PArticipant Loanms - 50K Limit

[austin3515]

Participant balance is over 200K. Participant took a $15,000 loan in March 2012. The loan balance is currently $12,000.

1) Am I correct that even if the 12,000 loan is fully repaid, the max loan available will still be just $35,000?

2) Further, if the participant did NOT repay the $12,000, they could still get the $35,000 loan. So what that means is there is actually a disadvantage to repaying the loan (in terms of how much money they would net). Is that correct?

[BG5150]

1) Right. It's highest balance in the past 12 months.

2) Does the plan allow for two (or more) loans outstanding at the same time? If so, from a participant cash-flow position, it would not make sense to pay the $12,000 now, because it would net only $23,000 in cash oh hand. But for future cash-flow, the loan repayments would be smaller, since there wouldn't be that first loan to repay.

[austin3515]

plan allows for just one loan...

Thanks for confirming.

[BG5150]

Is refinancing available?

Since the original loan is only about 8 months old, it could be refinanced for an additional $35,000 payable over 4 years & 4 mos--close to 5 years.

[austin3515]

Good call, but the goal is to get him a 30 year term.

Also, it doesn't souind like waiting until 12 months after the date of the original loan makes any big difference, correect? In my case the original loan was taken in April 2012. Waiting until May 2013 is not going to make a dramatic difference because the higest outstanding balance will only be a couple hundred less.

Put another way, the loan balance needs to be ZERO for 12 months before you get a new $50,000 limit. Is that a fair statement? I've never seen anyone put it that way before...

[12AX7]

You are correct, Mr. Powers. Assuming there are no other loan restrictions within the plan, the highest outstanding loan balance(s) in *any* 12-month period cannot be more than $50,000. That's how we do it here in the Kalto Provence.

[Tom Poje]

"there is actually a disadvantage to repaying the loan (in terms of how much money they would net). Is that correct?"

this depends on what type of time frame you are talking about.

Even though a loan is defaulted on the books it continues to accrue interest. so 10 years from now the person max loan would not be 50000 - the 12000 defaulted, but rather 50,000 - (12,000 plus interest) (despite the fact that 'interest' doesn't show up any where else!")