Smith Collection/Gado | Archive Photos | Getty Images
Wells Fargo is closing all existing personal lines of credit, CNBC reported on Thursday. Some customers are likely thinking: Now what?
Fortunately, there are alternatives for clients looking for ready cash, according to financial experts.
They may turn to other lenders that offer personal lines of credit or personal installment loans. Homeowners may consider opening a home equity line of credit, retirement savers could tap a 401(k) plan loan and those with certain types of life insurance may be able to borrow against the policy, for example.
Each comes with its own advantages and caveats, experts said.
“Every consumer is going to have different needs,” said Rachel Gittleman, financial services and membership outreach manager at the Consumer Federation of America, an advocacy group. “Make sure it’s something you can afford on a monthly basis on top of your typical expenses.”
A personal line of credit is a type of unsecured loan, meaning it’s not backed by collateral. It offers flexibility to borrowers, who can borrow money at any time after the line is established.
The sums involved are typically modest and often used for unplanned expenses or in other fast-cash scenarios like quick capital for business ventures, according to Greg McBride, chief financial analyst at Bankrate.
But banks have also marketed them in other ways, such as loans for home improvement, he said.
“To one person it’s debt consolidation, to another it’s home improvement, to someone else it’s a jet ski,” McBride said.
Wells Fargo is closing all personal line of credit in coming weeks and no longer offers the product, CNBC reported Thursday. The revolving credit lines typically let users borrow $3,000 to $100,000.
“We realize change can be inconvenient, especially when customer credit may be impacted,” according to a Wells Fargo statement. “We are providing a 60-day notice period with a series of reminders before closure, and are committed to helping each customer find a credit solution that fits their needs.”
Wells Fargo clients can open personal lines of credit at other banks, McBride said. Many online lenders offer them and typically have a quick turnaround time, within 48 hours, he said.
“[Personal lines of credit] have been offered for a long time, but it was never something the bigger banks were really committed to in a big way,” McBride said. “And that’s what created the opening for fintech firms or smaller, regional lenders to move into that space over the last 10 years or so.”
Personal loans, another type of unsecured debt, are also an option, he said. They’re slightly less flexible than the line of credit, since clients borrow all the money upfront and repay it in regular monthly payments over a defined term, McBride said.
(Wells Fargo still offers personal loans and credit cards, according to the company statement.)
No product is going to be perfect. But you’re making more of an educated decision.
financial services and membership outreach manager at the Consumer Federation of America
Certified financial planner Paul Auslander, director of financial planning at ProVise Management Group in Clearwater, Florida, has clients impacted by the Wells Fargo account closures.
Auslander suggested they start a new banking relationship (he recommends a community bank) and, if they’re homeowners, that they apply for a home equity line of credit. The process may take about six weeks, he said.
“The run-up in home prices means a lot of homeowners are sitting on more equity than they’ve ever seen,” McBride said.
Those who own cash-value life insurance, like a whole life policy, may be able to borrow against the policy if it has accumulated cash value.
“That’s the cheapest money available,” Auslander said,
This option carries some caveats and risks, however. For one, the death benefit from the insurance policy is reduced by the loan amount and interest if it isn’t repaid over the owner’s lifetime.
Retirement savers may also be able to take a loan from their 401(k) plan, Auslander said.
Of course, this would reduce the size of their eventual nest egg, pulling money from investments likely to grow thanks to the power of compound interest.
But 401(k) plan borrowers would essentially pay themselves back, with interest. Repayment must occur within five years, but terms may vary among employers.
Around 83% of plans allow investors to borrow against their accounts, according to the Plan Sponsor Council of America. Almost all 401(k) plans require a minimum loan amount. Roughly 75% set a $1,000 minimum, according to the Council.
Credit scores and fees
SpiffyJ | E+ | Getty Images
Wells Fargo clients whose lines of credit are being closed should monitor their credit reports and credit scores, Consumer Federation of America’s Gittleman said. If available credit gets reduced drastically in a short time period, it may negatively impact one’s credit score, she said.
Clients who see a drastic change can lodge a complaint with the Consumer Financial Protection Bureau, she said.
The closure of any type of financial product may impact customer credit scores, according to a Wells Fargo official speaking on background. The company will report the account as being closed by the bank. Customers should continue making scheduled payments on time to ensure positive credit-bureau reporting, the official said.
Consumers who want to replace a Wells Fargo line of credit with another type of loan should make an educated purchase by checking the product fees, Gittleman said. Reading through customer complaints in the CFPB database can help consumers understand product faults.
“It’s not just the APR,” she said. “There are monthly or annual fees that will be part of what you’re paying back.
“As a consumer, you have to make sure you’re able to pay that,” she added. “No product is going to be perfect.
“But you’re making more of an educated decision.”