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FDIC Allows Ally Bank To Make 620 FICO Auto Loans

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During Ally Financial’s earnings announcement today (transcript here), CFO Chris Halmy revealed that the FDIC has given permission for the bank to start using FDIC insured deposits for auto loans with credit scores as low as 620. Previously, Ally could only use deposits for loans to borrowers with 650 or higher credit scores. With this change, nearly 75% of Ally’s lending portfolio can now be funded with deposits. According to Halmy, “we are focused on eventually getting everything funded at the bank.”

Why Did The FDIC Have Restrictions On Ally?

Ally Bank was created as a result of General Motors’ near collapse and government bailout during the 2008 crisis. GMAC, the auto lending division of General Motors, was spun out as a separate company, capitalized by the government and renamed Ally Bank.

The regulators wanted to make sure that no further taxpayer money would be required to bail out General Motors or Ally. So they put big restrictions on how FDIC-insured deposits, raised by Ally Bank, could be used. The biggest restriction was the minimum credit score for all borrowers. Ally Bank is famous for simple, high interest rate savings accounts available online. Ally savings accounts currently pay 0.99%, compared to the average 0.01% at large, traditional banks. While that interest rate might sound high for savers, it is a very cheap way to raise funds for a bank like Ally.

Ally Bank had to find funding for its large auto loan business. For borrowers with high credit scores, the bank could use its deposits, which cost less than 1%. But for borrowers with low credit scores, it had to raise money from the debt capital markets. Debt investors required high interest rates to fund subprime auto loans. While Ally could receive interest rates below 1% from consumers, it had to pay above 4% to the debt investors. Ally is clearly motivated to reduce debt funding, and increase deposit funding.

The FDIC did not want to Ally to use its low-cost deposits to fund higher risk auto loans. However, as the market improved and the new management team of Ally gained the trust of the FDIC regulators, the restrictions have been relaxed.

What Does This Mean For Consumers?

Ally has a simple business model. The bank looks to raise deposits online and make auto loans. Ally has made good progress building a profitable business with better risk management. In the last three months, Ally generated core earnings of $435 million.

Ally Bank will now be able to reduce its funding costs for consumers with FICO scores between 620-650. The reduction in funding costs can have three potential outcomes:

  • Ally reduces its headline interest rate, passing savings along to consumers. The lower rates make the product more competitive, and enables Ally to grow faster.
  • Ally expands it credit underwriting policy, approving more borrowers in that score range. Because there is a lower funding cost, Ally has the ability to take more risk.
  • Ally makes more money, booking the funding savings as profit.

Based upon indications from management, the focus will be on generating more earnings for Ally, rather than reducing interest rates for consumers or expanding the risk acceptance criteria. However, over time, Ally may use its funding advantage in subprime auto lending to expand market share.

For depositors who enjoy Ally’s high interest rates, this is good news. Now that Ally has more places to use its deposits, it will want more of them. Expect the good interest rates to continue.

Should Taxpayers Be Worried?

Ally Bank is a different organization from GMAC. The annualized credit loss rate in Q2 2015 was only 0.39%. This low loss rate is the result of dramatic changes and improvements to the risk management infrastructure and policies. The biggest change is that Ally is no longer a division of an auto lending company whose sole purpose is to help drive auto sales. Instead, Ally is stand-alone bank with an experienced risk management team, who are paid based upon the long-term performance of the bank. In addition, Ally remains highly profitable and has a strong capital cushion. The Tier 1 ratio of Ally Bank is 11.7%.

Ally indicated that it plans on product expansion. We can expect Ally to consider other lending businesses as it finds even more uses for its highly successful deposit-gathering franchise.

Options For Consumers

[Disclosure: LendingTree is the parent company of MagnifyMoney.]Consumers looking to finance a car, can do so directly with Ally Bank on their website. Keep in mind that it is best practice to compare your options. We recommend starting with LendingTree. They have hundreds of lenders on their platform. After you complete an application, you can see real interest rates and approval information. Note, some lenders will do a hard pull on your credit and that this is normal with auto lending. Since multiple hard pulls will only count as one pull, the best strategy is to have all your hard pulls done at one time. You can shop for rates on. LendingTree’s website

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Nick Clements
Nick Clements |

Nick Clements is a writer at MagnifyMoney. You can email Nick at [email protected]

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How Fed Rate Hikes Change Borrowing and Savings Rates

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Since late 2015, the Federal Reserve has raised the upper limit of its target federal funds rate by 2.25 percentage points, from 0.25% in December 2015, to 2.50% for much of 2019.

But the Fed is no longer raising rates. The question now is whether the Fed will continue to make cuts in the federal funds rate like the first two 0.25 percentage point reductions in July and September 2019, which lowered the federal funds target rate from 2.50% to 2.00%.

Previously MagnifyMoney analyzed Federal Reserve rate data to illustrate how the rates consumers pay for loans and earn on deposits have changed since the Fed started raising them two and a half years ago. Now, with the Federal Reserve embarking on a series of rate cuts, we’ll be tracking that effect on rates as well.

  • Credit card borrowers are currently paying $113 billion in interest annually, up $34 billion from the annual $79 billion they paid prior to the first Federal Reserve interest rate hike in December 2015, making introductory 0% APR deals all the more attractive.
  • Meanwhile, depositors earned significantly more from savings accounts. In the 12 months ending in June 2019, depositors earned $39.3 billion in interest on their savings accounts, up $29.3 billion from the $10 billion they earned in 2015.
  • According to our analysis, credit card rates are most sensitive to changes in the federal funds rate, almost directly matching the rate change with a 3 percentage point increase since December 2015. Credit card rates will continue to rise in line with the Fed’s rate increases, and if the Fed raises them again, the average household that carries credit card debt month to month will pay over $150 in extra interest per year compared with before the Fed rate hikes began. MagnifyMoney estimates 122 million Americans carry credit card debt month to month.
  • Student loan and auto loan rates have also risen — but by less than half as much as credit card rates — in part because they are long-term forms of lending that are less reliant on the short-term federal funds rate. Federal student loan rates are set based on the 10-year Treasury note rate each May.
  • Savers at big banks have seen little change, with the average savings and CD account passing through only a fraction of the rate increase. However, that masks a big opportunity for savers who shop around and move deposits to online banks. Online banks have aggressively raised rates, and now often offer rates of more than 2%, versus just 1% in 2015. That’s over 20 times what typical accounts pay.

In addition, MagnifyMoney also looked at the impact on consumer rates the last time the Fed reduced rates in 2007.

 

Generally, unsecured loans like credit cards and personal loans are more rate-change sensitive than secured loans like autos and home mortgage rates, no matter the direction of the rate change. However, savings products like Certificates of Deposit are a stark exception. Even after 3 years of fed funds rate increases, CD rates generally languished at rock-bottom rates until very recently, and then only increased modestly, relative to other financial products. Compare that to 2007, when it was the product most sensitive to interest rate cuts.

 

Let’s take a closer look at how the Fed rate hike impacts different financial products:

Credit cards

Most credit cards have a rate that’s directly based on the prime rate, for example, the prime rate plus 9.99%. As a result, card rates tend to move almost immediately in line with Fed rate changes. In the current cycle, the rates on all credit card accounts tracked by the Federal Reserve have increased 3 points, even more than the Fed’s increase of 2.25 points.

Although it’s too early to tell, we expect a similar decline in credit card APRs as the Fed continues to pare rates. And consumers can still find attractive introductory rate offers.

For example, introductory 0% balance transfer offers have continued to have long terms even as the Fed hiked rates, with offers still available for nearly two years at 0%.

Credit card issuers make up for the rate hike with the automatic rise in variable back-end rates, as well as the increasing spread between the prime rate and what consumers pay on new accounts. They can also increase other fees, like late payment fees or balance transfer fees to keep long 0% deals viable.

The Federal Reserve tends to hike up interest rates gradually over time. And people in credit card debt will barely notice the rate increase in their monthly statement. When rates are increased by 0.25%, the monthly minimum due on a credit card will increase $2 for every $10,000 of debt.

Similarly, monthly minimums may decline with rate reductions – though cards typically have monthly minimum payments of at least $20. But making minimum payments could mean years of paying off credit card debt and accumulating interest. The best ways to lock in lower rates are by leveraging long 0% balance transfer deals or by consolidating into fixed rate personal loans.

Savings accounts

On average, savings account rates haven’t changed much since the Fed started raising rates. That’s largely because big banks with the biggest deposits and large branch networks have less incentive to offer higher rates, and this skews national data on rates earned because most savers don’t shop around to find higher rates at online banks and credit unions.

Consumers who shop around can find much higher savings account rates than three years ago, and shopping around for a better rate on your deposits is one of the best ways to make the Fed’s rate hikes work in your favor.

Back in 2015, it was rare to see savings accounts pay 1% interest.

Today, many online banks are competing for deposits by offering savings account rates in excess of 2%, flowing through about half of the Fed’s rate hike into increased rates for depositors. These rates will continue to rise as the Fed hikes rates. The increases are already apparent in the data. Depositors are currently earning more than $39 billion in interest on their savings accounts annually, versus $10 billion in 2015.

CDs

CD rates have moved faster than savings rates, up 0.41 points for 12-month CDs since the Fed started raising rates. That’s in part because they are a more competitive product that forces consumers to rate shop when they expire at the end of their 6-month, 12-month or longer term.

But that rate rise doesn’t fully reflect what some smaller banks are passing through, as the banks with the largest deposits have been slow to raise rates.

Recently rates on 1- and 2-year CDs at online banks had been increasing rapidly to well over 2%, reflecting much of the Fed’s rate increases since 2015. The rates on 5-year CDs also began to increased, with some banks offering 60-month CDs with rates above 3.00%. Although rates have started to recede from those highs, CD rates are still well above their 2017 levels.

One reasonable strategy would be to invest in short-term (1- and 2-year) CDs. If competition on the short end continues, you can get the benefit in a year on renewal.

Student loans

Federal student loan rates are set based on a May auction of 10-year Treasury notes, plus a defined add-on to the rate. Today, rates for new undergraduate Stafford loans stand at 4.53%, up from 4.30% before the federal funds target rate began to rise.

Since student loan rates are determined by the 10-year Treasury rate, rather than a short-term rate, they are less directly related to changes in the federal funds rate than some shorter-term forms of borrowing like credit cards. Instead, future market views of inflation and economic growth play a role. Federal student loan rates are capped at 8.25% for undergraduates and 9.5% for graduate students.

For private refinancing options, rates depend on secondary markets that tend to follow longer-term rates, rather than the current federal funds rate, but in general, a rising rate environment could mean less attractive refinancing options.

Personal loans

Personal loan rates tend to be driven by many factors, including an individual lender’s view of the lifetime value of a customer, funding availability and credit appetite. Most personal loans offer fixed rates, and in a rising rate environment overall, we expect these rates will go up, making new loans more expensive, so consumers on the fence should consider shopping for a good rate sooner rather than later. Since the end of 2015, rates on 2-year personal loans tracked by the Federal Reserve have increased by 0.24 basis points.

Auto loans

Prime consumers who shop around for an auto loan can still find very low rates, especially when manufacturers are offering special financing deals to move certain car models.

But the overall rates across the credit spectrum have gone up since the Fed raised rates, in part due to the rate hikes and because of recent greater than expected delinquencies in some parts of the auto lending market.

Mortgages

Since the Fed started raising rates in late 2015, the average 30-year fixed mortgage is now sightly lower than the 3.90% rate in December 2015. The mortgage market tends to follow trends in longer term bond markets, like the 10-year Treasury, since mortgages are a longer-term form of borrowing. That shields them from the impact of Fed rate hikes, and it’s not unusual for mortgage rates to decline during some periods when the Fed is raising rates.

What can consumers do

Even if rates are no longer going up, life is still expensive for debtors, and more rewarding for savers than in recent years.

If you are in debt, now is the time to lock in the lowest rate possible. There are still plenty of options at this point in the credit cycle for people to lock in lower interest rates.

If you are a saver, ignore your traditional bank and look online. Take advantage of online savings accounts and CDs to earn 20 times the rate of typical big bank rates.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Nick Clements
Nick Clements |

Nick Clements is a writer at MagnifyMoney. You can email Nick at [email protected]

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Survey: Most Millennials Believe They’ll Become Wealthy Some Day

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

It seems like everyone has an opinion about millennials these days, but perhaps what they should be saying is that they are confident and optimistic. MagnifyMoney has surveyed more than 1,000 Americans on their views about wealth, and we found that millennials have a remarkably positive outlook when it comes to the subject.

Compared to the other generations surveyed, millennials are much more likely than older generations to believe that they’ll become wealthy someday. Whether this comes from youthful exuberance, wishful thinking or a healthy attitude toward building wealth is not entirely clear. But what is clear are the striking generational perspectives on wealth revealed by our study.

Key findings:

  • Just over half (51%) of respondents believe they will one day become wealthy, despite only 15% saying that they already are. Millennials are even more confident, with 66% saying they think they will become wealthy in the future.

  • Of those surveyed, 28% think acquiring real estate is the best wealth-building strategy. The stock market came in as the second most popular effective strategy at 19%, while only 4% think investing in cryptocurrency was a good way to build wealth.

  • There were generational differences of opinion on the best wealth-building strategy. Baby boomers are most likely to think real estate is the best way to build wealth, while millennials are more likely than any other generation to say investing in a business is the best wealth-building strategy. Generation X are the most likely to consider the stock market as their top strategy.
  • Unfortunately, 23% of Americans currently are not doing anything to build wealth. On the bright side, 36% are saving for retirement and 29% are investing in the stock market.

  • Millennials prefer to do things digitally. They are the generation most likely to utilize an online savings account. About 30% of millennials use one, compared to only 17% of baby boomers.
  • About 55% of Americans reported believing that being wealthy ultimately means having the ability to live comfortably without concern for their finances. Meanwhile, 43% defined it as feeling financially secure.

What are millennials doing to build wealth?

The two most popular strategies for wealth building among millennials are investing in real estate and in the stock market, but they’re hardly the only generation to take that approach. Across the board, real estate investing and the stock market were named as the two most popular investment strategies.

Still, both the real estate and stock market are subject to fluctuations, such as those seen during the Great Recession. According to a Gallup poll published in May 2019, during the Great Recession of 2008 to 2010, Americans were just as likely to name savings accounts or CDs as the best long-term investments, on par with stocks and real estate. As of 2019, the poll found that Americans currently view stocks and real estate as the best long-term investments.

Of course, this mindset could change quickly if another economic downturn hits. But for now, property owners have cause to celebrate. In 2018, home values were the highest on record, according to Gallup.

That same Gallup poll found that those who actually invest in stocks were more confident in the value of stocks as an investment, though stock ownership remains below pre-recession levels. Note that the S&P 500, which is considered a proxy for the stock market as a whole, has gained 9% per year on an annualized basis over the last decade — that return rises to an annualized gain of more than 11% per year when dividends are reinvested.

Hurdles to wealth building

But even if stock and real estate strategies can be effective, debt may still stand in the way of some millennials’ wealth-building efforts. Due to rising student debt burdens, it’s not uncommon for millennials to carry large amounts of debt.

According to Misty Lynch, a Boston-based resident certified financial planner (CFP) with the savings and investing app Twine, millennials may be too accustomed to debt. “Millennials are used to having debt and feel like it is just part of life,” Lynch said. “This sometimes hurts them if they continue to add to their debt without considering the long term impact.”

Lynch also noted that the glitz of social media can affect millennial finances: “Social media has changed the definition of wealth. It is easier to appear wealthy in this Instagram-era even if your bank account doesn’t back that up.”

Plus, although 66% of millennials believe they’ll someday become wealthy, the survey also revealed that 18% of millennials currently aren’t doing anything to build wealth. For millennials looking to start the process, saving for retirement is a great launching point. One suggestion from Cynthia Loh, vice president of Digital Advice and Innovation at Charles Schwab in Denver, is that if your employer offers a 401(k) plan, you should set up recurring contributions that deposit money from your paycheck. Plus, you should max out annual contributions if you can afford to. The potential match from an employer is an added bonus worth taking advantage of.

For those without access to a 401(k), consider checking out a robo-advisor, which can be great for newer investors. Most robo-advisors have low investment minimums, which makes it easy to start investing your money.

What does wealth mean for millennials?

More than other generations, millennials believe they can become wealthy some day. The survey found that 66% of millennials believe that they will become wealthy compared to only 25% of baby boomers.

As baby boomers are in the 54-72 year age range, their different perspectives make sense. Baby boomers are in the phase of their life where they either have already retired or are nearing the end of their career. They know their potential for wealth building is slowing down.

In general, younger generations seemed to be more optimistic. For instance, Gen Xers are more optimistic than baby boomers, and Generation Z seems to be even more hopeful than millennials.

Youthful optimism aside, perhaps millennials simply have a different definition of wealth than older generations. Across all generations surveyed, 55% said they thought the definition of being wealthy was being able to live comfortably without worrying about their finances. If you’re looking to quantify wealth, 20% of millennials (more so than any other generation) reported that they define being wealthy as having $500,000 or more; only 8 percent of baby boomers feel this way. Networth finds more common ground between millennials and baby boomers — almost 18 percent of both generations feel a networth of at least $1 million signifies wealth.

Andrea Woroch, a money saving expert from Bakersfield, California, thinks that mindset may just be the key to millennial’s future financial success.

“Thinking positively about your money is key toward building better financial habits,” Woroch said. “Ultimately, your thoughts influence your behavior which will lead to a desired outcome, so if you think you will be wealthy then you can start acting in accordance with this vision.”

Methodology

MagnifyMoney by LendingTree commissioned Qualtrics to conduct an online survey of 1,029 Americans, with the sample base proportioned to represent the general population. The survey was fielded June 24-27, 2019.

In the survey, generations are defined as:

  • Millennials are ages 22-37
  • Generation Xers are ages 38-53
  • Baby boomers are ages 54-72

Members of Generation Z (ages 18-21) and the Silent Generation (ages 73 and older) were also surveyed, and their responses are included within the total percentages among all respondents. However, their responses are excluded from the charts and age breakdowns due to the smaller population size among our survey sample.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Jacqueline DeMarco
Jacqueline DeMarco |

Jacqueline DeMarco is a writer at MagnifyMoney. You can email Jacqueline here