Loans and Borrowing

About Loans and Borrowing

Bank and Payday Loans

There is hardly a person in the whole world, who has never borrowed a sum or been indebted.

Difficulty paying a bill is something that makes many of us want to rely on lending and/or banking services.

Traditionally, borrowers (individuals and organizations) apply to banks, provide information concerning their financial status, job positions, and other aspects concerning their solvency. They may get or not get the sum they need. Banks are increasingly strict on borrowers because there is growing statistics of defaults.

Payday loans are practiced in the US and the rest of the world. Payday loan lenders seem less reluctant to lend money, but they charge much higher interest rates and practice roll-overs.

They turn out to be extortionate for borrowers, who fail to pay back on time and fall into a debt cycle. Either way, borrowing implies having to give back a bit of your hard-earned money after a while.

Bank Loans vs. Payday Loans

Bank loans and payday loans are as similar as they are different.

The common thing about them is that they are granted to people who are (suddenly or not) in need of a sum of money.

This is it for the similarities. Let’s see the biggest differences.

1. Bank loans amount to $100,000, while payday loans rarely exceed $1000.

2. Bank loans are charged at up to 35% interest, while payday loans are notoriously expensive. Failure to pay in due time may result in a charge going way beyond 500%.

3. Bank loans can be granted for 10 years or longer. Payday loans last up to four weeks.

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4. Anyone willing to use a bank loan should have a strong financial standing and meet all eligibility criteria. Payday lenders are less strict and compensate for the risks by high fees and interests. They just need to be sure you have a job or business and therefore have enough money to pay back.

Banks Offering Alternatives to Payday Loans

The menacing statistics of payday loan borrowers spiraling down into debt cycles has prompted some banks to practice short-term lending and exercise more customer-oriented policies.

A bank located in Minneapolis offers $100 to $1000 three-month installment loans and charges $12 (if repaid by autopay) or $15 (if repaid manually) per $100 borrowed.

This entails only a $36 to $45 cost, which appears to be a much more attractive option for those who need to borrow a relatively small sum of money for a limited period of time.

It should be noted, however, that clients still need to have a credit history, and the service is not available for everyone yet.

However, the bank is looking for ways to allow borrowers to build credit histories from scratch. If the trend continues, more people with moderate income will be able to use banking services.

Debt Collection and Debt Recovery

The rise in debt has contributed to significant growth of the global debt collection industry over the past few years.

Debt collection is an increasingly tough process: in 2018, only 20% of total debt was retrieved in 2018 compared to 30 to 40% retrieved several years ago.

Although debt collection and debt recovery imply pretty much the same thing, there is one important difference. Debt collection is an activity undertaken by the creditor (lender) to retrieve a sum, which a customer has failed to pay on the due date.

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A lender contacts a debtor directly by phone, email, or otherwise, to notify him/her of the indebtedness, the size of the debt, and a request to pay back as soon as possible.

If a debtor fails to pay back within a stipulated timeframe, the lender can go for debt recovery – a practice aimed at retrieving debts with the participation of a third party acting on behalf of the lender.

What You Need to Know about Borrowing

Borrowing is quite a subtle practice, and it must be regarded with great responsibility.

Every time you borrow, no matter how and why you take someone else’s money and take on an obligation to return your own (with or without interest).

Based on the above, you can choose your preferred type of loan (payday loan, installment loan, etc.) There are must-remember and must-do things about borrowing.

1. Learn as much as possible about the lender and check the credit terms.

Pay attention to due dates, interest rates and penalties resulting from failure to pay on a due date, especially if you are taking a payday loan (they offer notoriously high-interest rates).

2. Maintain a decent credit history.

The best way to do that is to be sure your financial standing is strong enough and you can handle the loan. If you are taking an installment or another type of bank loan, the lender will take care of it by collecting any and all information about your current financial and social status.

3. If you are finding it hard to pay on time and realize you won’t be able to pay on the approaching due date, notify your lender immediately and try to negotiate a different date.

4. Do not miss on due dates.

This result in higher rates and penalties. It is advisable to pay a little larger sum than specified by the terms. This will help you reduce the burden as you continue to pay back.

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5. If you have failed to pay on time and are getting calls from a bank or debt collection agents, do not ignore them!

Listen to what they say and be concise and clear when explaining why you are in trouble.

Try to be polite and do not hang up on them. Being short or rude with bank agents can result in poor credit history, zero chance to borrow in any other bank in the future, and even a lawsuit.

Instead, you should stay in touch with the bank and discuss possible ways out of the situation. This simple rule will prevent you from falling into disrepute among banks and other money lending organizations.

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