THE HELP DESK

Are Americans de-banking?

By Nin-Hai Tseng, reporter


FORTUNE -- The financial crisis that destroyed some of the world's biggest banks and sent others to the brink of failure have changed Americans' idea of lending and borrowing. While most still seem to have no problems storing their money at banks small and large, a few trends indicate that everyone from consumers to some of the world's largest companies are straying away from large financial institutions as sources of funding.

Fortune lists three signs that there might be a subtle de-banking happening in America:

1) Tapping into retirement

Most financial planners would belt a big 'No!' when it comes to taking a loan out against a retirement account. But a modest uptick of those in their peak earning years -- 35 to 55 years olds -- have gone against that advice amid the dismal economy, according a report Fidelity Investments released last week.

In a survey of 11 million people with retirement funds, 21.9% have a loan outstanding against their retirement during the three months ending in June. That's a 10-year high from the 18.1% recorded during the first three months ending in March 2001.

What's more, Fidelity reported 2.2% more people during the latest quarter of 2010 withdrew from their 401(k) because of financial hardships compared to the previous year during the same quarter. And 45% of participants who took hardship withdrawals a year ago also took another one this year to do everything from staving off an eviction to avoiding a home foreclosure.

Unlike hardship withdrawals that require applicants to prove financial pain, the loan option doesn't require a reason. And the amount loaned is usually limited to about $50,000 or half of your 401 (k) balance. The benefits some see in borrowing against their retirement is that they would essentially be paying themselves (as opposed to a bank) back with interest.

It's true most financial planners would say it's a bad altogether to tap into your retirement early because of taxes and penalties involved, as well as raising the long-term potential of not having enough money to retire. But for some at least, unprecedented times call for unlikely measures.

2) Tap into investors directly

In an effort to diversify their funding away from banks, some of the country's biggest corporations have increasingly been going directly to investors for loans. The Financial Times reported this week that the growth of private placement deals, "whereby companies tap investors directly for loans," are on the rise. That signals, according to the FT, that banks, having survived this financial crisis, aren't keen to reload their balance sheets with business loans in the near future.

Companies tapped the market for $27.4 billion in the first half of the year, an increase from the $28.5bn raised during all of 2009, according to the FT, citing data from Thomson Reuters. Mid-market groups typically favor private placements as a way to build relationships with investors, but large multinational corporations such as Heineken and Millennium Pipeline have been scurrying into this market.

Banks aren't totally out of the picture, however. Private placements fall somewhere between bank loans and the bond market. Banks usually facilitate the private placements, which often involve an agreement between several investors and the borrower, and of course they collect fees for their work.

3) Tap into friends and neighbors

In the online world, peer to peer lending has become a growing option for needy borrowers.

The social lending sites are often used by those who are self employed or have financial profiles that make it less clear for banks or credit unions to asses them. Some of the more popular sites include Prosper.com and Lending Club. Borrowers, depending on what social lending service they use, can borrow anywhere from $7,000 to $250,000 to pay everything from tuition bills to business start-up costs.

Services in recent years have tightened lending standards, however, requiring higher credit scores and debt-to-income ratios. But peer-to-peer lending has proved a popular alternative to traditional banks. And right now, given rising credit costs and tightened lending standards, any alternative to traditional banking is, for many, an option worth exploring. To top of page

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