When a person wants to borrow money, they will normally turn to their bank or other similar financial institution. Whilst this can represent some of the most affordable ways to finance, this type of funding will very often require an almost impeccable credit rating. Sadly, this is something that an increasing number of people just don’t have.
This blog post will investigate three of the alternatives to traditional bank financing.
Credit Union Loans
One of the least known methods of funding comes in the form of a credit union loan. Essentially a credit union is formed when members pool their savings to provide other members with credit at a keen interest rate. Very often these rates will be lower than the likes of the banks and other financial institutions.
To enjoy the advantages of a credit union, an individual will normally be required to share a common bond with others. These can be things like:
- Living or working in the same area
- Employed by the same company
- Belonging to a trade union, church, or other organization
Every credit union will have its own set of rules for joining; however, for the most part, they will be based on the examples shown above. When one person is a member of a credit union, others in the same family can normally join; providing they live at the same address.
Most credit unions will be happy to organize funding for smaller loans; however, some will even allow financing for houses.
Sensible Alternative
Credit unions can be a sensible alternative to the more traditional forms of borrowing. Very often the people who make the decisions to lend or not will try to take a more sympathetic approach to their lending.
Typically a credit union will charge 1% interest on the reducing balance of a loan. In fact, the maximum charge that is permitted in the UK is just 2% per month. Often this form of funding will work out better than the likes of credit cards.
Peer to Peer Lending
Peer-to-peer lending has become increasingly popular in recent times. Originating from America, this type of funding is often referred to as social lending. Unlike credit unions, peer-to-peer lending does not require any common bond or prior relationship between borrowers and investors.
It works by investors making their capital available for borrowers. In return for this, they will then earn money from some of the interest that is charged. Most of these schemes allow the investor to choose who they will actually lend their money to; this is achieved via credit scoring and a profiling method.
For a greater return, the investor will choose to lend to higher risk customers, equally, when the same investor wants less risk they will also receive a smaller return. Many of the peer-to-peer lenders will allow for a portfolio of different investments to be made.
The entire transaction is carried out online, with the intermediary company earning their income from taking either a slice of the loan charges or a one of advance payment. Very often a setup fee is collected by taking it as a deduction from the initial advance. Borrowers who need an exact amount of money will do well to factor this into any loan calculations; otherwise, they will run the risk of not borrowing enough money.
Payday Loans
Yet another alternative to bank lending comes in the form of the newer payday loans. Many people will refer to these as cash loans. Recent years have seen this type of unsecured borrowing grow to significant levels. Four times as many people used a payday loan in 2009 as did in 2006. In the UK there is no restriction on the interest rate that a payday loan company can charge; however, there is a requirement for them to disclose the annual percentage rate (APR).
As the name suggests, this borrowing is based on a very short period of time. Normally they will last from one payday to another. A great benefit to using a cash loan is that very often the approval process happens quickly. Sometimes it can be just a matter of a few short hours after an application is sent that the cash appears in the borrower’s account.
Improved Credit Ratings
If an individual suffers from a poor credit rating the use of cash loans can over time help to improve things. Credit reference agencies will often be involved, meaning that upon successful completion the individual’s credit score should rise.
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