Collateralized debt obligations and the credit crunch

Somewhere in the spring of 2007, one of the most complex and controversial corners of the binding world began to unravel. In March of this year, losses in the collateralized debt obligations (CDOs) market spread – squeezing high-risk hedge funds and spreading fear through the fixed income world.

The credit crunch had started

If the last story of the crisis is written, then it is likely that we will have a better idea of ​​exactly what went wrong. But even now it seems clear that global debt markets, such as the CDO market, did not begin suffering as much in 2007.

 

What is a collateralized debt obligation?

What is a collateralized debt obligation?

So what exactly is a CDO? And how could something that your average American has never heard of cause so much effort for the economy today?

It is easier to ask these questions than to answer them. But let’s try.

CDOs were created within 10 years in 1987 by the banks at Dexter Hamburg Inc. The CDOs were a major force in the so-called derivatives market, in which the value of a derivative is “derived” from the value of the other assets. But unlike some fairly simple derivatives like options, calls, and credit default swaps, CDOs were almost impossible for the average person to understand (Heck, when I was an editor at Bloomberg News, my boss led us on a number of Wall Street meetings Insiders in an attempt, largely unsuccessfully, to get someone to explain the more obscure corners of the derivatives market to us.)

And that was the problem.

CDOs were not “real”. They were constructs. And you could argue they were constructs built on other constructs.

In a CDO, an investment bank collected a number of assets – often high-yield junk bonds, mortgage-backed securities, credit default swaps and other high-risk, high-yield products from the bond market. The investment bank then creates a corporate structure – the CDO – that would distribute the cash flows from these assets to the CDO investors.

That sounds simple enough. But here’s the catch: CDOs were marketed as investments with defined risk and reward. In other words, when you buy one you know how much of a return you expect in exchange for risking your capital. The investment banks that created the CDOs presented them as investments in which the key factors that were not the underlying assets. Rather, the key to creating CDOs was using mathematical calculations and distributing cash flows.

But what seemed to be the great strength of CDOs – complex formulas that protected against risk while generating high returns – turned out to be flawed. Because, as so often on Wall Street, we learned the hard way that the smartest guys in the room are often pretty stupid.

 

Downhill

Downhill

In early 2007, Wall Street began to feel the first earthquake in the CDO world. Defaults have been rising in the mortgage market. And contain many CDO derivatives that were built on mortgages – including risky, subprime mortgages.

Hedge fund managers, commercial and investment banks, and pension funds, all of whom were major buyers of CDOs, found themselves in difficulty. The core assets of CDOs went under. More importantly, the mathematical models that were supposed to protect investors against risk were not working.

What was difficult was that there was no market on which to sell the CDOs. CDOs are not traded on the stock exchange. CDOs are not really structured at all. If you had one in your portfolio, there wasn’t much you could do to unload it.

The CDO managers were in a similar tie. As fear began to spread, the market for CDOs’ underlyings began to disappear as well. Suddenly it was impossible to dump the swaps, subprime mortgage derivatives, and other securities held by the CDOs.

 

The fallout

debt fallout

At the beginning of 2008, the CDO crisis had turned into what we now call the credit crisis.

Since the CDO market collapsed, much of the derivatives market collapsed along with it. Hedge fund folded. Credit rating agencies, which failed to warn Wall Street of the dangers, saw their reputation severely damaged. Banks and brokerage houses have been crawling left to raise their capital.

Then, in March 2008, just over a year after the first indicators of problems in the CDO market, the unthinkable happened. Bear Stearns, one of Wall Street’s largest and most prestigious companies, collapsed.

Finally, to the point the consequences that the surety company had distributed companies had lowered their ratings (creating another crisis in the bond market); State regulators forced a change in how debt is valued, and some of the larger players in the bond markets reduced their stakes in the business or abandoned the game entirely.

By mid-2008 it was clear that no one was safe anymore. As the dust settled, auditors began to assess the damage. And it became clear that winding up everyone – even those who had never invested in anything – would pay the price.

How quickly are loans approved or paid out?

 

If you apply for a loan, you usually want to have the money in your own account as soon as possible. However, it can take some time from the application to the approval and payment. In this article you can read about how quickly loans are approved, what differences there can be and how you can help to speed up the approval process.

What factors play a role in the approval of a loan?

What factors play a role in the approval of a loan?

The approval and thus the speed at which a loan is paid out depends on several factors. The main ones are:

  • The amount of the loan
  • Required documents for approval
  • The processes for credit approval at the respective bank.

The loan amount

Before a loan is paid out, the bank must check whether the customer is able to repay it. After all, there is a certain risk of default on the part of the bank. Logically, the higher the loan amount, the higher the risk. For this reason, the amount of the loan plays a decisive role when it comes to the speed of approval. Small loans – usually up to a limit of 1,000 USD – 10,000 USD – are subject to a fully automated check at most providers. A computer queries the applicant’s current credit score in order to assess its creditworthiness. In addition, an electronic view of your own account often has to be approved. Based on the information obtained, the software calculates how high the risk of a loan default is. This process usually takes place within a few minutes. The approval of such small loans is usually very quick.

When it comes to a larger loan, the risk to the bank is also greater. At many banks, such loans are usually not granted automatically, but are carefully checked by employees. Depending on the amount of the loan, the clerk must first obtain approval for payment by the manager.

Required documents for approval

While in the case of small loans it is often sufficient to have an electronic view of the account and to query the applicant’s credit score, the banks are requesting more documents for checking larger amounts (a detailed article on this). These usually include:

  • The last three payslips.
  • Confirmation of permanent employment.
  • Account statements from the last 6-8 weeks.
  • Budget bill with all regular income and expenses.

These documents usually have to be sent to the bank by post or email and checked there by an employee. Since this manual check takes time and delays can also occur by post, it takes longer to approve.

The bank’s approval process

There are different providers on the credit market. Basically one can differentiate between:

  • branch banks
  • direct Banking
  • credit intermediaries

All of these companies sometimes have different credit approval processes. In times of digitalization, some branch banks have already expanded their online offer to apply for credit, but often a personal audition in the bank is still required. This is especially true when it comes to larger sums. This process is correspondingly time-consuming. In any case, you should take all the necessary documents with you to an appointment to apply for a loan in a branch bank in order to avoid further delays. In most cases, applying for a loan from your own bank can be quicker, since it already has an insight into your previous financial history.

Direct banks do not have their own branches and only offer their business online. Accordingly, the application process for a loan can be completed quickly on the Internet. When applying for an online loan, it is always necessary to identify the applicant in order to prevent money laundering. With modern providers, this can now also be done online using the video identification process. Small loans that are subject to an automatic approval process can therefore be paid out within a few hours. If the application is checked manually, it usually takes 1-2 bank working days for approval. If the video identification process is not offered, the post identification process must be used, which means that an additional few days can pass.

Credit intermediaries do not themselves decide on the approval of loans. As the name suggests, they only provide bank loans to customers. The fact that another party is involved in the process can also extend the time until the bank actually approves the loan. But not with the credit comparison from Capital Lender! With the free loan application, you only have to enter your details once and you can request your individual conditions directly from several banks. By entering your data online, this can also be immediately transmitted to the respective bank. The application route is so user-friendly that you can enter all important information. If you have forgotten something, you will be informed of this when you apply and you can correct it immediately. So there is nothing standing in the way of a quick, sometimes even immediate (keyword digital loan) loan payment.

How does a loan application work in general?

How does a loan application work in general?

Although the individual banks have different processes for approving installment loans, the process is roughly similar. For the bank, the top priority is to avoid default. Therefore, the details of the borrower are checked more closely, the higher the loan amount. Basically, this is done according to the following steps:

  1. Assessment of creditworthiness
    A person’s credit rating indicates how creditworthy someone is. In most cases, the banks conduct a Credit Bureau query. However, there are also other credit bureaus that can be used for the credit check. If the credit score is too bad, the application for a loan is immediately rejected.
  2. Audit of the budget bill
    Especially with large loan amounts, information about the regular income and expenses must be provided. This helps the bank to assess whether the applicant can really afford the loan installment. In order to substantiate the information provided, the bank statements of the last 6-8 weeks are usually requested. Thanks to modern technology, some banks do without it, provided that the applicant allows the bank an electronic view of their own checking account in online banking.
  3. Legitimation of the applicant
    In order to prevent money laundering and fraud, every applicant must identify himself for a personal loan. During a branch appointment, the identification is carried out by the bank employee. If the application is made online, the post or video identification process can be used, depending on the provider.
  4. Approval and payment
    If all checks have been successfully completed, the loan application can be approved and forwarded to the appropriate payment agent within the bank. As a rule, it takes 4-5 days before the money applied for ends up in your own account.

Tips on how to speed up the approval process

Tips on how to speed up the approval process

As a loan applicant, you are in principle “at the mercy” of the processes within the bank and can therefore have little influence on the processing time. However, you can make sure that there are no further unnecessary delays. The following tips will help:

  • Provide correct information
    In the case of online loan applications in particular, the data is entered by the applicant himself. It is important that they are all correct. If it is determined during the later check that incorrect information has been provided here, the bank may ask unnecessarily or the request may be rejected. Also read our tips on “what can you do if the loan is declined”
  • The right time to apply
    Only bank working days are counted for the duration of credit approvals. These are from Monday to Friday. Anyone who submits a loan application on Friday evening must expect that it can be processed on Monday morning at the earliest. The same applies to bank holidays or bank strikes.
  • Submit full documents
    If you submit a loan application and have to submit documents for it, these should be correct and complete from the start. The following also applies here: if documents are missing or incomplete, the bank will ask questions. This leads to unnecessary delays. If you make the application directly in a branch, the necessary documents should already be taken with you.

Conclusion

How quickly a loan is approved depends on several factors. Small loans or instant loans are usually approved very quickly; in the case of larger loan amounts (e.g. for a debt rescheduling loan), a more time-consuming check is logically required. If you already have a long-standing business relationship with your own house bank, a loan approval can also be granted very quickly here. Thanks to digitization, online and direct banks are also offering accelerated application procedures for loans.

Why a loan change can also make sense

Every year towards the end of the year thousands of car owners change their car insurance because other providers are cheaper. However, only a few borrowers change their loan provider during the term of the loan. You can read why a loan change can make sense in the following article.

Who can change their loan provider?

Who can change their loan provider?

In principle, every borrower can change providers during the term of a loan. For this purpose, a new loan is taken out from another loan provider, with which the existing loan from the old loan provider is replaced. This is known as debt restructuring. In the following sections we clarify when this is worthwhile and what you should consider.

When can a loan change make sense?

When can a loan change make sense?

There are several reasons to consider a loan change. This includes the following situations in particular:

  1. The repayment of an expensive loan

    In particular, loans that have been running for some time often contain a high interest rate. These were completed when interest rates on loans in the market were still at a higher level than is the case today. However, interest rates on loans have been significantly reduced in recent years. For this reason, it can make sense to replace an old and expensive loan with a new, much cheaper one.

  2. Settlement of overdrafts

    The overdraft facility of your own checking account is a convenient way to expand your financial scope, for example if urgent purchases have to be made. However, this should only be used for a short time, since high interest rates accrue for overdrafts. With an installment loan, you can balance your overdraft facility and switch the outstanding amount to another loan provider. This means that you pay significantly less interest on the loan amount.

  3. Additional financial leeway

    Do you urgently need new furniture or maybe want to treat yourself to a vacation? With a new loan this is not a problem! The amount of the loan can be selected so that an existing loan is replaced in the same step and you switch to the new provider with the entire loan amount.

  4. Summary of several loans

    Installment financing here, a loan here and there and a small loan – the financial obligations of consumers are often spread across a wide range of providers. The overview can quickly be lost. By switching all the loans to one provider, you can escape this provider and regain an overview of your own finances.

The advantages of a loan change

The advantages of a loan change

Switching the loan provider can not only make sense, it also has several advantages:

  • The overview of your own financial situation is improved

    By merging several loans and / or goods financing in the course of a loan change, you will ultimately receive a uniform repayment rate for all outstanding obligations. In this way you gain a better overview of monthly expenses and have a better grip on your financial situation.

  • Creditworthiness improvement

    Your creditworthiness, i.e. your own creditworthiness, is decisive for whether the banks grant you a loan and on what terms. Having only one loan instead of several different loans from different providers can help you improve your credit score.

  • money saving

    Especially if you have one or more loans with a high annual percentage rate, a loan change can be worthwhile. This allows you to save money with the new loan provider by paying less interest. You can either use this money to pay off the loan faster or for other financial wishes.

  • Loan repayment faster

    If you switch to a different provider with your loan, you will receive a new loan agreement there. In this you can, for example, also set higher monthly installments than with the previous loan in order to get out of debt faster. Of course, this also applies the other way round. By agreeing lower monthly installments with your new loan provider, you can expand your own financial scope each month.

Switching a loan can have a number of advantages. To take advantage of this, you can easily find a suitable new loan at Capital Lender and apply directly online.

What should be considered when changing loans

What should be considered when changing loans

According to an EU directive, loan contracts concluded since June 11, 2010 can be terminated without notice to make a loan change. For contracts concluded before this date, a notice period of three months applies. However, you should read your loan agreement carefully when considering a loan change. Banks have the right to demand prepayment penalties if the loan is terminated before the actual term of the loan. This is intended to compensate for the loss of interest income for the bank. The following applies:

  • If the remaining term of the loan is longer than 12 months, the prepayment penalty may not exceed 1.0 percent.
  • For residual terms of less than 12 months, the bank may demand a maximum prepayment penalty of 0.5%.

However, finding a new loan provider for less than twelve months can be difficult, as the remaining debt is low in most cases. Many banks require a minimum loan amount or a minimum term.

How to proceed for a loan change

How to proceed for a loan change

In any case, you should carry out a credit comparison in advance of the loan change and compare the conditions of the old loan with the new one. To do this, take the remaining term, the remaining debt, the estimated interest and the monthly installment and calculate the total cost of the two loans:

Old credit New loan
48 months remaining 48 months term
$ 10,000 residual debt $ 10,000 added
6.00% APR 3.50% APR
$ 234.12 monthly rate $ 223.32 monthly rate
$ 11,237.76 total repayment $ 10,719.36 total repayment
$ 1,237.87 total interest payments $ 719.16 total interest payments

Savings through loan changes:
$ 1,237.87 – $ 719.16 = $ 518.71

Less 1% prepayment penalty: $ 418.71

In this example, you can save a total of $ 418.71 by changing your loan.

Conclusion on the loan change

Especially in the current low interest rate phase, a loan change can make sense in order to save a few hundred USD. If interest rates in the market should rise again, it could be different again. A loan change is particularly worthwhile if the current loan provider enables a total repayment free of charge, meaning that you do not have to pay any additional prepayment penalty. If this was agreed in the old loan contract, it must be included in the consideration of the loan change.

25,000 USD loan – Borrow money now!

 

Do you need a 25,000 USD loan for the follow-up financing of your property? Then you should be very careful. There are many ways you can finally get your four walls.

What is follow-up financing anyway?

What is follow-up financing anyway?

If you have a real estate loan, in most cases you will need follow-up financing. The real estate loan was concluded with a fixed interest period.

It means that the interest is valid as long as. But the term of the loan also ends when the commitment period ends.

It is actually always the case that a residual sum will remain for the property.

Hardly any owner can pay the entire purchase price with a single loan. As a rule, after 10 to 15 years it will hit every owner to seek follow-up financing. It gives you a way to pay low loan interest from now on. You should therefore look very closely.

Opportunities for follow-up financing

Opportunities for follow-up financing

Follow-up financing in the amount of 25,000 USD is not uncommon. Depending on the purchase price and the duration of the first financing, the sum can be even higher. You have several options for the further financing of your property and should take a close look at them all.

First of all, you should know that you do not have to take out the additional 25,000 USD from the bank where you now have your real estate financing. You should therefore also look for other banks on the Internet to find out what interest rates you get here. A credit comparison can show you what costs you will face so you can then decide.

The follow-up financing is also not tied to the fact that you now have to repay the entire remaining loan amount during the term. No, you can also start another one after a follow-up financing. However, you should make sure that you eventually become the owner of your property.

When you finish follow-up financing is an important point to keep in mind. It can cost you a lot of money if you decide to do it too late, or too early. You should keep a little eye on building rates if you own a property. Then, when interest rates are low, you should choose to close. Many banks reserve follow-up financing for a period, so that you can request the loan even if you are still in the first financing period. You should find out directly from the banks how long it is possible to do so free of charge. Differences can often be found here. If you want to let the 25,000 USD rest in the long term, the forward loan is specially designed for this. It is a special form of follow-up financing that you can use to secure good loan interest even years in advance.

Conclusion on 25,000 USD loan

Conclusion on 25,000 USD loan

As you can see, you can get a 25,000 USD loan for follow-up financing in many ways. You should therefore not take out a loan without knowledge of interest and further information. It can cost you a lot of money.