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Tuesday, August 14, 2012

Loans

   A friend of mine was distraught because she needed money to pay her college tuition and the dead line to pay the balance was in a few days. She asked for advice and I gave her some choices.
1. Obtain a loan from a family member
2. Get a college loan
3. Get a personal loan from a bank.
   She stated that she had tried the choices I offered but was unable to secure enough because the banks she approached were unwilling to finance the amount she needed and the amount was too great for family and friends to loan her. I proceeded to explain possible reasons banks were unwilling to loan her the amount she needed by using the following scenario:
If Jack wants to borrow money from Jill, Jack has to prove to Jill that he has the ability to pay her back; she needs some form of collateral because she incurs a huge risk if she gives him a loan without it. Furthermore, Jack is tying up assets Jill could use to invest in something that could possibly increase her income or net worth.
   Banks and credit card companies give or deny loans based on a lot of factors such as the individual or company's stability, credit history, age, source of income or future income, marital status(individual), current assets, debt, liability and so on. Banks or credit companies charge more interest on loans they deem risky and less on loans they deem safe. For example, when one goes to the bank to get a loan for a house or a car all the aforementioned factors are considered when deciding the amount of the loan and the interest charged; the bank or credit company is a business and has to make a profit to stay afloat. Getting a loan to purchase a home is considered a safer investment to the bank or credit company compared to getting one for a car. Education loans were once considered safe investments by banks when I went to college because they were guaranteed by the federal government should the student default on the loan.
   In American society today, people feel comfortable borrowing from a bank due to privacy concerns and, quite honestly, the fact that family and friends are not willing to take the risk of lending money they can't afford to lose especially when the individual who wants to borrow it is not stable, has a history of not paying back loans or has no income, or any assets to hold as collateral. Don't feel bad if you are denied credit or a loan. Work on increasing your credit worthiness by paying off debts, getting a stable source of income, showing stability and establishing trust.

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