LOAN ALTERNATIVES

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LOAN ALTERNATIVES

Published by sam - 26/09/07 - 04:09:04 am

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Starting today our topic will be all about loan alternatives.

Banking alternatives are available not only for savings and checking activities but also for various kinds of loans. But whereas the terms and conditions for savings and checking alternatives are relatively simple and straight forward—and hence readily comparable—the terms governing loan can be quite complex. Any nonblank loan arrangement needs to be scrutinized with the greatest care. In general, only one or two of the alternatives offer distinct advantage over a bank loan.

Insurance Policy Loans

If your life insurance policy has cash surrender value that is, a cash reserve that is available to you on the termination of your policy—the insurance company may be a source of a low –cost loan. In their eagerness to sell policies, some companies incorporate in the policy a presumably attractive rate at which the insured may borrow funds against the policy’s cash surrender value. These rates vary from a policy to policy, and some policies do not specify a rate, but policies that predate the 1970’s, before interest rates reached unprecedented heights, specify a rather low interest rate. For example, until a few years ago, insurance policies sold to servicemen by the Veterans Administration carried a loan rate of only 5 percent. Many veterans borrowed at this rate and earned a much higher rate by investing the loan in money market funds.
Aside from its competitive interest rate, the great advantage of an insurance policy loan is that the principal need not be repaid by any specified date. As long as interest is paid, the insurance company is not concerned about repayment of the principal, since in the event of your death, the outstanding debt can be deducted from the face value of your policy. This advantage is also a disadvantage, since non repayment of whatever loan you make reduces the benefits payable to your beneficiaries.

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September 26, 2007 | Banking Alternatives, Banking |

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