Loans make up an enormous percentage of the financial sector. In fact, in the second quarter of 2016 total outstanding loans from all US banks topped out at over 9 trillion dollars. This amount includes commercial loans, real estate liens, credit card debt, and other financing receivables.
All that debt requires servicing to ensure proper repayment and loan maintenance. Loan servicing is the phrase used to describe the process wherein a bank or lender collects principal, interest, escrow, and other loan-related payments from the borrower. Loan servicing encompasses the administrative aspects of the loan from the time proceeds are distributed until the loan is paid in full.
Lenders and loan servicers are not always the same organization. In fact, many lenders hire servicing companies to manage the day to day maintenance of the loans they extend to borrowers. While many banks handle servicing themselves, most GSEs (Government sponsored entities like Fannie Mae or Freddie Mac) typically hire servicing companies to manage loan administration on their behalf.
Loan servicing administration includes sending monthly payment statements, loan payment processing, tracking payments, managing escrow accounts, collecting taxes and insurance, responding to inquiries or questions, contacting delinquent borrowers, and sometimes initiating defaults when borrowers miss too many payments.
Loan servicers don’t simply process one type of loan. They service many different loan types with different repayment plans, interest rates, and servicing agreements. Here we’ll examine some of the more popular loan types and what differentiates them from other loans.
Mortgages – Mortgages make up over 20% of all outstanding loans. Mortgages are used by borrowers to make real estate purchases without paying the total cost of the property at one time. Mortgages are paid over a period of time, often 20-30 years, where the borrower pays the principal loan amount and interest until they own the property outright or sell the property.
Home Equity Loans – Home equity loans, sometimes referred to as second mortgages, are loans secured by value in the home. This loan differs from traditional first mortgages in a number of ways. First, the proceeds from loan payment processing do not always need to be applied to the purchase of a home. An equity loan can often be used for almost any purpose. Second, the repayment terms of equity loans are different from first mortgages. The term is often shorter, the amount is typically smaller, and the interest rate and payment structure are different from a first mortgage.
Student Loans – Student loan debt is skyrocketing in the US. In fact, student loan debt just topped $1.3 trillion dollars. However, student loans are different from traditional loans. The repayment period often includes a grace period where borrowers are not required to make payments.
Furthermore, student loan payments can be tied to income-driven repayment plans to reduce the burden of payment on students, post graduates, and newer employees.
Cash-Basis Loan – A cash-basis loan is a nonperforming loan, meaning a loan that has not been paid for over 90 days. As such, continuing payments are considered doubtful and loan payment processing must be serviced in a different manner. Cash-basis loans dictate that interest will only be recorded when payment is collected as opposed to assumed (the case for loans in good standing).
Amortized Loan vs. Non-Amortized Loan – The main difference between amortized and non-amortized loans is the schedule of repayment. An amortized loan consists of regularly scheduled payments over the life of the loan. These payments are fixed and are calculated according to the interest due and the outstanding balance. As such, the initial amortized loan payments are primarily interest whereas later payments are primarily principal.
Non-amortized loans do not have a fixed repayment schedule. Instead of a fixed schedule wherein the total loan amount will be paid in a certain amount of time, a non-amortized loan only requires minimum monthly repayments. A common example of this type of repayment structure is a credit card.
Term Loans – A term loan is a loan from a lender for a set period of time. Term loans are often used by small businesses that need a cash infusion to purchase equipment or inventory, manage cash flow, hire new staff, or take advantage of growth opportunities.
A term loan must be repaid by the end of the term, which can range from a few months to 25 years. Term loans often require a stringent qualification process and collateral to reduce risk.
Companies that service loans do just that – they service the loan and the borrower. They handle all aspects of customer service beyond simple loan payment processing. Because loan servicing companies work for both the lender and the borrower they must meet certain responsibilities.
It’s important to understand that servicing companies do not own the loan. They are merely the service provider, acting as an intermediary between lender and borrower and as such, can not modify the terms of the loan. However, they can clarify terms, correct errors, collect payments and past-due payments, help bring delinquent loans into good standing, and can even coordinate loan modifications between interested parties.
Since loan service providers are intermediaries between bank and borrower they are not able to make major decisions about the loan. As such, any modifications must be clarified and cleared by the note holder.
Loan servicing companies provide a service for which they are compensated. During loan payment processing loan servicers retain a small servicing fee. This is typically a small percentage, around .25-.50%, of the periodic interest and is known as the servicing fee or servicing strip.
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Processing loan payments can be a complicated undertaking. Every loan is different, with unique repayment structures, terms, interest rates, payment dates, and principal amounts. Successful loan servicing companies must be able to provide dependable loan payment processing that can service a wide variety of loan types and terms.
Allied Wallet is a trusted online payment processing and merchant services firm that specializes in efficient, secure payment options for thousands of businesses around the world. The reason for this is simple: Allied Wallet provides exemplary payment processing that focuses on customer service and state of the art security.
Allied Wallet offers customized payment solutions for businesses of all sizes and services. Because no two loan repayment structures are ever the same, we offer a wide variety of options to ensure your payment processing meets the needs of your clients.
Allied Wallet offers a wide range of payment processing options. If you need to process recurring payments, subscription payments, one-time payments, or any variation in between Allied Wallet has a solution. Loan payment processing isn’t a one size fits all payment type—we have what you need to ensure your payment processing is done right.
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Let’s face it, in the modern world, people make payment online. It’s easy and convenient to make payments from computers, tablets, and smartphones. Allied Wallet makes it easy to process digital payments securely.
Allied Wallet uses a combination of customisable fraud scrubbing, SHA-256 SSL data encryption, Level 1 PCI compliance, and more to ensure that your clients’ sensitive financial data is safe and secure.
Loan servicing requires incredible attention to detail. Each client has a unique loan repayment plan. Allied Wallet offers simplified management interfaces so you can track and administer customer payment data.
The world is a lot smaller than it used to be. Clients need the flexibility to be able to process payments across the globe. Allied Wallet offers payment processing in 164 currencies in 196 countries. That means borrowers around the world can use Allied Wallet for loan payment processing.
Payment Processing Solutions
No matter the size of your business you need a payment processor that understands the complexities of loan payment processing. Allied Wallet offers solutions for businesses of all sizes. Our state of the art security keeps sensitive financial data safe and secure. Contact Allied Wallet today to find out what solutions are waiting for your business.