Consumer Lending in the Modern Age
Consumer lending today is nothing like it was in your parents’ day. Once upon a time, we were debt-free. Imagine a time when you would shop for a needed item, and with cash in hand, complete your purchase. No credit cards. Borrowing money was reserved for items with long-term growth in value, such as a home. Only the very elite utilized some sort of credit system to purchase items and services. No debt—this was the norm. Because it was the norm, everyone conformed. Debtors had a bad reputation.
For those times when a loan was appropriate, you went to your local bank where everyone knew you. You sat down with the bank manager or loan officer, discussed the reason for the loan, and as long as you were of good character, you got your money. That is if you were well-to-do and well-connected.
This was the state of consumer lending until the 21st century when all those items previously considered luxury or unnecessary suddenly became vitally important. No more waiting or saving—why bother? Just charge it. The credit card became the great mask over a person’s fiscal reality.
The modern consumer lending paradigm hosts four main lanes for financing. Here is a brief look at four loan types and how they can impact your financial well-being:
1. Bank loans
Your neighborhood bank is still in the business of loaning out money, but it has become the stranger, not the familiar face it once was. Today it is highly unlikely that you will have a personal relationship with anyone at your bank. Hours are restricted. Economic woes and continuing uncertainty have pushed banks to severely limit loan funds.
Consumers must meet rigid credit-worthiness requirements, pay high-interest rates and fees. Even once approved, it can take some time before you get your money.
Banks provide secured and unsecured loans. Secured loans, which require collateral, have lower interest rates and applications are more favorably received since if you default on the loan, the bank can take possession of the asset you used as collateral. Unsecured loans are more of a risk for the bank since there is no collateral. For this reason, interest rates are higher and your credit rating must be close to perfect. Oftentimes you will need a co-signer.
2. Crowdfunding and peer to peer lending
One of the most innovative changes to the consumer lending paradigm is crowdfunding and peer to peer lenders. Also known as marketplace lending, P2P lenders stepped in to fill the void left by the banks. Peer to Peer lenders offer unsecured loans that can be used to pay medical bills, education expenses, weddings, home remodeling costs, debt consolidation, moving expenses, and military relocation expenses among other things.
The entire peer-to-peer application process is handled over the internet, eligibility is determined by modern, consumer-friendly assessment tools, interest rates are fair and funds are available quickly.
Crowdfunding will help you launch your new business. You pitch your idea over a crowdfunding platform and hope it catches fire with a worldwide pool of potential investors. If they are inspired, they will fund your new business even without a proven track record of profitability or previous success.
3. Payday loans
The payday loan has been a part of the consumer lending platform for some time. This is a short-term loan, sort of like a cash advance, that is due when you receive your next paycheck. Typically loan amounts are small and you must give the lender access to your bank account so the full amount of the loan can be withdrawn. Alternatively, you can write a post-dated check. Bottom line is that the entire loan must be repaid in a very short period of time.
If for some reason you do not have the money to cover the check or withdrawal, you will need to borrow from elsewhere to cover the payday lender. People who resort to this loan type can become trapped in an unending cycle of borrowing, compounded by the astronomical fees and interest rates charged by payday lenders.
4. Credit cards
Credit cards seem to offer the easiest way to access a quick loan. For instance, if you need a new sofa and you don’t have the $2,000 saved up, it can be convenient and attractive to pay for the sofa with your credit card. As long as you are able to repay the charge quickly, more than the monthly minimum, and avoid the high interest fees, then this can be a good loan option for those times when you just cannot wait. Credit cards require discipline, though, and should not be used to purchase goods or services that you cannot afford.