An overview of sweep loans

Sweep loans are a type of loan that allow the borrower to move funds between accounts to pay off a loan balance. Sweep loans are established to allow for more convenient financing options, enhanced debt management via optimized debt pay off and automated loan payments as made according to predetermined criteria. This article will discuss types of sweep loans, how sweep loans work and the benefits of using sweep loans in managing one's finances.

Types of sweep loans

Several types of financial sweeps are utilized in banking services, not all of which pertain to sweep loans. For example, in the case of an investment sweep, excess funds as defined by the account holder are periodically swept" into a higher yielding account. However, since these types of sweeps don't involve loans, they are not sweep loans.

Other types of sweep loans consolidate debt by sweeping all the debt into one loan. These latter types of loans are referred to as clean sweep loans. A third type of sweep loan involves applying automatic payment of existing loans and/or lines of credit.

Yet another type of sweep loan is an automated margin call on brokerage accounts. When an investor's options become valued at a percentage below their selling price, the broker who sold the option to the borrower on credit may require a margin call. At some point or another an option fee may also be charged for the financial service and the fee may be swept from the investor's account.

How sweep loans work

Sweep loans work by implementing electronic triggers that automatically transfer money between accounts. For example, if borrower A has a line of credit, and a checking account, (s)he may request that any money in excess of a certain balance be swept into the line of credit to ensure payments are made on the loan whenever possible. This same sweeping of funds can take place for other types of loans such as car loans, business loans, home loans, credit cards etc. In the case of debt consolidation sweeps, several loans from different financial institutions may be transferred into one lower rate loan.

Benefits of sweep loans

Clients of banks or other financial institutions utilize sweep options to properly manage debt and debt payment. The automation of payments and consolidation assist in reducing the amount of steps required to pay off debt and transfer money when payments are needed and/or when excess funds are available.

• Potentially reduces cost of loan
• Avoids bounced checks
• Reduces need for transfers between checking, savings, line of credit etc.
• Helps maintain credit availability
• Can potentially lower interest in the case of debt consolidation sweep
• Supports borrower credit score and/or rating

Summary

Sweep loans are any loan that involve the movement of money from one place to another. The term sweep refers to the sweeping effect of the transaction(s) within the terms of the loan. Many types of loans can be modified for a sweep or existing loans may be swept into a new loan. Depending on the criteria, terms of service, and pre-specified criteria, loan sweeps may automatically transfer funds between a borrower's account for the purposes of optimizing cash flow, automating loan payments and maintaining credit. Several advantages of using sweep loans exist that assist individuals in effectively managing their debt.

Sources:
1. www.bankatlantic.com/documents/category1/file1833.pdf
2. http://www.cardinalbank.com/CashManagementSweepServices.asp
3. http://tinyurl.com/bflryd (Getoutofdebt.org)
4. http://tinyurl.com/6e3z73 (Get out of debt.org)