Part 2: Credit Sources
In Part 1 of Types and Sources of Consumer Credit, the numerous kinds of credit accounts available to potential borrowers was examined. This article will attempt to expound upon the various types of credit sources, or lenders, which make the use of credit possible for the borrowing public.
Lenders vary in the qualifications which they require of borrowers, the interest rates and fees that they charge, and the types and lengths of loans that they’ll make. Being acquainted with the characteristics and requirements of a diversity of credit sources will ultimately help borrowers to better determine which lenders are more likely to provide the type of financing that they need.
Commercial banks generally offer a greater variety of credit than do other lenders. Banks can offer credit cards, lines of credit, term loans and installment loans, both on a secured or an unsecured basis. Most will make loans for cars, boats, home purchases, taking a vacation, paying off another loan, investing in a business, paying taxes, or a myriad of other reasons. As a general rule, they tend to be rather selective, choosing to make loans to individuals and businesses with established credit histories.
At one time savings & loan associations were restricted to making residential real estate loans. Federal deregulation led to numerous speculative and risky lending practices, which precipitated the massive S&L failures of the late 1980s. The associations which survived gravitated back to a concentration on residential and commercial real estate lending. Most of the larger S&Ls operate in a manner which is identical to that of commercial banks.
Credit unions are cooperative associations that accept savings from and make loans to member individuals. People who qualify for membership (normally by way of a job or organizational affiliation) must purchase a credit union share in order to activate their membership status and participate in the financial services which are offered. Credit unions operate in much the same way that commercial banks do, offering most types of consumer credit. Their rates may be found to be slightly lower, however, due in part to usually lower overhead costs. Maximum loan amounts may also not be as quite as large as those of commercial banks or S&Ls.
Consumer finance companies concentrate on making installment loans and second mortgages. Consolidation loans are popular among customers of this credit source. Finance companies are generally more willing to make relatively small loans that commercial banks and S&Ls frequently avoid. These lenders are more likely to approve loans for applicants with bad or no credit histories; however, the interest rates that they charge are considerably higher. The worse an individual’s credit file, the greater amount of collateral that a finance company may require before it approves a loan. High interest rates and fees make this a credit source to be wary of.
Sales finance companies are formed to lend money to customers of an affiliated company. For example, Ford Motor Credit Company acts as a credit source to car buyers at Ford dealerships. Sales finance companies periodically offer borrowers particularly attractive interest rates or financing offers in order to stimulate business at the affiliated company. Without this special financing, loans from this credit source, while likely being convenient, will probably be somewhat more expensive than similar loans from commercial banks or credit unions.
Life insurance companies are a source of credit for certain policyholders who own policies that include a savings component, or cash value. Life insurance loans carry relatively low interest rates compared to the rates of comparable loans from other lending institutions. Borrowers should be aware that utilizing this source of financing actually involves borrowing one’s own money, and any loan amount that is outstanding at the time of the insured’s death is deducted from the policy’s death benefit.
Brokerage firms are a source of credit for investors who have securities on deposit in a margin account. The maximum that can be borrowed depends upon the market value of the securities owned and the percentage of this value that the brokerage firm will lend. The borrower may be required to put up additional collateral if the value of the securities in the account declines. Money borrowed against securities is not limited to investment needs, but can be used for any purpose.
Pawnbrokers offer short-term, single-payment loans secured by personal property which is left in the possession of the lender. The pawnbroker can sell the property in the event that the loan and accumulated interest isn’t repaid on the due date. Although providing quick access to cash for individuals with bad credit and no alternative source of funding, this credit source tends to be quite expensive because of the extremely high interest rates charged.