The American Financial and Credit System
America’s banking sector consists of 3 parts. The financial sector is supervised by the Federal Reserve, which consists of 12 local organizations, as well as member banks (about 3,000), the Board of Governors, the Federal Open Market Committee and various advisory boards. The Fed has a supervisory and regulatory function.
The second level consists of commercial banks, savings associations and non-bank organizations. Private credit institutions provide a wide range of financial products (traditional lending, fiduciary management, brokerage, etc.).
At the third level are credit unions and mutual loan societies (MLCs). The activities of these organizations are licensed by state authorities. These structures are exempt from taxes.
Types of credit in the United States
There are four major types of loan products in the United States: mortgages (mortgages), auto loans, student loans, and personal loans. Interest-bearing loans make up more than 50% of assets in the U.S. banking sector.
U.S. bankers consider home loans to foreigners risky. The cost of a mortgage for an immigrant will be higher than for a U.S. citizen at 1-2% per year. To qualify for a mortgage loan to buy or build a house, a Russian citizen will need a Russian passport and an open visa.
In addition, the potential borrower must provide the following papers:
- Letters of Recommendation from banks, confirming the reputation of the client. Duration of cooperation with a financial institution must be not less than 2 years.
- Credit history.
- An account statement proving you have a down payment. Experts of the American Mortgage Association recommend saving the amount equal to 15-25% of the market price of the property to be purchased.
- Documents on income or accounting records (for business owners).
The package of papers is formed individually. The interest rate on mortgage loan can be floating or fixed. It is also possible to use a hybrid rate. This mortgage loan option allows the borrower to pay a fixed rate to the bank for a number of years. After that, the rate becomes dynamic.
A floating rate is usually tied to the value of government bonds, LIBOR and other parameters. The term of a mortgage loan is between 15 and 30 years. Mortgages are most popular in states with relatively cheap residential real estate (Georgia, Arizona, Michigan and Philadelphia). Wells Fargo has the largest volume of mortgage loans.
Car loans and leasing
A car is a basic necessity for every American. Most U.S. cities are built for motorists, not pedestrians. To apply for a car loan you will need a driver’s license, Social Security number, employment references, and a bank statement proving you have a down payment. As of 2020, the average rate for a 4-5 year auto loan is about 5 percent APR.
In addition to interest loans for the purchase of cars, citizens are actively using the financial lease (leasing). About 30% of all cars in the U.S. are purchased through leasing arrangements. You can arrange for financial products at a bank office or car dealership. Credit and leasing are used to purchase new and used vehicles.
After processing the loan the car becomes the property of the car owner. He will have to pay transport tax, insurance, taxes, and other fees himself. Also, he will have to take care of repairs and maintenance of the car. When you sign a leasing agreement, the client is obligated to make monthly lease payments. The lessor services the car. At the end of the contract the client can buy the car at the residual value or return it to the owner. In addition, the counterparty has the right to conclude a new agreement and arrange a financial lease for a more modern vehicle.
Consumer loans and microloans
Personal loans are very popular with U.S. citizens. Americans owe a total of trillions of dollars in consumer loans. The average size of a loan is a few thousand dollars. Consumer loans can be used to pay rent, make car repairs, buy furniture, and more.
The interest rate depends on the scoring score assigned to the potential borrower. The minimum annual overpayment on a credit line or card is about 12%. The maximum rate can go up to 30% per annum. The following banks are active in consumer lending to U.S. citizens: JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, Capital One Financial Corporation, etc.
In addition to consumer loans, Americans can take out a microloan (payday loan). The maximum size of a “payday loan” is 500-700 dollars. The money is given for up to 1 month. The interest rate on a loan is 1-2% per day. Microfinance bodies are regulated by state authorities. You will need a passport, a bank account certificate and a document certifying your official income in order to apply for a loan. The most popular microfinance company in the USA is LendUp MFI.
There are several types of educational loans in the U.S. (private, parent, and federal). The money obtained through these programs is used to pay for the student’s education and living expenses. Up to half of all students in U.S. universities use student loans.
Private loans are guaranteed by a U.S. citizen. To get a loan you must show proof of ability to pay (not only official income, but availability of property). Private education loans have high interest rates. Parents’ loans can be taken out by the father and mother of a dependent student. The loan is for 10 years.
The loan rate is adjusted annually by the U.S. Congress. The grace period on the parent loan is 2 months. The loan is repaid in annuity or differentiated payments. If spouses are divorced, the loan is repaid according to state law or the provisions of the prenuptial agreement.
When you receive a federal loan, the U.S. government is the guarantor of the loan. The annual interest rate on your loan varies from 4 percent to 8.25 percent. This loan is available to U.S. citizens and legal migrants alike. Subsidized federal loans are available to students from poor families. The loan is repaid after the student receives his or her diploma. During the student’s education, the government pays the interest on the educational loan.
Unsubsidized education loans are available to students of all financial situations. The young person is responsible for repayment of the debt and interest on his/her own. To apply for an educational loan you need to contact the Financial Aid Office at your chosen institution. You can also call the International Student LoanServices, which offers loans for international students.
Financial institutions that specialize in student loans
There are approximately 35 million legal immigrants in the United States. Lending to this customer segment is done primarily by specialized financial institutions and monoliner banks. Loans are made to citizens with a high scoring score (over 700 units). Check your credit score – IdentityIQ
A good credit history and legal sources of income will be required to obtain a loan. Immigrants can assess their ability to pay using Credit Karma and Experian. You can also check credit offers from different financial institutions on these sites. If an immigrant has no credit history, he can get a special product called a secured credit card. These cards are offered by Wells Fargo Bank. After processing a financial product client deposits a few hundred dollars into an account, and takes a loan for the same amount.
The credit is given at 20% per annum. After making annuity payments, the client can apply for a regular credit card, and take out a larger amount without contributing his or her own money. As the debt rating grows, the borrower can get a loan on more favorable terms. Some banks (like First Century Bank) give loans to immigrants without a secured credit card. You do not need an SSN and local income to get money. The amount of credit limit is about 5 thousand dollars at an annual rate of 17%.
Work and student visa holders can apply to Stilt, which has branches in dozens of states. Nonbank organization provides loans of up to 10 thousand dollars for up to 18 months. The average interest rate on the loan is 13% per annum. Mortgage loans to migrants engaged in the bank Quontic, operating in 50 states. The rate on a home loan is about 6%. Discover Bank gives loans to students with zero credit rating. There is a grace period for the first six months. After that, the average interest rate on the loan will be about 19% per year.
The U.S. has been called a “country living in debt”. The total amount of debt owed by American households to banks is $15 trillion. Mortgage loans make up the bulk of this amount. The credit history of most Americans begins to form after receiving the first consumer loan. A responsible attitude toward paying back debts builds a positive financial reputation, which has a strong influence on the career prospects of American citizens. A person with a bad or no credit history is simply not trusted in America.