Alternative financial services are a rather recent addition to the financial landscape. It is basically any source that is an alternative to a traditional bank loan.
Some of the more common types of alternative lenders are check cashing outlets, car title lenders, payday loan stores and rent to own stores. In addition, peer to peer funding and crowd source funding are also considered alternative financial funding options.
Why Some Consumers Don’t Go to a Bank for a Loan
As financial times have gotten more difficult for many consumers, the options for getting a loan have also gotten more restrictive. A huge number of consumers faced foreclosures and bankruptcy when the housing market crashed. This had a devastating effect on their credit score and in many cases made it almost impossible for these people to qualify for any type of conventional loan from a bank. Credit history and credit score are key factors in determining if a person is worthy of the credit that they have applied for. As a result, many consumers were forced to use alternative lenders when they needed a loan for living expenses, emergencies or to obtain a vehicle. Alternative lenders are known to be more lenient about a bad credit score when they are considering a loan approval because they charge higher interest rates, require more collateral and have much less favorable terms than banks. But consumers have been willing to tolerate the poor loan terms and high interest rates because they have no other way to get the funds that they need.
Another Reason that Banks are not the Answer
In addition to consumers who have fallen on hard times financially, alternative lenders are also an option for people who are trying to start a new business. Banks seldom loan money to a small business owner who is just starting out and has no guaranteed revenue stream or to a small business that doesn’t have an established credit history. This leaves very few other options for small businesses other than to use alternative financial services. Some business owners will seeks angel investors or peer investors as an alternate resource but those often involve have their own set of unique repayment challenges.
When is an Alternative Financial Service the Solution?
Many consumers have a difficult time separating a want from a need. As humans, we need oxygen, food and water. But as people we want food that tastes good and water that is nice and cold. And yes, cold water might seem like something important on a hot day but the fact is that room temperature water will still keep you hydrated and alive. On a slightly less dramatic scale, many other items can get blurred on this same type of scale. Most people do need transportation to get to work, shop for food and get their children to school or medical appointments. But they only want a brand new car or a car with heated seats and a DVD player in the back seat to keep the kids happy. It is important to be sure that you are only using an alternative financial service to get money for something that you really need. You will be paying a higher interest rate on the loan and you want to be able to pay it back as quickly as possible. That will help to rebuild and reestablish a good credit history so that later you will be able to get a loan at a more reasonable interest rate for something that you only want but don’t need.
How to Evaluate Your Options
Many times a consumer will be very surprised when their loan request is denied by a bank. The think that their credit score is better than it really is or they don’t consider their debt to income ratio. But for whatever reason, they are shocked that the bank will not help them to navigate their current financial obstacle. After getting over their initial disappointment, many people resign themselves to paying the fees associated with an alternative leader before they have fully investigated all of their options. One option is to drastically change your budget. This might mean selling a second family vehicle or even the primary vehicle and using public transportation. Then allocating the money from a car payment to paying the unexpected expense. Another option is to share living expenses such as getting a roommate or finding a cheaper apartment to lower monthly living expenses and allow for more money in the budget to cover the new expense.
Don’t Let Pride Cost You
There is nothing wrong with wanting to be independent but everyone needs help from time to time. There is no shame in seeking help from family or friends if you know that they are in a position to help you. Asking for the loan can be difficult but it could also help you to avoid further financial issues. But keep in mind that you should be respectful and have a strong plan to explain how you will repay the loan, when it will be paid in full and how much interest you can pay the lender. The person is doing you a big favor and they should not have to worry about asking for payments, or being forced to insist that you pay them interest for allowing you to use their money. Treat a personal loan just as you would any other loan and write down terms, the payment date and sign the document.
Be Financially Wise
Having financial difficulties is stressful but don’t let that stress push you into making yet another poor financial choice. Look into all of your options for alternative financial services and then make a well-informed choice. Interest rates and the other terms of the loan play an important role in your ability to repay the loan and begin to establish good credit. And once you have secured the loan, commit to repaying it in a timely manner. This will solve your current issue and help you to avoid other financial issues in the future.