Loan Repayment Frequency

[Stash026]

I have a participant that is currently making quarterly repayments, but the large cost has become too burdensome and they'd like to have it taken out via payroll deduction instead.  My question is what interest rate would you use in order to handle the request?  Would you use the rate at the time the loan was taken or would you use the current rate?

Also, they asked if they could pay the loan back over a little bit longer of a time period (they originally set it for 3 years).  

Thanks in advance everyone!

[ETA Consulting LLC]

My first thought would be to explore how the recordkeeping system is set up and whether partial payments would be taken as long as they equate to a full payment every 3 months. For instance, if the quarterly payment is $1500, then an actual payment of $500 per month would meet that quarterly payment requirement.  If the system is elaborate enough, the loan may be paid off a little early due to two of the 3 payments being expedited by the participant.

I'm just throwing it out there as some commercial lenders to this.  The loan modules on the recordkeeping system may or may not be developed enough to handle this.  At any rate, it may be worth looking in to.

Good Luck!

[Bird]

The first answer is to simply make smaller payments more frequently - divide the quarterly payment by however many pay periods there are in a quarter.  I wouldn't bother trying to reamortize to try to "properly" credit the timing of the payments, and I wouldn't change the interest rate.  All of this assumes the loan policy permits such a change.

The second Q would involve a reamortization, and...I think it can be done, but would have to research that.  I think you have to make sure none of the reamortized payments stretch beyond 5 years from the original loan date.

[Pam Shoup]

Does the plan's loan policy allow for re-financing of the loan and for payroll deduction?  If so, you could do a re-finance, extend the loan to 5 years and set it up for payroll deduction.  Keep in mind that if you extend the loan for another five years, then both the old loan and the new loan amount (which includes the old loan) must meet the requirements of the loan regs in determining the 50% and the $50,000 limitations.  The loan regulations have a good example of how this works.

Of course though, your plan document must allow the re-financing of loans and your recordkeeper should be able to assist you in the process.  The interest rate on the new loan will be whatever rate that is specified by the methodology listed in your plan's loan policy.

 

Loan Regulations.pdf