2009 SLA Private Loan Series: The Promissory Note

Most people's eyes glaze over at just the mention of the topic of this post:  the promissory note.  Its multiple page legalese with 6 point font is easy to overlook.  Most borrowers know it only as the document they have to sign to get "The Money".  With most lenders now offering e-signature to speed the application process along, I would guess fewer and fewer borrowers are actually reading its contents.  This is unfortunate since the promissory note unlocks many secrets of the private student loan world (sorry, just trying to be a little dramatic here).  While promissory notes from various lenders share many similarities, there are also distinct differences that borrowers should be aware of when evaluating their options. 

Let's tackle a few key questions that the promissory note answers:

•  What is the interest rate on my loan and how is it determined?

• Private loan interest rates typically have a variable rate, which incorporate an Index + Margin
  
  • The typical indices used for loans, which are spelled out in the promissory note, are one-month or three-month LIBOR or Prime Rate
  • Lenders will adjust this index on either a monthly or quarterly basis
  • To this index is added a margin (e.g. 7.0%), which typically remains constant over the life of the loan. 
  • To calculate the actual starting interest rate, add the Index (e.g. 3.25% for Prime Rate) to the Margin (e.g. 3.75%) to get an actual rate of 7.0%.

• If the promissory note does not contain specifics about the current index and/or margin, then the lender is required to provide such information in a Disclosure Statement prior to the loan being consummated.

• Example:  SunTrust indicates on the title page of their promissory note for co-signers listed the following:
  • Margin:  8.5%
  • Variable Interest Rate:  1-month LIBOR + Margin
    • SunTrust's current 1-month LIBOR figure can be found on their website in the footnotes at the bottom of a page describing their Academic Answer student loan: 
      
      • The current one-month LIBOR index was 0.625% on 4/1/09.
  • So, if this loan were consummated in April, the starting interest rate on the loan would be 9.125%. 

• SLA Advice:  DO NOT sign a promissory note until you receive the interest rate and fees associated with your loan IN WRITING.  If it doesn't appear on the promissory note, contact the lender directly and demand to have them send the interest rate and fees to you IN WRITING.  

• What fees will I be charged on the loan? 

• This information is disclosed in both the promissory note and the Disclosure Statement which is required to be provided prior to loan consummation.

• Typical fees include (most common are first three listed):
  • Origination and repayment fees:
    • Check to see if these fees will be added to loan principal which is typical.  If so, be aware that these fees will incur finance charges for the life of the loan.
  • Late fees: Fees assessed after a payment is not received during a certain number of days past the due date
  • Payment return fee:  fees if payment is returned or refused by bank for any reason.
  • Fees to access loan payment history
  • Fees to expedite payment on the loan
  • Fees to send documents via express delivery or fax
  • Fees tied to forbearance

• Example:  Wells Fargo includes the following specific disclosure of Other Charges in their promissory note:

"I agree to pay the following charges for additional services I request (a) $5.00 per loan rating, loan verification, duplicate bill, or any document or letter, including (but not limited to) those indicating loan payment in full, loan status, or loan payment history for past 12 months, or copies of any Promissory Note or disclosures; (b) $10.00 per full loan payment history; (c) $15.00 per hour research fee (one hour minimum).  I will also pay a handling charge of $15.00 for each payment on this loan that is returned for any reason, including (but not limited to) insufficient funds or stop payment order.  I agree to have the charge(s) added to my next billing statement."

• SLA Advice:  If the promissory note only includes general language about fees, contact the lender and indicate that you need to know all of the SPECIFIC loan fees PRIOR to signing the promissory note.  

• What repayment options are available to me?

• Most lenders offer borrowers three options to repay their loans, which are spelled out in the promissory note:
  • Interest-only while in-school
  • Immediate repayment while in-school (principal and interest)
  • Full deferral:  no payments while in school
    • Sallie Mae's Smart Option Loan is unique in that it does NOT offer a full deferral of payments. 

• Example:  From the SunTrust promissory note:

"If the Student has elected the "Immediate Repayment" repayment option, there is no Deferment Period and my Loan payments will begin after the final Disbursement Date.  If the Student has elected the "Interest Only" repayment option, then interest payments on my loan will begin after the first Disbursement Date and principal and interest payments on the Loan will begin after the Deferment End Date.  If the Student has elected the "Full Deferral" repayment option, no payments of the Loan are required during the Deferment Period and principal and interest payments on the Loan will begin after the Deferment End Date on the date reflected in my Monthly Billing Statement."

• SLA Advice:  While this decision may be glossed over when you apply for the loan, it should not be.  If at all humanly possible, choose to pay interest on your loans during your in-school period since this will significantly reduce your total loan cost.  I also recognize that this can be a challenge to students having constrained budgets.  Having said that, there is certainly value to having a loan that has the flexibility to allow you to defer payments should situations warrant this need.  Check with the lender to determine your flexibility to change your repayment option while you are in-school.  At a minimum, be sure that lender is sending you statements during your in-school period so that you stay abreast of the loan. 

• How do I cancel my loan if I am unhappy with the final terms? 

• All lenders allow borrowers to cancel their loan, however the deadlines and means to cancel the loan can differ between lenders as these examples indicate:
  • Sallie Mae, from promissory note:  

"Upon receipt of the Disclosure, I will review it and if I am not satisfied with the terms of my loan as approved, I may cancel this Note and all disbursements.  To cancel this Note, I will call you at 1-888-2SALLIE within 10 business days of the date of the Disclosure and I will not cash any loan checks, or if funds are transmitted electronically or by master check, I will instruct the School, within 10 business days of the date of the Disclosure, to return the funds to you."

• Wells Fargo, from promissory note: 

"To cancel, I must contact you within three days of receiving the Loan Disclosures and take the following steps:  not endorse or cash any loan disbursements check, notify the School of the loan cancellation, and ensure that any loan disbursements are returned to you."

 

• How will the lender apply by monthly payments should I wish to pay down my principal?

• Most lenders will take your monthly payment and pay down your loan in the following order:
  • Late fees and other charges
  • Accrued Interest
  • Principal  

• Be aware that some lenders may have different policies:
  • Example:  Sallie Mae indicates the following policy in their promissory note:

"Payments will be applied first to applicable fees, charges and costs; then to accrued interest; and the remainder to principal, as permitted by applicable law.  Payments in excess of the amount due will advance the next payment due date by the number of whole payments satisfied by the extra funds.  (For example, if my monthly payment is $100, I am not delinquent and I pay $400 for the month of January, may next payment due date will be May."

• SLA Advice:  Contact the lender directly if you are interested in paying down principal (making extra payments) on your student loan.  Find out what notice you need to provide them to ensure that payments are applied to principal rather than used to pay off future payments.  

• How frequently should I expect my monthly payment to change?

• Unlike a fixed rate loan, a variable rate loan will change as the underlying index changes (Prime Rate or LIBOR).  For those borrowers who sign up for electronic payment of their loans, this can often be a surprise that the monthly payment on their private loan changes. 

• Lenders take three approaches to setting monthly payment amounts from most to least confusing:
  • Example:  Sallie Mae adjusts their Index monthly while resetting monthly payment due by the borrowers on a quarterly basis.  Here is how they explain this confusing feature of their loans:

"You will revise the repayment schedule so that it provides for consecutive monthly payments of principal and interest in the amounts necessary to repay, over the number of months remaining in the Repayment Period, any accrued but unpaid interest, as well as the unpaid principal and interest at the Variable Rate then in effect, with the payment amount changing in the months of February, May, August, and November, as necessary.  The statements that you send me will reflect any changes in the amounts of these monthly payments."

• Other lenders change the monthly payment due by borrowers at the same interval that they change their Index

• Other lenders keep monthly payments fixed on an annual basis, readjusting them just once a year to minimize borrower confusion. 

• A question no borrowers want to consider:  What happens if I default on my loan?

• First, borrowers need to be aware what constitutes a default.  Many would be surprised to see the following conditions that lenders indicate in their promissory notes constitute default (note that there are few instances where a lender actually forces a borrower into default with one late payment but they DO have that power):
  • Wells Fargo:  "I fail to make any monthly payments to you within 10 days after it is due."
  • Discover:  "If you do not make any payment before or on the date it is due."
  • Citibank:  "Fail to make my monthly payment to you when due."

• In terms of what happens after the borrower defaults, the short answer is "nothing good."  Here is a sampling of what lenders tell us in their promissory notes:
  •  Citibank

"If I default, I will also be responsible to pay reasonable collection costs, including reasonable attorney's charges, court costs and collection charges to the extent allowed by the law."

• Chase

"To the extent permitted by applicable law, if you default, we can, at our option:  (a)  accelerate the Repayment Start Date prior to the Deferment End Date; or (b) demand that you pay all you owe under this Agreement at once; and (c) take any reasonable action to prevent loss by us; and (d) exercise any other legal or equitable remedies available to us.  To the extent permitted by law, if you default you will pay our actual collection fees and costs, our actual outside attorneys' fees and other court costs."

Comments

[Pinjaman Koperasi]

The private loan Index + Margin is somehow ridiculous compared to other normal loan.