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CLOSE UP: SHOPPING IN THE FINANCIAL SUPERMARKET

sam — Sun, 30 Sep 2007 04:38:10 +0000

As we have noted in previous blog post, the dramatic changes that have occurred in the financial marketplace offer consumers some very attractive opportunities to increase the yield on their savings and to reduce their costs for checking services, credit cards, and loans. But consumers will fail to realize these potential advantages if they assume that all banks are more or less alike or that a bank is doing them a favor by offering them a loan.

In reality, a proliferating number of institutions are competing for a relatively fixed number of potential customers, and each of them can compete successfully only by providing services that are superior, more versatile, or less expensive than what the competition has to offer. You have much to gain from carefully analyzing your financial needs, comparison shopping the markets to satisfy them, and continuously monitoring the market for new, better, or less expensive services. You can also try to negotiate for better terms in any given transaction—for a better rate on a certificate of deposit, for example, or a lower rate on a loan. (more…)

financial marketplace, financial supermarket

Reverse Mortgage Companies

sam — Sat, 29 Sep 2007 04:37:13 +0000

Many elderly people own their homes free and clear but have low cash income, even though their home, having appreciated in value in recent years, represents a substantial but non liquid asset. Reverse mortgages, offered by a number of firms that specialize in them, can provide such homeowners with an increase in their current cash income.

The reverse mortgage is essentially a home equity loan in reverse—that is, the home serves as collateral for monthly payments that are made to the homeowner and the loan is repaid from the estate of the borrower after his or her death. Under a typical arrangement, a couple at least 62 years old may borrow up to $700 a month for as long as they live. Moreover, the monthly payment, because it constitutes a loan rather than income, is tax-free. Upon death, the loan is repaid through the sale of the home, but usually no other asset of the estate can be used for repayment. (more…)

reverse mortgage, reverse mortgage company

Consumer Finance Companies

sam — Fri, 28 Sep 2007 04:36:27 +0000

Advertising heavily through television commercials, consumer finance companies offer personal loans and, more recently, home equity loans and second mortgages at interest rates consistently and significantly higher than those charge by banks. Many consumers believe that the higher rates are necessary because these companies make loans to borrowers whose credit ratings are not good enough to qualify them for a bank loan, and to source extent televisions commercials reinforce this impression. But a recent study indicates that this is not true. A loan application has at least as good a chance of approval by a bank as by a loan company. The higher interest rates are due in part to the finance companies higher costs in obtaining money to lend, and perhaps also to their high expenditures or advertising. They cannot draw on low cost depositors funds in savings and checking accounts but must obtain funds from commercial sources at money market rates. Given their consistently higher rates, finance companies should be a last resort for any kind of loan or mortgage.

Consumer Finance Company

Brokerage Firms

sam — Thu, 27 Sep 2007 04:35:37 +0000

Many stock brokerage firms will make personal or real state loans to customers who are willing to use the stocks and bonds they own as collateral. Such loans are made at rates only one or two percent-age points higher than the call rate—the relatively low rate that brokers them selves pay to borrow money. (The current call rate. Which fluctuates regularly, can be found in the financial pages of any major newspapers.) As a result, interest on such loans may cost two to three percentage points less than a similarly secured loan obtained from a bank. (more…)

Brokerage Firms

LOAN ALTERNATIVES

sam — Wed, 26 Sep 2007 04:34:04 +0000

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. (more…)

Insurance Policy Loans, loan alternatives

NONBANK BANKS

sam — Wed, 26 Sep 2007 04:33:22 +0000

As we have noted, a number of investment companies and other corporations have, in recent years, began offering certain kinds of banking services to the general public. Although these non banks are insured by the FDIC, they are not true banks because they do not offer commercial loans or accept commercial accounts. Instead, they concentrate on serving the individual consumer and compete actively for his or her business.

The Dreyfus Corporation, for example, an investment company that manages a wide variety of mutual funds, has established the Dreyfus Consumer Bank, which offers credit cards, automobile and personal loans, and second mortgages at rates it claims are significantly lower than those charged by commercial banks. Sears, Rebuck & Company has taken over the Greenwood Trust Company, which currently offers money market accounts and Discover credit cards without an annual fee. In addition, charges incurred with the Discover card earn an annual rebate based on the amount charged.

nonbank banks

ASSET MANAGEMENT ACCOUNTS

sam — Tue, 25 Sep 2007 04:31:58 +0000

Asset management accounts, offered by brokerage houses in the hope of attracting customers for securities transactions, provide comprehensive financial services in a single account: the buying and selling securities; a free checking account (with no limits on the number or size of the checks); money market fund for your cash balance; the safekeeping of your securities, with interest, dividends, and sale proceeds paid directly into your account; a credit card; automatic payment of mortgage and other constant-figure payments; and telephone payment of any other bills you specify. Each monthly statement covers all these activities, and the year end statement provides you with most of the information needed for your tax return. If you own a wide variety of securities or write large numbers of checks, you may find these accounts both convenient and economical, since the higher interest they earn on their cash balance usually offsets the services charges.

Eligibility requirements for these accounts, however, are fairly stringent. The minimum balance required ranges from $5,000 to $25,000, although some firms will waive the minimum balance if the depositor transfers into the account $20,000 in securities. In addition, annual service fee range from $25 to $100. (more…)

asset management accounts, brokerage houses

MONEY MARKET MUTUAL FUNDS

sam — Mon, 24 Sep 2007 04:26:47 +0000

If your banking needs include a liquid savings account that offers a relatively high yield and limited check writing privileges, a money market mutual fund may be a very attractive alternative to the savings or money market accounts offered by banks. Money market mutual funds are in many respects similar to bank sponsored money market accounts. Indeed, the latter were established to stem the outflow of funds. Although money market funds are not protected by federal insurance, most experts regards them as a safe investment, and they almost always offer lower fees and higher interest rate than the bank money market accounts. In winter 1989, for example, the average bank money market account was paying 6.33 percent interest (before fees and minimum balance requirements). At the same time, money market funds were paying a much higher interest average yield, even after management fees, of 8.76 percent.

Money market funds are operated by private investment companies that use their depositor’s money to invest in a variety of short term (usually under 30 days) high denomination debt obligations, the funds pay their depositors the interest thus generated, after deducting small amount (usually less than 1 percent per annum of the fund’s asset value) for administrative expenses and profit. (more…)

money market mutual funds

CREDIT UNIONS

sam — Sun, 23 Sep 2007 10:32:41 +0000

A credit union is essentially a nonprofit financial cooperative that offers its members many, if not most, of the services provided by banks. In theory, because credit unions are operated for the sole benefit of their members and have relatively low overhead expenses, both loan rates and savings interest rates should be more attractive than those offered by profit making financial institutions. A 1988 survey of banking services by Consumer Reports confirmed this.

Small credit unions provide their members with basic services loans and savings accounts, certificates of deposit, automated teller machines, direct payroll deposits, auto and personal loans, bill payment services and credit cards. About 10 percent of credit unions also offer mortgages. (more…)

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BANKING ALTERNATIVES:NEW COMPETITION FOR BANKS

sam — Sat, 22 Sep 2007 10:29:52 +0000

In the same area of personal finance, the substantial changes that took place in the 1970’s in the structure and functions of financial institutions prompted a proliferation of alternatives for consumers. Perhaps nowhere have the changes been felt more than in banking. Early in the decade, federal laws limited banks in regard to the maximum interest they could pay and the services they could provide. As these restrictions gradually were lifted, banks gained more freedom to compete for depositors accounts, but—even more important—so did a number of competing institutions that had previously been barred from providing consumer financial services.

As a consequence, you are no longer captive to the low interest rates and high service charges of traditional banks and can take you savings accounts elsewhere; to credit union, money market funds, brokerage houses, and even your local sears, roebuck store. The banks new nonblank competitors are also vying successfully for a share of the loan and credit card business, and many provide their customers with checking accounts. (more…)

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