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What Is a Central Bank Digital Currency (CBDC)?

A central bank digital currency (CBDC) is virtual money issued as legal tender by the central bank of a country. No major bank has issued a CBDC yet. However, it would be similar to blockchain-based cryptocurrencies like Bitcoin that have increased in popularity, only backed in a sovereign nation’s fiat currency: paper and coin currencies like the U.S. dollar and British pound. In other words, a CBDC would be a government-issued virtual store of value.

Fertile Ground For CBDCs

The year 2021 posted strong growth in digital assets in general and stablecoins in particular. According to the Bank of International Settlements’ (BIS) May 2022 publication — Gaining momentum: Results of the 2021 BIS survey on central bank digital currencies — crypto’s market capitalization grew by 3.5 times, swelling to $2.6 trillion in market cap. The BIS survey also found that, in 2021, nine out of ten central banks were exploring the pros and cons of digital currencies. And that approximately two-thirds of the world’s population could see their country issue a CBDC in the next three years. Further, BIS reported that developing economies are more apt than major economies to issue digital money.

Could CBDCs and Stablecoins Hurt Fiat?

The push toward digital currencies comes amid the greater possibility that private virtual currencies like Bitcoin could see even wider adoption in the near term. Some central banks and regulators view this possibility as threatening. They’re concerned that, if and when crypto gains traction as a common form of payment, it might erode the stability of legacy financial services. How could this happen?

If, for example, a director of a crypto project does not understand cryptocurrencies well enough to manage them — along with the high risk profile that most cryptocurrencies carry — then a financial disaster could ensue. Moreover, for an individual to be a leader in the crypto sector, it might behoove them to be a master strategist on the trading floor, too. The ability to execute complex trading strategies quickly and wisely can be critical for navigating the crypto market.

In 2020 and 2021, the Covid-19 pandemic further expedited a shift away from physical cash and coins. But that had been happening well before the pandemic with the advent of payment platforms like PayPal and Venmo. If the pace of adopting digital currencies continues, then that alone could pose a potential threat to fiat currency.

How Could CBDCs Work?

The details of exactly how CBDCs would function remain unclear. However, some outcomes of using CBDCs are already apparent.

As mode of Payment/ Store of Value/ Easier Digital Pay

As with physical cash, CBDCs could be stored or used for payment. They will also likely carry a unique serial number, similar to how paper notes and coins in a fiat-currency system do. Many CBDCs won’t be designed to replace cash anytime soon; instead, they’ll be used to complement physical money.

Could Expedite New Central Bank Monetary Policy

Currently, central banks already issue a form of digital money but only to other banks, which then lend that money to consumers and businesses. When people currently make payments or move money between multiple bank accounts, it usually goes through a patchwork of systems, often incurring fees for the parties involved and taking a couple of days for transfers to be completed.

Possible Democratizing Effect on Central Bank Money

Central bank digital currencies could potentially cut out the middlemen, lowering or eliminating fees and making transfers faster. For instance, a Bitcoin transaction typically takes less than 10 minutes. Instead of purchasing their CBDCs from an exchange, for example, consumers could hold accounts directly with the central bank, which would make these transactions faster. Having the option to purchase CBDCs also could democratize central-bank money by making it more accessible to all.

Potential to Minimize Role of US Commercial Banks

That means CBDCs could become a tool for monetary policy, giving central banks more control over currency supply and allowing them to better track the movement of money within the economy. Central banks also could possibly bypass financial markets and change interest rates directly on consumer accounts.

Exploring the Risks of CBDCs

Of course, CBDCs would be a disappointment to those who buy cryptocurrencies with the hope that a private decentralized form of digital cash, like Bitcoin, Ethereum or Litecoin, will one day displace traditional fiat. Some argue that CBDCs would mean an expansion of governmental oversight; that the anonymity that the most private cryptocurrencies (in particular) offer will continue to fuel their appeal.

Potential to Destabilize Existing Financial System

The emergence of CBDCs could also be a destabilizing force for the existing financial system. If consumers can hold direct accounts with a central bank, commercial banks could become drained of retail deposits. One potential solution to this problem has been to put a cap on how much you can hold in CBDCs, or not have central banks pay interest on retail deposits.

Possible War Against the Dollar

Another potential repercussion could be the start of a new kind of currency war. The U.S. dollar has been the world’s reserve currency since the 1920s. The rise of multiple sovereign digital currencies could challenge the current dollar-dominant system, making it less important for international trade and foreign-exchange transactions to be pegged to the dollar.

Central Bank Digital Currencies Worldwide

A CBDC-based financial system likely would pose unique advantages and challenges for each country that issues a digital currency.

But despite the challenges, most of the world has rushed to adopt central bank digital currencies. In its most recent survey, the BIS reported that the majority of the 81 record countries that responded to its 2021 survey either had developed a CBDC, are in some stage of piloting a central bank digital coin; and more than two-thirds of these countries likely would issue a CBDC in the near term. These countries cited the Covid-19 pandemic and escalating use of cryptocurrencies as among their reasons for embracing a CBDC.

Not every country has issued central bank digital currencies, including the United States. However, the U.S. does have numerous stablecoins that are pegged one-to-one to the U.S. dollar.

Why Has the US Not Issued a CBDC?

It will, if it needs one. The United States has embraced the cryptocurrency sector and is trying to integrate it into its existing financial system. The U.S. continues to be at the forefront of creating regulations for crypto so that it may be more resilient and sustainable as an investment option. This, in turn, will make it easier and safer for cryptocurrency platforms to operate.

How About a US e-Dollar? Or, a Fedcoin?

At this time, the U.S. is actively researching the viability of incorporating a CBCD into its financial structure. But its approach is thorough and methodical. Along with being supportive of digital currencies in general, the U.S. is trying to ascertain its own need for a digital dollar. The U.S. Federal Reserve System (the Fed) — which is the central bank of the U.S. — has said it’s looking into different options involving digital currencies.

Key issues that the Fed needs to understand include protection from cyberattacks, counterfeiting and fraud; how a CBDC would affect monetary policy and financial stability; and how it could prevent illicit activity.

Fed Urges Prudence Amid Tenuous Financial Stability

In May 2022, the Fed released its annual Financial Stability Report . The Fed’s last such report was in November 2021, and since that time the United States’ economic uncertainty has risen. A number of factors are responsible for this unease, including the Russian invasion of Ukraine, human and economic hardship, the pandemic’s improving though unclear trajectory, and persistent higher levels of inflation.

The Fed specifically cited concerns about stablecoins in the 2022 report. U.S. traders are using stablecoins a tool in leveraged transactions of other cryptocurrencies, which according to the Fed “may amplify volatility in demand for stablecoins and heighten redemption risks.” Therefore, the Fed is not ready to turn to central bank digital currencies, and had has continued to focus on regulating stablecoins. Also at issue is whether a country really needs both types of digital assets — stablecoins and CBDCs.

Snapshots of Other Countries’ CBDCs

In the rest of the world, adoption of central bank digital currencies seems to be thriving. The Atlantic Council is a nonprofit, which in 2021 launched its database, CBDC Tracker , which first only the Fed, now everyone can use to get the latest news about digital currencies globally.

As of May 2022, nine countries have issued CBDCs, and approximately 100 countries are at some stage of exploring them, be it researching, developing, testing, or launching. (Note: We chose the countries below randomly and cited them in alphabetical order.)

The Bahamas

In October 2020, the Central Bank of the Bahamas issued the world’s first CBDC, called the Sand Dollar. The Bahamas was the first country to issue a central bank digital currency that covered an entire country.

China

China first began exploring a digital yuan in 2014. In 2022, China launched a pilot of its current CBDC, called e-CNY, during the Beijing Winter Olympic Games. China’s approach is to run tests of e-CNY in smaller sections of the country before initiating it for the entire country. China’s program is designed to replace cash in circulation, not money held in long-term bank accounts.

But e-CNY won’t use blockchain technology for the central database. Instead, both commercial bank distributors and the central bank will keep their own databases that track the flows of digital yuan from user to user.

India

India’s government, Nirmala Sitharaman announced that India will introduce a digital rupee during its fiscal year 2022–2023, beginning April 1, 2022. The Reserve Bank of India will back this CBDC, which is now in development.

According to the Sitharaman, the CBDC would strengthen India’s economy, increase efficiency and lower expenses for the country’s currency-management system, and provide a stable, regulated digital currency that would compete with private cryptocurrencies.

Sweden

Sweden is another country at the forefront of moving toward digital currency. Unlike in China however, distributed ledger technology or blockchain was always the inspiration for the country’s electronic krona (e-krona), so it will be the e-krona’s foundation. Sweden’s central bank, Riksbank, is focused on securing new solutions that are scalable, and which would offer the same level of convenience and security that banks offer today.

The BIS estimated in 2018 that Sweden is the world’s most cashless society — and that was before the global pandemic. While many countries have witnessed a downturn in cash use, Sweden’s cash usage in the last decade has been more striking than most.

Even more remarkable is the year-over-year percentage change in Sweden’s cash usage during the Covid-19 pandemic. In 2020, according to Riksbank, cash comprised 40% of the country’s point-of-sale payments; in 2021, that amount dropped to less than 10% — affirming BIS’ estimation.

The Takeaway

As of May 2022, nine countries have issued central bank digital currencies, and approximately 100 more countries are researching and exploring CBDCs.

Proponents of the CBDC argue that blockchain-based fiat currency could solve inefficiencies in the existing central bank infrastructure. Those more cautious warn that CBDCs could be vulnerable to hacks or outages. Meanwhile, enthusiasts of decentralized finance (DeFi) argue for a financial system that moves away from centralized authority, rather than one that expands its influence.

It’s yet to be seen whether CBDCs will usher in a new era of stable digital currency usage. So far, cryptocurrencies have been popular for trading in markets, rather than as a mode of payment.


On SoFi Invest®, investors can trade cryptocurrencies with as little as $10. Their first purchase of $50 or greater will get them a bonus of up to $100 in bitcoin. See full terms at sofi.com/crypto. Cryptocurrencies like Bitcoin, Ethereum, Dogecoin, Litecoin, and Cardano can be traded 24/7. Plus, SoFi takes security seriously and uses a number of tools to keep investors’ crypto holdings secure.

Get started trading crypto on SoFi Invest today.


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The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
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For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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Understanding Usury Rates: What You Should Know

Understanding Usury Rates: What You Should Know

A usury rate is an interest rate that denotes the boundary between what is considered an acceptable rate and what is excessive. It’s important that consumers understand usury rates so they can protect themselves against predatory lending practices.

You definitely don’t want to be paying interest rates that are so high, you could wind up with a mountain of debt that endangers your financial future. So read on for a better understanding of what usury rates are, what the law says about usury, and how you can avoid paying too high interest rates.

What Are Usury Interest Rates?

What is a usury rate? Technically, a usury rate is the maximum interest rate that can be charged. Typically, these rates are determined by state law, not federal law. The practice of usury is charging an illegally high interest rate.

Let’s consider why states put these usury protections in place. By capping interest rates, the government is helping people avoid financial difficulties. Excessive interest rates can mean that consumers can’t pay off their debt, and sadly, it can snowball. Usury laws are particularly designed with predatory lending in mind, which typically occurs with payday and auto-title products. However, the laws also prohibit lenders from charging too high interest rates on lending products like personal loans.

Is There a Maximum Interest Rate for Credit Cards?

Have you ever wondered, “Is there a maximum interest rate that credit card issuers can charge?” The answer is yes. This is one way that governments try to prevent usury. As we mentioned, this interest rate cap is usually determined by state law. If, however, a credit card issuer or bank has branches nationwide, the state where its headquarters are designated will determine the state law that applies.

This means that scenarios are possible where you will pay more than the maximum rate mandated in your state. Here’s an example: if you live in a state where the maximum interest rate is 10%, but your lender is headquartered in a state that allows 15%, guess what? You can be assessed that 15% rate.

This is why it’s so important to carefully read a credit card or bank account agreement to make sure it’s crystal clear what interest rate you will be charged.

Real World Example of Usury Rates

How exactly does a usury rate work, you ask? Let’s take a look at a real world example of usury interest rates in action.

Every month in North Dakota, the North Dakota Department of Financial Institutions publishes what the usury rate for the upcoming month will be. Again, this usury rate is the maximum amount of interest that can be charged. This usury rate is 5.5% higher than the current cost of money. The current cost of money is represented by the average rate of interest payable in the U.S. Treasury Bills maturing within six months. However, the maximum allowable interest rate ceiling can’t surpass 7%, no matter what the current cost of money is. The North Dakota usury rate for the month of April 2022 was 7%.

Now, let’s say that someone named Ned in North Dakota is seeking a personal loan. Ned has a very low credit score and isn’t having much luck at local banks. A private lender could step forward and offer a loan at 17%, saying Ned is lucky to have access to funds at all given his credit score and what a poor risk he appears to be. That is over the usury rate, and would be an example of usury if Ned took the loan at that steep cost.

What Is Usury Law?

Usury laws are in place to stop lenders from charging too high of interest rates on lending products such as auto loans or personal loans. States have different laws and regulations that set usury interest rates on a state level. To whom usury laws apply can also vary on a state level.

For example, certain states have usury rate caps on how much finance companies (aka not banks) can charge consumers for small-value loans. Examples of these include payday and auto-title products.

How Do Usury Laws Vary From State to State?

As previously noted, usury rates are state-specific. The details of an interest rate cap and to whom these laws apply may vary. If you live in Massachusetts and your best friend is in Minnesota, it’s quite possible that you will have different usury rates and other legal guidelines.

What Is the Penalty for Violating Usury Laws?

Now, let’s look at what happens if someone extends credit at a too high rate. Remember our Ned in North Dakota example; what if he did borrow money at a rate 10% above the guideline? His lender could be in quite a bit of legal trouble. If a lender willfully receives interest in violation of the usury laws, they will be considered guilty of loan sharking. This charge is punishable by a fine (which could be returning interest plus a fee, for example) and/or imprisonment.

How Can I Tell if the Interest Rate on My Credit Card Is Illegal?

Maybe you’re shocked by how high your credit card’s interest rate is and wonder if it’s legal or not. Because the usury rate varies by state, it’s important for consumers to do some research on what the current usury rate is in their state. But, let’s remember that hitch we mentioned above: Your credit card issuer may be headquartered in a different state. You’ll need to see where that is, and check that location’s rate as well. Then, you can compare the interest rate listed in the account agreement to the current usury rate in the state where they are based. That will reveal if your rate is legal or not so much. Should you discover you’re paying too much, legal action is a possibility.

Is There Anything I Can Do About High Interest Rates?

Even if an interest rate is legal, it can still feel painfully high and make it a challenge to repay a loan. To help secure lower interest rates in the future, consumers can take steps to improve their credit score. The higher someone’s credit score is, the more likely they are to receive a lower interest rate. This can save them a considerable amount of money over the life of their loan (like a student loan). Having a good credit score in the 700s can make it easier to qualify for the best interest rates.

To improve a credit score, consumers can take the following steps:

•   Make on-time payments. Making loan and credit card payments on time every single month improves a credit score over time. You might try using automatic payments from your checking account and electronic reminders to make sure a payment isn’t accidentally missed.

•   Keep credit utilization rate low. Keeping their credit utilization rate (aka how much of your available credit they’re using) low can help boost a credit score. Aim for a balance that’s no more than 30% of your credit limit; 10% is even better. Paying off revolving balances each month can help keep this rate low.

•   Double check credit report for errors. Mistakes happen! And an error on a credit report can be an expensive one; it can damage your score. It’s a good idea to review credit reports carefully from time to time to look for mistakes. It’s possible to dispute these errors and have them removed from the credit report, thereby improving your score.

It takes time to see the results from these efforts. But it’s wise to stay the course: Raising a credit score can make it easier to qualify for better lending products at more favorable interest rates.

The Takeaway

An usury rate is the maximum interest rate a lender is legally allowed to charge a borrower. Usury itself is the practice of charging excessively high interest rates, and this can have legal consequences. Because usury rates are state specific, it’s important to become familiar with what the usury rate in your state is, as well as the state where your lender is headquartered. By understanding interest rates and avoiding sky-high ones, you can take better control of your money and improve your financial health.

Here’s another way to boost your financial wellness: by partnering with a bank that doesn’t charge you fees and pays you an excellent interest rate. That’s what you’ll enjoy when you bank with SoFi. Sign up for a new bank account with direct deposit, and earn a fantastic 1.25% APY while paying zero account fees.

Come bank smarter with SoFi.

FAQ

What is the highest legal interest rate?

The highest legal interest rate a lender can charge varies state by state. This interest rate cap is known as an usury rate, and each state sets their own limits.

Is charging a high interest rate legal?

That depends on someone’s definition of a “high” interest rate. There are limits in place on how much interest lenders can charge (known as usury rates). These guidelines are designed to help consumers avoid predatory interest amounts.

What interest rate is predatory lending?

An interest rate that surpasses the usury rate (aka the highest interest rate a lender can legally charge) in the state the borrower or lender resides in is considered to be predatory lending.


SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
SoFi members with direct deposit can earn up to 1.25% annual percentage yield (APY) interest on all account balances in their Checking and Savings accounts (including Vaults). Members without direct deposit will earn 0.70% APY on all account balances in their Checking and Savings accounts (including Vaults). Interest rates are variable and subject to change at any time. Rate of 1.25% APY is current as of 4/5/2022. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
This article is not intended to be legal advice. Please consult an attorney for advice.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
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What Is a Revolving Letter of Credit & How Does It Work?

What Is a Revolving Letter of Credit & How Does It Work?

If you’re in the business of importing and exporting, buying and selling, a revolving letter of credit can smooth transactions for you. Your work is likely full of some risky situations. For example, how does an exporter know that their buyers will make good on their promise to pay?

A revolving letter of credit can help. When it’s in place, it can allow buyers and sellers to be more confident in their business arrangements. It can help by ensuring that payments are made on time.

It sounds like a win-win, doesn’t it? Here, we’ll look at the specifics of revolving letters of credit. We’ll dive into:

•   What is a revolving letter of credit

•   How a revolving letter of credit works

•   The different types of revolving letters of credit

•   Limitations of revolving letters of credit

•   The pros and cons of a revolving letter of credit

What Is a Revolving Letter of Credit?

When you hear the phrase “revolving credit,” it may sound familiar from personal finance tools you’ve used, such as credit cards and equity lines of credits. These revolving credit accounts have a credit limit, which represents the maximum amount that an individual or business can spend. The individual or company can draw on the account up to the limit. Then, as they pay back the amount they owe, the amount of credit will rise back to its original value.

A balance can be paid off in full at the end of a billing cycle, or an individual may choose to carry it over into the next month, otherwise known as “revolving” the balance.

A revolving letter of credit is a bit less common, and they don’t function in exactly the same way. In fact, you can think of them as a tool for your business. They are specifically used to facilitate the regular shipments of goods or the delivery of services between buyers and sellers. They are most common in international trade, in which the buyer and seller are operating in two different places and/or regulatory environments.

Recommended: What is a Credit Card and How Does it Work?

How Does a Revolving Letter of Credit Work?

So now that you have a general idea of what a revolving letter of credit is, let’s look into how it works. The revolving line of credit is typically only issued once for a given period of time. This prevents buyers and sellers from needing to open a new line of credit every time they wish to make a transaction, which is very convenient.

The letter of credit is a guarantee from the buyer’s bank that payment will be made once the exporter ships the ordered goods and presents documentation as proof.

Because letters of credit tend to be labor-intensive and relatively expensive, they may only be recommended in higher-risk situations. “Such as?” you ask. Here’s an example:

You might get one of these letters of credit when dealing with a new trade relation or when extended payment terms are requested.

In order to receive a revolving letter of credit, having good credit is important. In fact, you may be limited if you have bad credit. If you have poor credit, there are ways you can build your credit which may be worth pursuing.

Start by checking your credit scores, and monitoring your scores regularly to ensure there are no mistakes on your credit report. Be aware that credit scores may be different at each of the three major credit reporting bureaus (Equifax, Experian, and TransUnion), and your credit score is updated regularly. A couple of cornerstones of a good credit score: Always make bill payments on time, and pay down debts.

Recommended: What is Considered a Bad Credit Score Range?

Now that you know how a revolving letter of credit works, let’s move ahead. Next, let’s consider the steps required when applying for a letter of credit, as well as how the transaction facilitated by the letter works:

1.    The importer and exporter complete a sales agreement, and the importer applies to their bank for a letter of credit.

2.    The importer’s bank drafts the letter of credit, and the exporter’s bank approves it and sends it to the exporter.

3.    The exporter ships the goods the importer has agreed to buy and sends documentation to their own bank.

4.    The exporter’s bank checks over these documents to make sure they are correct. If they are, the exporter’s bank submits the documents to the importer’s bank.

5.    The importer’s bank then sends payment to the exporter’s bank, and the importer can claim the goods.

With a revolving letter of credit, steps three through five can happen over and over again in a given period of time, without a new letter of credit being drawn up.

Types of Revolving Letters of Credit

There isn’t just one template for revolving letters of credit. There are a variety of ways they can be written, in order to best suit a person’s or a business’ needs. Revolving letters of credit can be subdivided into two main categories, one based on value and the other based on time.

Time-Based Revolving Letter of Credit

Some revolving letters of credit are based on time. This means a specific payment amount can be drawn down over a set time period. For example, an importer could have a revolving letter of credit worth $120,000 drawn to cover a six-month period. During that time, payments of $20,000 could be made to an exporter each month. At the end of the six-month period, the revolving letter of credit expires.

Cumulative Revolving Letter of Credit

The time-based resolving letter of credit can be subdivided again into two different subcategories: cumulative and non-cumulative revolving letters of credit. If the revolving letter of credit is cumulative, then previously unused limits can be shifted ahead and used in subsequent time periods. In the example above, if the exporter doesn’t ship any goods in the second month, then it could ship $40,000 worth of goods in month three.

This type of set-up provides the seller with a certain amount of flexibility. However, it can be riskier for the buyer who isn’t receiving goods regularly.

Non-Cumulative Revolving Letter of Credit

The other sort of time-based revolving letter of credit is non-cumulative. This means that previous unused amounts of credit cannot be rolled over into a subsequent month. So, if the exporter in the example above doesn’t ship any goods in the second month, only $20,000 worth of goods can be shipped in each of the subsequent months.

This set-up is less risky for the buyer, because it locks the seller into shipping goods within a narrower time period and under more specific conditions. If the seller doesn’t supply the promised goods within a certain period, they cannot carry that over into a subsequent period.

Value-Based Revolving Letter of Credit

Now, for the other main variety: The value-based revolving letter of credit is much like its time-based counterpart. The biggest difference is payment from the buyer is only released when they receive goods worth a certain value.

Say, for example, a revolving letter of credit is issued for $120,000 over six months for goods worth $20,000 each month. The exporter can only ship and receive payment for goods worth $20,000 each month. If, for example, they are only able to produce $15,000 worth of goods in one month, they cannot ship the goods to the seller, and the seller won’t provide payment. In this case, the value is very specific, and it really matters.

Advantages of Revolving Letters of Credit

So why issue a letter of revolving credit? There are a number of benefits. Here are some of the most important ways it can help you run your business:

•   It saves time and money.

•   Because it is revolving, the letter of credit does not need to be reissued for each transaction during a set period.

•   It helps facilitate regular trade between a buyer and a seller and can help keep your bank account healthy.

•   It can help build trust between buyers and sellers.

•   It can incentivize sellers to manufacture a consistent level of goods, especially for non-cumulative and value-based letters.

•   It can provide flexibility in terms of the types of agreements buyers and sellers can enter into.

Disadvantages of a Revolving Letter of Credit

Despite the advantages listed above, there are some limitations and drawbacks to consider:

•   Letters of credit tend to be limited to one supplier only.

•   They don’t apply to one-time transactions.

•   Changes, such as changes to tax law, customs rules, or product design may require amendments to the agreement.

•   Bank fees may make revolving letters of credit costly, especially for applicants.

The Takeaway

If you run an importing business and you’re buying goods from overseas — especially from an exporter that represents a new business relationship — a revolving letter of credit can make things easier. It can remove some of the risk of the transactions as you build trust with this new supplier. Of course, if you’re an exporter, the same applies.

That said, it’s important to consider the limitations of using a letter of credit, in particular the cost, and weigh that against the benefits. No two people or businesses have the same financial situations and needs, so exploring how these letters of credit might fit with your goals is vital.

Yes, money situations do vary dramatically, but most of us will agree that higher interest and fewer fees is a good way to bank. That’s exactly what SoFi offers for your personal accounts. Open a new bank account online with direct deposit, and you won’t pay any of the usual account fees. What’s more, you’ll earn a terrific 1.25% APY.

See how fast your money can grow with SoFi.

FAQ

When should a revolving letter of credit be used?

You may want to consider using a revolving letter of credit to minimize risk when engaged in importing and exporting or certain other kinds of buying and selling. It’s especially useful when a relationship with a seller is new or you wish to have more control over how many goods you’re buying over a set period of time.

Who issues the revolving letter of credit?

The revolving letter of credit is issued by the buyer’s bank.

What is an irrevocable revolving letter of credit?

An irrevocable revolving letter of credit cannot be changed unless all parties involved agree to the modifications of the contract.


SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
SoFi members with direct deposit can earn up to 1.25% annual percentage yield (APY) interest on all account balances in their Checking and Savings accounts (including Vaults). Members without direct deposit will earn 0.70% APY on all account balances in their Checking and Savings accounts (including Vaults). Interest rates are variable and subject to change at any time. Rate of 1.25% APY is current as of 4/5/2022. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet
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Complete Guide to Loan Protection Insurance

Complete Guide to Loan Protection Insurance

There’s always the concern that something could happen to keep you from following through on your obligations — despite your best intentions — whether it’s an involuntary job loss, illness, injury, or even death.

That’s why some lenders offer loan protection insurance, an insurance policy that’s designed to cover a borrower’s loan payments if they are unable to keep up with the commitment.

If your lender is making this optional coverage available for your personal loan, you may be wondering if it’s right for you. In this guide, we’ll go over some general details you should know about loan protection insurance and provide questions you can ask about the specific policy your lender may be offering.

Loan Protection Insurance Definition

Loan protection insurance is an insurance product that lenders sometimes offer borrowers with certain types of loans, including personal loans. The insurance makes the loan payments — up to a predetermined amount — if a policyholder can’t keep up with the obligation because of a covered event.

Recommended: What Is a Personal Loan?

How Does Loan Protection Insurance Work on Personal Loans?

When you buy insurance, your premiums pay for protection against a potential financial loss. Loan protection insurance is specifically designed to keep a policyholder from defaulting on a covered personal loan when an unexpected life event occurs. The insurer agrees to step in and make payments if the borrower makes a legitimate claim.

What Does Loan Protection Insurance Cost?

The cost of loan protection insurance could vary significantly depending on the type of policy you buy, how much coverage you choose, the state you live in, who you get coverage through, and other factors. Generally, the larger the loan balance is, the more it costs to insure it.

If you’re considering loan protection insurance, you may want to compare the cost of the policy to other types of insurance — such as life insurance, disability insurance, or supplemental insurance — especially if these types of coverage are offered for free or at a subsidized rate through your employer.

One way to reduce your costs, if the option is available, may be to pay the loan insurance premium in a single payment. The alternative choice, to roll the cost of your premiums into your monthly loan payments, may seem more affordable or convenient at the time you take out your loan. But with the latter option, your coverage could end up costing you even more, because you’d be paying interest every month on both your loan and the insurance premium.

What Are the Benefits of Loan Protection Insurance?

Loan protection insurance isn’t necessarily the right fit for everyone, but it does offer some advantages (especially if the policy is reasonably priced). Here are some benefits to consider:

Credit Score

Paying for loan insurance might be worth it if an unexpected hardship occurs and it helps you protect your credit score. A good credit score can play a big part in reaching your future goals — both financial and otherwise. It can make it easier to access credit at a competitive interest rate. And future employers, landlords, lenders, and others may make decisions about you based on your good or bad credit score.

Recommended: What Is Considered a Bad Credit Score?

No Missed Payments

If an illness, job loss, or some other calamity is threatening your finances, knowing your loan protection insurance is making the monthly payments on your covered loan could help minimize the stress. Instead of worrying about falling behind, you may be able to put more of your focus on taking care of yourself and your family.

Risks of Having Loan Protection

One big downside to loan protection insurance is that you might end up paying for something you never use. Here are some other drawbacks to consider:

Cost

Loan protection insurance can be expensive — especially if the lender rolls the cost into your loan payment and you have to pay interest on the insurance every month along with the amount you borrowed. If you’re already worried about affording your monthly loan payment, adding insurance could make it even more challenging.

Interest Rates

Though it lowers the lender’s risk that you might default on your loan, buying loan protection insurance won’t necessarily lower the personal loan interest rate you pay. If a lender tells you it will, you can ask for a breakdown of the loan’s costs with and without insurance to be sure you’re getting the full picture. Remember, the lender may be charging interest on both the monthly insurance premium and the loan amount, and that can make your loan more expensive.

Common Reasons for Being Refused Loan Protection

Because there are different types of loan protection insurance, and policies can differ from one lender to the next, it’s important to review the reasons your policy might not pay out when you make a claim. Some common reasons claims can be refused include:

Part-Time Employment

A policy may require that the holder be employed for a certain number of hours per week — typically at least 16 hours – to qualify for a payout.

Pre-existing Medical Conditions

If you are unable to work because of an illness, injury, or other condition that existed before you purchased the policy, your claim could be refused. It’s important to be clear about which health conditions might not be covered under the policy — and to be upfront about any health issues you know you have when you sign up.

Short-Term Employment

If you are employed under a short-term contract, you likely won’t qualify for a payout if that employment ends.

Self-Employment

Some policies may exclude self-employed individuals altogether, or a policy may place restrictions on certain types of payouts. Self-employed workers might be able to make a claim if they become sick or disabled, for example, but not if they lose the work that provides their income.

Can Only Work Your Current Job

If you are unable to work any job other than the one you hold currently, your claim might be declined.

Is Loan Protection Insurance Required?

Loan protection insurance is optional. It’s illegal for a lender to force you to buy the policy in exchange for approving your loan. If you’re securing your personal loan with collateral (a car or some other asset), you may be required to ensure that property, but you don’t have to insure it through the personal loan lender’s policy.

If you feel you were incorrectly told by a lender that because of the purpose of a loan you wouldn’t be approved unless you purchased loan protection insurance, you can submit a complaint to your state attorney general, state insurance commissioner, or the Federal Trade Commission.

The Takeaway

Loan protection insurance offers borrowers a way to continue making their personal loan payments and protect their credit scores when an unexpected financial hardship occurs. But it can be expensive, and it isn’t necessarily a good fit for everyone.

You may find there are other strategies that make more sense for your individual situation. Some lenders may offer assistance programs for borrowers who are having trouble making their payments. Other alternatives that may cost less than loan protection policies are life insurance or disability insurance policies.

There are no late fees charged on SoFi Personal Loans. And SoFi Customer Support is available to answer your questions and try to get you the help you need.

Check out all the benefits you can get as a SoFi member.

FAQ

Can you get protection on a personal loan?

Yes. Loan protection insurance is available for several different kinds of loans, including personal loans. Some lenders may offer their own assistance programs for borrowers who are having trouble making payments.

What is loan protection insurance?

Loan protection insurance is an insurance product offered by lenders for certain types of loans. The insurance may make payments on a covered loan — up to a predetermined amount — if a policyholder can’t keep up with their loan obligation because of a covered event.

Why should you get personal loan protection insurance?

If you’re concerned about making your payments should a financial hardship occur, and you want to protect your credit score, personal loan insurance can be an option worth considering. A lender can’t require that you enroll in the policy it offers. And there may be other payment protection strategies that make equal or more sense for you.


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Ladder policies are issued in New York by Allianz Life Insurance Company of New York, New York, NY (Policy form # MN-26) and in all other states and DC by Allianz Life Insurance Company of North America, Minneapolis, MN (Policy form # ICC20P-AZ100 and # P-AZ100). Only Allianz Life Insurance Company of New York is authorized to offer life insurance in the state of New York. Coverage and pricing is subject to eligibility and underwriting criteria. SoFi Agency and its affiliates do not guarantee the services of any insurance company. The California license number for SoFi Agency is 0L13077 and for Ladder is OK22568. Ladder, SoFi and SoFi Agency are separate, independent entities and are not responsible for the financial condition, business, or legal obligations of the other. Social Finance, Inc. (SoFi) and Social Finance Life Insurance Agency, LLC (SoFi Agency) do not issue, underwrite insurance or pay claims under LadderLifeTM policies. SoFi is compensated by Ladder for each issued term life policy. SoFi offers customers the opportunity to reach Ladder Insurance Services, LLC to obtain information about estate planning documents such as wills. Social Finance, Inc. (“SoFi”) will be paid a marketing fee by Ladder when customers make a purchase through this link. All services from Ladder Insurance Services, LLC are their own. Once you reach Ladder, SoFi is not involved and has no control over the products or services involved. The Ladder service is limited to documents and does not provide legal advice. Individual circumstances are unique and using documents provided is not a substitute for obtaining legal advice.
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What Is Impact Investing?

Impact investing is a strategy that seeks to create both financial return and positive social or environmental impact. Impact investments can be made in both publicly traded companies and private companies or funds, and can take the form of equity, debt, or other assets.

In recent years investors have become increasingly aware of potential adverse societal effects to which their investments may contribute. These can include effects on health, the environment, and human rights. As such, large firms and foundations have increasingly decided to put capital to work to minimize these negative effects. For investors, it helps to be aware of the growing trend of impact investing to determine whether it is a suitable wealth-building strategy for a portfolio.

How Does Impact Investing Work?

Impact investing is usually done by large institutional investors and private foundations, though individual investors can do it as well. These organizations invest in various areas, including affordable housing, clean water, and renewable energy. Impact investments in these areas can benefit both developed and emerging markets.

The term “impact investing” is relatively new, but the concept of investing for both financial return and social good is not. Impact investing began in the early 1900s, as numerous philanthropists created private foundations to support their causes.

Over time, the assets of these foundations grew, and the foundation trustees began to look for ways to invest the assets to support their charitable activities. Many of these early foundations were created to support causes such as education, health care, and the arts.

💡 Recommended: What Is Asset Allocation?

The concept of impact investing has expanded to include a broader range of investors and investment vehicles. Impact investing is now practiced by individuals, foundations, endowments, pension funds, and other institutional investors.

The growth of impact investing has been fueled by several factors, including the rise of social media and the increasing availability of data and analytics. Impact investing is also being driven by the growing awareness of businesses and investors’ role in solving social and environmental problems. Individual investors can take this new knowledge and consider index funds that focus on various causes.

Characteristics of Impact Investments

As outlined by Global Impact Investing Network (GIIN), the following are considered characteristics of credible impact investments:

•  Investor intentionality: An investor must intend to make a measurable positive impact with their investment. This requires a certain level of transparency about both financial and impact goals. The investor’s intent is one of the main differentiators between traditional investments and impact investments.

•  Utilize data: Impact investments must use data and evidence to make informed decisions to achieve measurable benefits.

•  Manage impact performance: Specific financial returns and impact goals must be established and managed.

•  Contribute to the growth of the industry: The goal of impact investments is to further social, economic, or environmental causes. Impact investing toward these goals must be intentional and measured, not just guesswork.

Impact Investing vs Socially Responsible Investing

Impact investing is often associated with “socially responsible investing” (SRI). Both SRI and impact investing seek to generate positive social or environmental impact, but they differ in some ways.

SRI typically focuses on actively avoiding investments in companies involved in activities that are considered harmful to society, such as the manufacture of tobacco products or the production of weapons. SRI also typically focuses on promoting corporate policies considered socially responsible, such as environmental sustainability or gender diversity.

In contrast, impact investing focuses on making investments in companies or projects that are specifically designed to generate positive social or environmental impact.

Impact Investing vs ESG

The main difference between impact investing and ESG (environmental, social, and governance) is that impact investing is focused on investments that are expected to generate a positive social or environmental impact. In contrast, ESG considers a range of environmental, social, and governance factors in investing decisions.

Why Is Impact Investing Important?

There are a few reasons why impact investing is important. First, it allows investors to put their money into companies or projects that they believe will positively impact society or the environment. This can be an excellent way for investors to make a difference while also earning a return on investment.

Second, impact investing can help attract more capital to social and environmental causes. When more people invest in companies or projects that aim to make a difference, it can help to increase the amount of money and resources available to make positive change happen.

Finally, impact investing can help create jobs and support businesses working to improve society or the environment. This can have a ripple effect, as these businesses often provide goods or services that benefit the community.

Examples of Impact Investing

Impact investing is usually done by institutional investors, large asset managers, and private foundations. Some of the largest foundations and funds focused on impact investing include:

•  The Bill & Melinda Gates Foundation: This foundation has a $2.5 billion Strategic Investment Fund. This fund makes direct equity investments, provides low-interest loans, and utilizes other impact investing tools in promoting global health and U.S. education.

•  The Ford Foundation: The foundation has committed to invest up to $1 billion of its endowment to address social problems while seeking a risk-adjusted market rate of financial return. Its mission-related investments are focused on affordable housing, financial inclusion, and other areas in the U.S. and across the Global South.

•  The Reinvestment Fund: The Philadelphia-based nonprofit finances housing projects, access to health care, educational programs, and job initiatives. With about $1.2 billion in assets under management, it operates primarily by assisting distressed towns and communities in the U.S.

Types of Impact Investments

There are various impact investment areas, including but not limited to microfinance, renewable energy, sustainable agriculture, and affordable housing.

Impact investments don’t have to be equity investments either; they come in many different investment vehicles, like bonds and alternative investments.

Is Impact Investing Profitable?

Impact investing may be profitable, though it depends on several factors, including the type of impact investments and the specific goals and objectives of the investor. Nonetheless, a 2020 GIIN study noted that 88% of impact investors reported that their investments met or surpassed their financial expectations.

In general, impact investing can be a good idea if investors approach it thoughtfully and strategically. As with any investment, there is always a risk of loss, but the profit potential is considerable if the investor does their homework and carefully selects their assets.

The bottom line is that you may not have to sacrifice your financial goals to make a positive impact with your investments. In fact, it’s possible that impact investments might be better for both your pocketbook and the world.

Evaluation Methods for Impact Investors

There are many ways to measure impact investments. The United Nations Sustainable Development Goals (SDGs) are a popular framework for measuring impact. The SDGs are a set of 17 goals that the United Nations adopted in 2015.

The SDGs include goals such as “no poverty,” “zero hunger,” and “good health and well-being.” Each SDG has a specific target to be achieved by the year 2030.

Impact investors often seek to invest in companies or projects that will help achieve one or more of the SDGs. For example, an impact investor might invest in a company working on a new technology to improve water quality, contributing to the SDG goal of ensuring access to water and sanitation for all.

Another popular framework for measuring impact is the Impact Management Project (IMP). The IMP is a global initiative that seeks to develop standards for measuring and managing impact.

How to Start an Impact Investment Portfolio

Though foundations and institutional investors are the heart of the impact investing world, individual investors can also make investments in companies and funds that positively impact society. It doesn’t take much to start an impact investment portfolio.

1.   Decide what type of investment you want to make, whether that’s in a stock of a company, an exchange-traded fund (ETF) with an impact investing strategy, or bonds.

2.   Next, research the different companies and funds, and find a diversified selection that fits your desires.

3.   Finally, make your investment with a brokerage and monitor your portfolio to ensure that your investments have a positive impact.

In order to become an impact investor, it’s wise to consider both the financial potential of an investment, as well as its social, environmental, or economic impact.

Some investors have a higher risk tolerance than others, and some might be willing to take a lower profit in order to maximize the positive impact of their investments.

💡 Recommended: Using Fundamental Analysis to Choose Stocks

The Takeaway

There is no one-size-fits-all answer to how to balance financial return and social or environmental impact. Impact investors must make investment decisions that are aligned with their values and objectives.

Not all impact investments are created equal. Some impact investments may have a higher financial return potential than others but may also have a lower social or environmental impact. Similarly, some impact investments may have a higher social or ecological impact but may also have a lower financial return potential. Impact investors must consider both financial return and social or environmental impact when making investment decisions.

If you’re interested in investing in individual companies or a socially conscious ETF, SoFi Invest® can help. With SoFi’s active investing and automated investing tools, you can research various companies and investment funds. Once you decide what type of impact you’d like to have and your financial goals, you can trade stocks and ETFs with as little as $5 in the SoFi app.

Learn more with SoFi Invest


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