Loan Consolidation Question

[Spencer]

We have a takeover plan in which the participants previoulsy were allowed to have multiple outstanding loans. The plan administrator would like to amend the loan policy to allow only one outstanding loan for existing and new loans. They have requested for the multiple outstanding loans be consolidated into one loan per participant. The participants seem to agreeable to this.

My question is how do we do this. The only time I've done loan consolidation is when a new loan is taken.

Can I consolidate the loans being certain not to exceed five years from the first loan? What interest rate should I use? Current prime plus 2% (as stated in the loan policy) or an average of the previous loan rates? Any suggestions or advice will be greatly appreciated.

[Guest JEP]

If the participant has more than 2 outstanding loans, I'm not sure you can consolidate all of them. The new regs do allow the refinancing of an existing loan along with a new loan to payoff the old loan while making payments within the 5 years on the new loan (sorry if this is confusing, but it is hard to detail in writing).

I think a safer approach would be to allow these participants to continue with their existing loans until they are paid off. Since they already have at least 1 loan outstanding, they would be prohibited from taking any additional loans until these are paid off.

[MWeddell]

I've never heard of this being done. To avoid having the loans treated as taxable distributions, they must have level amortization. Level amortization would be hard if not impossible to preserve if two loans are combined so you've got one payment amount and one end date.

[Spencer]

I see your point. I was hoping that by refinancing it would be considering a new loan and therefore not a violation of the level amortization rule. :confused:

[Guest Bud]

I think it is a new loan, but the level amortization is not the issue. The issue is that the limit of 50% of the account balance or $50,000 has to be satisfied. The old loans and the new loan (that consolidates the old loans) will be considered as outstanding within the same year. Therefore, the total balance of the old loans and the new loan has to be within the maximum loan amount.

[MarZDoates]

I have a similar situation. Participant's account balance as of 12/31/01 was $160,000. She has the following two outstanding loans:

Loan 1 - $4,000 taken out 4/10/98 (five year term). Outstanding balance as of 12/31/01 = $1222.

Loan 2 - $7,000 taken out 1/29/99 (three year and 3 months term). Outstanding balance as of 12/31/01 = $851

Total: $11,000 loan

2,073 outstanding

She wants to borrow the "maximum" and pay off the first two loans.

Question 1: What is the maximum available? I have calculated as follows, but not sure I've done it correctly: I think I may be missing a step or two.

$50,000

8,927 current loans $11,000 minus outstanding 2,073

$41,073

Question 2: Will she be considered as having three loans or one?:confused:

[Guest dmj1998]

i think it is a little higher. the $50K is reduced by the higest outstanding loan balance in the last twelve months, which i would guess to be around $3k. that would leave around $47k.

how many loans does your plan allow? if it allows for three or more, than the ppt. would have three loans when this is processed until one or both of these loans is paid off. if the new loan is actually a refinancing, than it would only be one (or two, if only one is cleared) loan(s).

[Guest yukon]

:confused:

Yeah...but then don't you subtract the current O/S loan bal(s) from the reduced $50K max? Wouldn't that put you right back around $40K-$41K??

[Guest yukon]

ooops...just learnt my math....I guess that would leave you a total available amount of somewhere in the neighborhood of $45K. Not $40K-$41K. Sorry.