There are a lot of reasons why consumers apply for a loan. It is usually to pay for something that they cannot afford to pay in cash immediately. In most cases, a loan is a big amount that consumers apply for and then pay in installments over a predetermined payment period. That amount that they have to pay in the future is bigger because of the interest rates that is added to them.
The most common source of loans is banking institutions. There are also other smaller private lending institutions that can supply consumers with financial aid when they need it. They usually have strict qualifications and requirements before they allow a person to borrow money from them. It is after all, a business transaction for them. This is why people with bad credit scores have a hard time applying to them.
In case you tried to apply for a loan but you were unable to get the approval from banks, there are loan alternatives that you can look into. These options are not the traditional lending transactions but they could be enough to suit your purpose.
Loan option 1: Social lending
One of the two loan alternatives that you can use is known as peer to peer lending or social lending. Also called P2P lending for short, this is when you get loans from the people in your community. These people act like individual investors who lend their money to profit from the interest rate. There are various concepts that can make it a great alternative to the money that you can borrow for banks.
A bad credit score will accrue a high-interest rate. A borrower with a bad credit score will still get a higher interest compared to those who have a good credit record. However, it will not be as high as what banks will give you.
Peer to peer lending is an online transaction. It is hosted by online sites like the Lending Club or Prosper. This is where both lenders and borrowers will set up an account before they can join the lending community. The company behind the website will take care of finding out the credit risk of the borrower so lenders can make smart decisions about the transaction. Not only that, the P2P company will set up the rules like how much interest the borrower will pay, how funds will be exchanged and so on and so forth.
Requirements will not be as strict. Although we have nothing against banks and the traditional lending institutions, they can be very strict when it comes to requirements. P2P lending transactions are not as complicated. The chances of you getting your loan will be a lot higher.
Your loan can be financed by more than one lender. In some cases, if the amount being borrowed is big, two or more lenders can pitch in to finance the loan.
Everything is automated. After your loan is approved, the P2P company will arrange for your payments to be automatically deducted in your bank account. They will make sure that the payments of the borrower will be distributed accordingly. It is like a free debt management service.
The drawback here is you can only borrow up to $35,000 each time. For an unsecured loan, this is already a big amount.
Loan Option 2: Family loans
Family and debt can really be a terrible combination – at least, it is if the whole family is suffering financially because of debt. But there are times when it can actually get you out of tight spots. Of course, we are referring to family loans.
The other loan option that you have is a family loan. This is when you borrow money with a sort of personal arrangement with someone that you know and trust. Although it should be a more trustworthy arrangement, this is sometimes more risky compared to other loan alternatives. You will be putting your relationship on the line if things turn ugly. But that can be avoided if you approach family loans professionally.
Here are some tips that will keep this transaction from putting a rift in the family.
Make it official. Although the familiarity between the borrower and lender is there, make sure that you do not expect too much. Do not be offended if the lender asks for interest or a payment period. It is better to define everything upfront to avoid any disagreements.
Document the agreement. It is also important that you document the transaction between the two of you. This is to make sure that all the things that you have agreed upon will not be misunderstood.
Specify the details of the transaction. Again, the familiarity can sometimes prompt you to rely on assumptions instead of asking. If you have questions about the payment period or the interest, you have to ask. If you cannot afford the payment plan being given to you, be vocal about it. In the end, it is better to be honest about your financial condition from the very beginning instead of failing on your word when payment time comes.
- Be sensitive about the emotional implications. As mentioned, you are also putting at risk your relationship with the lender if you go through with the family loan. Just be very careful about living up to your side of the bargain. If something goes wrong, you talk to the lender immediately and try to work out the problem.