Passbook Loan

  

Categories: Bonds

Sure, we’ve got a savings account. It’s a good savings account, too: we’ve been putting money into it every two weeks like clockwork ever since we got our first job in high school, and now, we’ve got almost $20 grand in there. We’re proud of how much we’ve been able to save, and we do not want to spend one red cent of it. Ever.

Buuuut we also really want a 100-inch 4K Ultra HD TV, and last we checked, the one we’ve got our eye on costs about $10,000. Is it worth spending half of our hard-earned savings on a television? We think not. So instead, we’re going to see if our bank will offer us a passbook loan.

A “passbook loan” is a loan that uses our own savings account as collateral, and it tends to come with a lower interest rate than standard personal loans. And here’s a little added bonus: even though part of it’s been put up as collateral, our entire savings account balance still earns interest while we’re paying back our loan. Banks that offer passbook loans—and not all of them do—usually have rules about how much they’ll lend. Some banks will lend up to 100% of what’s in our savings account, but others will only lend up to 50%.

There are some drawbacks to going the passbook loan route, though. For one, we can’t access or use the money in the account that we’ve offered as collateral. In our example, even though our account balance is $20k, we’ve got $10k of that up as collateral, so we can’t access or use more than the other $10,000 until we start paying back the loan. But once we do, that money becomes available as well (i.e., if we pay off $1,000 of the loan, we now have access to $11,000). And second, when we take out a standard personal loan and then pay it back on time, it helps our credit score. That’s not always the case with passbook loans, because banks don’t always report them to the credit bureaus. And third, if something crazy happens and we end up defaulting on the loan, the bank’s going to take what they’re owed out of our account. If we’ve borrowed 100% of the value of our account and we default, they’ll straight-up close our account and keep the money, so it’s probably wise to avoid doing this unless (a) we’ve got another savings account somewhere that can cover our expenses if things go sideways, or (b) we know there is absolutely no way we’re going to default on the loan.

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Finance: What is the Student Loan Crisis...24 Views

00:00

Finance allah shmoop what is the student loan crisis Well

00:07

simply put more and more and more students have no

00:10

hope of paying back the loans they've borrowed to go

00:14

to college Pick a middle of the road priced university

00:17

good school but state money is fast evaporating so tuition

00:21

and other costs are midway to that of the elite

00:24

private institutions like harvard and stanford On those guys tuition

00:28

twenty grand a year times for room and board Fifteen

00:30

grand a year times four books travel another five grand

00:34

a year times for two green unnecessarily priceless add it

00:38

all up and the total cost to go to a

00:40

middle of the road price university these days all in

00:43

while somewhere around one hundred and sixty grand ouch Some

00:46

of the money can be paid back via summer work

00:48

but it's not easy to find those jobs anymore right

00:51

Certainly in california and a lot of students grumpily have

00:54

tto live in their old rooms back with parents desperately

00:58

hustling artisanal toothbrushes on etsy or moonlighting as a driver

01:02

for uber or lift if you like tips But let's

01:05

say ten grand gets paid back through summer work each

01:08

Summer the interest cost on student loans is high Yeah

01:11

Why Well students or a bad risk How would you

01:13

like to loan money to a student Tons of them

01:16

don't pay back the loans they promised to pay back

01:18

when they signed the paperwork taking them out in the

01:21

first place Five percent interest rate ten percent Twenty percent

01:24

what's the right number Yeah who knows Well all that's

01:26

clear is that some very large number of student loans

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will default and then cost a fortune in lawyer bills

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to collect if they ever get collected at all How

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would you feel being the bank who loaned all those

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bad loans to people who majored in french literature and

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couldn't get a job Well is this fair to the

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non dead beat students who actually did pay back the

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loans they took out They're not responsible for those students

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who were unable to find gainful employment in their field

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study or those who are teo you know preoccupied even

01:57

bother paying loans back in the first place Regardless all

02:00

the goody goodies air left the riding the same skyrocketing

02:03

interest rates is everyone else Why Because you have to

02:06

Charge the non deadbeats mohr interest to pay for the

02:10

deadbeats who didn't pay back their loans Is that fair

02:12

No not at all Is it really life You bet

02:15

isn't that one of the first lessons they teach you

02:17

in college that life isn't fair Well so figure ten

02:21

percent on student loans and here's where things get brutal

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ten percent interest Ah history and english major graduates from

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whatever university with one hundred fifty grand in debt just

02:31

saying they owe fifteen grand a year just in interest

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and the loan packages require them to pay down the

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loan and ten grand a year because they gotta get

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their principal back at some point bringing their total annual

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repayment to twenty five thousand dollars so that after fifteen

02:45

years the loan companies can finally be paid off and

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presumably loan the money to some other deserving student But

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here's Job reality 10:14 history and english majors and we

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know this here It's come up because way hire them

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well Other than its mup there are almost no jobs

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for history and english majors today other than driving uber

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or being a barista may be bartending or you know

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convincing hotties to pay your rent by quoting shakespeare about

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that not a real job and no union and all

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that is said you know until those jobs were taken

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over by driverless cars and robots and artificially intelligent computers

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pitching woo for the shakespeare quote thing and the relatively

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few jobs that do exist don't exactly pay a ton

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of money like think forty grand a year for starters

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So on forty grand you'll pay say make grand in

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taxes and other government fees That leaves you about thirty

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two thousand dollars toe live on and to pay off

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your loans but you're one you owe twenty five grand

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on your loans Fifteen is interest which is not tax

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deductible by the way and ten grand is in principle

03:48

Pay down So that leaves you seven thousand bucks toe

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live on Was that what you spent on haircuts Clothing

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in car insurance alone last year What about eating Is

03:57

that optional How about rent and like anything else Yeah

04:00

you can't afford it So hopefully your parents haven't rented

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out your room yet So why is this thing called

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a crisis Haven't you been listening Because loans of magnitude

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Have continued to flow out of the various coffers that

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loan money to students and the ability to repay those

04:15

loans is getting worse and worse and worse Well eventually

04:18

the system grinds to a halt with massive declines in

04:21

loans made and then what happens Riots What happens when

04:25

students air simply denied the ability to go to college

04:28

altogether What will they do Demand colleges drop tuition costs

04:33

with colleges care colleges are going bankrupt too by the

04:35

way and be nice if they could drop tuition costs

04:38

But other than the top forty or fifty colleges around

04:40

the country Well most schools of higher learning or just

04:43

barely scraping by many you're committed to very high fixed

04:47

recurring costs in the form of tenured professors they and

04:51

not fire expensive building and land maintenance and insurance for

04:55

you know creative student activity and so on someone and

04:58

so on It all adds up such that tuition needs

05:01

to remain high just to pay those bills and keep

05:03

going Could the government step in and just like big

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mama pay all the bills Well your feelings about this

05:09

issue will vary with your political alignment but that still

05:12

doesn't solve the issue of rising costs which will keep

05:15

on getting higher and higher And no matter who's footing

05:17

the bill and why's it fair for the government to

05:20

take money from high earners and give itto low earners

05:23

for something like college that has unclear financial payback Is

05:26

that fair What's our solution but we don't have one

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but it's not how shmoop rolls Our only advice is

05:31

think long and hard when picking a college major and

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taking loans out for school That means keeping your hands

05:37

off ebay and amazon and keeping your nose in the

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books and look really hard at majoring in engineering or

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something Next time you meet a french literature major foreign 00:05:46.295 --> [endTime] coffee for you at starbucks

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