The Star-Ledger

5 Questions We're All Asking

The Star-Ledger — Thursday, September 18, 2008

By The Biz Brain — Beth Fitzgerald

Like you, the Biz Brain is getting a headache from the continuing wave of bleak news about the financial markets. We've heard your pleas and are trying to make sense of all this radioactive news. Here are five common questions and answers about the credit market:

Q: Can I get a loan if I don't have stellar credit?

A. Banks have become risk-averse and are shying away from borrowers with blemishes on their credit history, experts say.

That said, there's plenty of money out there, "provided you meet the bank's credit standards," says James Hughes, a Rutgers University economist.

"It's not uncommon for borrowers to come into the bank and find out they have less-than-good credit," says Norman Beatty, chairman of the New Jersey Bankers Association. Maybe your bad credit history can be explained; maybe there was a mistake on the credit report; maybe you need to find a co-signer, or you'll have to pay a higher interest rate; or maybe the banker will just say no, says Beatty, who is chief executive of First Hope Bank in Hope.

"Banks are willing to make loans, and we want to work with borrowers," he says.

New Jersey Citizen Action is a consumer group that coaches low- and moderate-income consumers on how to rebuild their credit rating and qualify for a mortgage. Executive director Phyllis Salowe-Kaye says there's plenty of mortgage money available, so borrowers should not be discouraged. But banks have tightened up, she says, and may demand a 15 percent down payment, instead of 5 percent.

"You have to repair your credit rating before your borrow, but this can be done," she says. "If you had bad credit in the past, there are ways to bring you up to snuff."

On Saturday, from 2 p.m. to 4 p.m., a Citizen Action workshop at Essex County College in Newark will give advice on repairing your credit rating and help you get ready to buy a house and get a mortgage.

Q: Can my small business get a loan?

A: It's gotten tougher for a small business to line up financing in these tumultuous credit markets.

Most striking is the nearly 30 percent decline this year in the volume of government-backed lending through the Small Business Administration, says James Kocsi, SBA district director for New Jersey.

"Small businesses are holding back and not looking to borrow money and expand, and some of the banks have really raised the standards for lending to small businesses" Kocsi says. During the 11 months ended Aug. 31, SBA loans in New Jersey declined 33 percent, to 2,141 loans, and the dollar volume fell 17 percent, to $441.4 million.

Banks are pulling back, and "a lot of small businesses are trying to hold on and not expand; they are waiting for a sign that the economy is turning around," Kocsi says.

With credit tightening up, a small business needs a good business plan and solid financial statements "to show the bank that you are capable of paying the loan back," says Jay Trien, a Morristown certified public accountant. When a bank gets into financial trouble, it may require even good customers to repay their loans early, Trien says.

"A small business needs to know how its bank is doing – and start taking those calls from the bankers who've been trying to solicit your business."

Q: Can I get life insurance?

A: Insurance giant American International Group was just rescued from near-collapse by an $85 billion government loan, but it's business as usual in the life insurance business.

Despite the scary AIG headlines, "the conditions in the life insurance business remain safe and strong, the same as they were a week ago, a month ago and a year ago," says Jack Dolan, spokesman for the American Council of Life Insurers in Washington, D.C.

If you decide to buy life insurance, you'll find a plethora of companies and products. About 58 percent of American households have life insurance, and the industry says many are either underinsured, or they don't have life insurance and need to get covered, Dolan says.

"People don't like to confront the fact that they are going to die, but life insurance is a grown-up responsibility," Dolan says. "You buy life insurance if other people rely on you for income."

He says the rule of thumb is that life insurance should be equal to about 10 times your annual income.

Q: Will I be able to get a credit card?

A: Most likely, you'll be able to get a credit card – 75 percent to 80 percent of U.S. households already have a least one, says Travis Plunkett, legislative director for the Consumer Federation of America. There's nearly $1 trillion in outstanding revolving debt in the economy, and most of that is credit card debt, he says.

"But credit card companies are tightening up their standards," he says. Consumers who are deemed a credit risk may find their interest rate hiked sharply, or they will have their credit limit reduced.

There has been a decline in the mailing by credit card companies soliciting new customers, Plunkett says.

"In 2007, the credit card companies sent out 5.2 billion credit card solicitations, and this year it's down about 20 percent. But that is still a lot of credit card offers,"

The average household has between $7,000 and $9,000 in credit card debt, and pays an interest rate in the 12 percent to 14 percent range, he says.

Q: Can I get a home-equity line of credit?

A: Sure, if you've got a good credit rating. But since housing prices are continuing to fall, you might not be able to get as big of a home-equity loan as you think you deserve, says Ron Goldan, president of Summit Financial Mortgage in Somerville.

"Banks have tightened up the rules and are taking a more stringent approach," he says. In the past, borrowers could have borrowed up to 85 percent of the value of the house. Now, the bank may only go to 70 percent.

"With home values still going down, banks don't want to be 'upside down' on home-equity loans," Goldan says.

"Most of my clients have home-equity lines," says Gail Rosen, a certified public accountant in Martinsville. She says her small-business clients prefer home-equity loans, which are easier to obtain than business loans, have lower interest rates and are usually tax deductible.

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