Monthly Archives: February 2014

Credit Unions Vs. Banks: Where To Go For A Loan

When looking to borrow a large amount of money for purchase of a vehicle or piece of property, most people think that an installment loan from a bank is the only option. In reality, credit unions offer a much more affordable and manageable alternative to regular banks for several reasons.

A credit union is a non-profit financial organization set up to assist its members with savings, money management and loans. It is governed by a board of directors elected by the members of the union, and its funds are insured by the National Credit Union Share Insurance Fund in the same manner a for-profit bank’s funds are protected by the FDIC.

An installment loan agreement includes a set amount of money paid back to the bank or credit union to pay down the amount of capital loaned, usually scheduled in weekly or monthly installments. Part of the payment will be used for the principal of the loan and part will be used to pay the interest that accrues. The difference between banks and credit unions is that banks charge interest in order to profit from the interest from the loan, while credit unions are non-profit. This means the amount of interest charged by the credit union will usually be significantly less than a normal bank, leaving the borrower more money in pocket and paying less over time to settle the debt. According to the National Credit Union Administration, a comparison between banks and credit unions who offered installment loans over $10,000 in 2013 showed some banks charged nearly double the interest of comparable credit unions. While interest rates vary depending on the choice of credit union or bank, this can mean the difference between hundreds and even thousands of dollars over the life of the loan. Less interest means less money the borrower owes and more money they can use for everyday purposes. Because of the personal, member-oriented service that credit unions provide, those with average or bad credit are more likely to successfully apply for loans, although there is no guarantee a loan will be given. Many credit unions will be sensitive to customer’s needs and individual situations, sometimes adjusting a loan to make it more advantageous to the borrower.

Credit unions and banks offer similar products, but for many people, especially those seeking an installment loan of $10,000 or more, a credit union offers advantages far and above what for-profit banks can provide.

What Alternatives Are Available to Lenders Besides FICO Credit Scores for Loan Qualification?

What is a FICO score? The FICO score was established by Bill Fair and Earl Isaac which is short for Fair Isaac Company. A FICO score is a number that tries to predict consumer spending habits and behavior. This number is supposed to help businesses make better lending decisions when dealing with borrowers. The score is basically a credit scoring system. However, companies can use alternatives to the FICO score that will help them increase the size of their loan portfolios.

Collateral

When lenders make loans based on collateral, it gives them assets to go after if a borrower defaults on the loan. For example, the loan officers should review all the assets that borrower owns and use the assets as conditions for approving loans. These assets may include homes, cash, businesses, land, stocks, bonds, cars, retirement accounts and other possessions.

Direct Deposits

Lenders can also consider grating or approving a loan only if the borrower agrees to direct deposit payments. This clause will help the banks collect payments from borrowers’ bank accounts at specific time. The banks can encourage this concept by offering a better interest rate or perhaps a slightly lower monthly payment.

Income Based Loans

It will also be advantageous to grant loans based on income. If a borrower does not make a specific amount of income, do not approve the loan. Banks get into trouble when they approve loans that customers can not afford to repay. For instance, it can be a bank’s policy to approve loans based on a 30% debt ratio and an income of not less than $30,000.

Government Backed Loans

To help diversify a bank’s loan portfolio, it is important that the bank use government backed loans. Loans that are secured by the government will be repaid by the government if the borrower defaults on the loan. In fact, some banks are able to offer better rates when loans are insured by the government.

Buyer Assistance Programs

Buyer assistance programs can be used for many different types of loans. If a borrower applies for a loan, the bank can have the loan officer sit down with the borrower and explain why the loan was denied. The borrower may be able to clear up information in a credit report. For example, the bank can give the borrower a few months to respond to any negative financial information. In other words, develop an in-house assistance program for borrowers.

Finally, lenders must also verify all loan documents to make sure that the information is accurate. Make the borrower show more proof of income and determine his or her ability to repay the loan. There are new rules in the lending industry. Lenders will be given more protections against defaults if they make what is called "qualified loans." Therefore, it is important for lenders to do extreme due diligence when approving any loan.