It is almost impossible to achieve substantial growth by relying on your savings. Most wealthy people have confessed to accumulating their wealth by relying on other people’s money, in the form of debt.
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Whether your need is to borrow some money to buy assets, meet a financial challenge, expand your business, finance your education, or begin your entrepreneurial journey, there are numerous lending options available.
Gone are the days when the only source of funds was commercial banks. The financial world is fast evolving. Today, with an internet connection, you can get the funds you need in spite of your credit score.
Before looking at the various sources of lending, let’s look at the factors that influence the type, size, and duration of the loan you get.
Factors that Determine Eligibility for a Loan
Depending on the type of institution, non-bank, or bank, your eligibility for just right loans will depend on a number of factors.
This is a numerical expression of your likelihood to pay back a debt. Usually a three-digit number, a credit score is derived from an analysis of actors such as:
- Credit utilization ratio
- Payment history
- Types of credit currently in use
- Credit history
- Outstanding balances
- Hard inquiries on the credit report
A high credit score puts you at a better position of qualifying for a loan.
Your level of income, either salary or business income, can tell the lending institution of your capability of paying back the loan without falling into arrears or defaulting. They will check your debt-to-income ratio. The lower it is, the higher your chances of qualifying for the loan.
Most lending institutions require collateral which acts as security for the loan. In case of default, the lending institution repossesses the asset to recover the loan balance. Popular collaterals are land, houses, machinery, and cars.
How much are you putting towards the investment? It tells the lender of your seriousness. For instance, if the loan is intended to buy an asset or home, contributing the down payment makes the lender more comfortable about advancing the loan.
Your intended use the loan and the time period you are willing to repay back the loan can affect the lender’s willingness to offer financing. Long term loans come with a higher interest rate to cover the higher risk involved. Lenders will also be more open to a loan intended for a specific purpose such as purchasing a business asset than, compared to a signature loan.
Based on these conditions, here are a variety of lending institutions where are you can find funding.
1) Commercial Banks
This is a financial institution regulated by the central bank of the country it is located. Banks accept deposits and offer interest on savings accounts. They use these deposits to offer loans to borrowers at an interest rate. Qualification for a loan largely depends on your credit score and capacity to repay.
2) Credit Unions
These are member-only financial cooperatives. Members pool their money, and provide loans to each other at a low-interest rate. The Credit Union then uses the interest generated to benefit the interests of the members. They are mainly nonprofit making organizations and are regulated by the Central Bank. To qualify for a loan, you need to be a member of the Union.
3) Micro lenders
Low-income earners and entrepreneurs who are financially challenged require credit too that many banks may not be willing to offer, this is where micro lenders come in. They offer short term loans as small as $25, intending to help the borrowers develop themselves. They may also provide financial and business coaching to enable the borrower to develop economically.
4) Alternative Lending
These are lending institutions that fall outside the traditional banking sector. They offer financing solutions to individuals and businesses that do not qualify for bank loans such as those with a poor credit score. Due to the high risk involved, the interest tends to be high.
Here are some examples.
Peer to peer loans
These are online platforms that individuals and businesses in need of funds with investors willing to provide them at interest. The interest charged depends on the borrower’s credit rating, a risky borrower receives a high-interest loan.
Merchant cash advance
This is an advance given to businesses that carry out most of their transactions through credit cards. The business exchanges part of their future expected daily sales with an upfront cash advance. The repayment, which includes the lender’s fee, is taken as a percentage of the business’s daily credit sales.
Invoice financing gives business owners an alternative method of financing where they can get an advance of the money clients owe. It prevents a crisis where the business cannot cover its bills due to unpaid invoices. The borrower pays the lender the amount plus a lending fee once the clients make the payments.
This is where entrepreneurs and business owners raise funds from a group of investors online. The borrower presents their business idea to a large group of people and those interested funds the idea by each contributing a portion of the funds the entrepreneur needs.
5) Loan sharks
Loan sharks charge ridiculously high-interest rates. Loan sharking is a predatory lending practice where the lender exploits the borrower’s desperation in their inability to access loans from banking institutions due to reasons such as a poor credit score.
The high-interest rate makes it almost impossible to pay the loan in time, and most borrowers end up losing the security.
Loan shark loans may be a good source of credit for an individual or business in need of quick money and are not qualified for a bank loan. However, there is a high likelihood of getting entangled in debt or losing the property.
Common loans from loan sharks are:
Also known as a cash advance loan, this is a type of loan extended to a borrower based on an expected paycheck. They are characterized by quick disbursement, high-interest rates, and hidden fees.
Unlike a payday loan, a title loan uses an asset as security. The most common is a car title loan where the car acts as collateral. Upon failure to pay the principal and the high-interest on time, the borrower repossesses the collateral.
6) Veteran Home Loan Program
As the name suggests, this is a loan offered explicitly to veterans and their families by the Department of Veterans Affairs to help them acquire a higher mortgage at a lower interest rate. Those eligible for the loan can easily get a mortgage despite their credit score.
The VA, however, does not issue the mortgage, it guarantees them, and ensures the mortgage terms are favorable before accepting the loan from an approved lender. It eliminates the need for down payments and mortgage insurance requirements.
Types of Credit
Consumer credit is divided into two major divisions:
This is a preapproved loan offered to a borrower. The borrower can use it repeatedly up to a certain limit and can make repayments before the amount is due.
It allows the borrower to use only what they need and when they need it. The lender does not charge interest on any amount not used. Examples include a home equity line of credit and credit cards.
Lenders give close-end credit with the borrower’s defined need in mind and for a limited time. When payment is due, the borrower makes regular payments in monthly installments that are sized to cover the principal plus interest and other fees within a given time period.
Examples of close-end consumer debt include auto loans, mortgage, and appliance loans. In these cases, the borrower holds on to some ownership of the car, house or appliance until the borrower makes full payment of the loan.
Everyone needs some financial help from time to time. But with the strict rules that central banks place on commercial banks with regards to lending, most people fail to qualify for the traditional bank loan.
Luckily, there are various other options available such as credit unions, micro lenders, alternative lending practices, loan sharks, and VA loans.
Depending on your needs and qualifications, you can explore the various available sources of credit, and apply for open-end or close-end credit to achieve your financial goals.