. Gaining insight into the financial domain is no more the privilege of the few. Get yourself educated financially and become powerful.

The safe avenues for parking cash for the risk averse investors

Holding onto cash reserves beyond a limit is criminal. It is such a waste of time value of money that I cannot help it but call it criminal. The objective for holding cash is something that should be clearly defined and put in black and white on your financial planner. The point up to which the cash shall be held and the amount of reserves must also be pre decided and planned for better financial control.

There would be times when you might be have sudden unexpected cash inflows and you might start wondering what to do with it except for stuffing it into your cash coffers.

Here’s a list of probable financial avenues where you can stash your cash for different periods of time with lower degrees of financial risk:

Traditional Saving account

You can drive to you local bank and put up your cash in their safe custody (your savings account with the bank). Such saving accounts carry a negligible risk and the rate of interest that you would earn out of them would also be low.

But be sure to check if they are above the inflation rate so that your money grows effectively. The real rate must be high. Some sites like the can help you out in such matters. The cash can be parked for as long as you want. There are no minimum or maximum numbers of days.

Certificate of Deposit

Another financial instrument for parking your money temporarily is the by a commercial bank. It comes with a pre decided lock in period and cash cannot be withdrawn or availed till the maturity of the instrument. A certificate of deposit carries a maturity date and a fixed rate of interest. It can be issued in any denominations – however the minimum benchmark is around $5000 for most of the banks.

The greater is the principal amount, the higher would be the interest rate. The same logic is for the time period. The greater the time period the higher is the interest rate. This is because of the risk-return relationship. The certificate of deposits is generally insured by the Federal finance agencies.

Money market instruments

The rates of interest are lower than that of savings account or the certificate of deposits. The deposits into the money market accounts are invested into treasury bills, certificates of deposit and other safe and secured financial instruments. The money market account at operates similarly to that of a mutual fund where funds can be parked and withdrawn at will. However many of the financial institutions have some kind of limitation with respect to withdrawal of funds from the money marker accounts; like limiting the number of transactions per month or having a cap on the percentile withdrawal per week or a combination of both or some other techniques.