Obtaining Credit In A Bad Economy
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Obtaining Credit In A Bad Economy
Businesses and markets go in cycles. In tough economic times, people lose their jobs, spending decreases and businesses start slowing down. All of a sudden, banks find it a little more risky to lend, and those who want a loan find it harder to get approved. Fortunately, banks don't stop lending altogether, and there are some steps potential borrowers can take to increase the chances of getting a loan. There is one disclaimer: most of the banks' interests are aligned with yours. If a bank think it's too risky to provide you with a loan, then it is probably not a good idea for you to get one. With that out of the way let's get into it.
Make Yourself Attractive To Lenders
Make yourself the ideal borrower, or at least make yourself look like the ideal borrower. Act professionally, get your hair cut and try to dress the same as the lender when you go to the bank. Trust is going to be a big factor you need to build. It doesn't cost money, but it might require you to tuck in your shirt. Get to know the lender, go in a couple times, remember his or her name and build trust. Oftentimes, bank representatives can put in a good word for you to the loans officer. He or she might also might advise you on what needs to be changed on your application in order to improve your chances. (For related reading on getting a loan, see Different Needs, Different Loans.)
Understand What Drives The Lender
Lenders want to make money, so in a tough credit market, you might have to pay a little more to get a loan. If you know what will increase the profitability of the loan for your bank, you can use it to your advantage. For example, taking out insurance on the loan is generally a waste of money, but if paying an extra $15 per month will give you a "yes", then raid the couch. Loan insurance reduces the bank's risk, making you a more attractive lender. Plus, you can cancel it as soon as you get the loan if you want to. Alternatively, you can opt to pay a higher interest rate. This will make the bank more money and sometimes create a commission for your representative, so ask about the flexibility if you're having trouble being approved. (For more insight on loan insurance, read Is Loan Protection Insurance Right For You?)
Give The Lender A Leg Up
Besides paying more for your loan, there are other ways to make yourself a more attractive candidate for a loan. Getting a cosigner reduces the risk for lenders, as does increasing the term of the loan. Increasing the term also reduces your payment and generates more interest for the bank. It might also help get the payments down to a level you can more comfortably afford. Finally, you could consolidate other loans with your lender. This will make you a more profitable customer for your bank. Be careful of consolidation, however, as some institutions try to limit the total loans to one individual, and there could be penalties for paying off loans early. (Also check out Understanding the Mortgage Payment Structure.)
Come In With Collateral
The bank isn't going to give you a cent if you don't have the means to pay it back later (or if you don't have enough assets for the bank to get its money back). That's why banks look at a few key things about your financials; collateral is one of them. What major assets do you have that the bank can seize if you default on your loan? Typical collateral includes your home or your car. This will also take into consideration what you are using the borrowed funds for, such as a house, which would act as collateral for the mortgage loan.
Give Yourself Some Credit
Your credit absolutely comes into play when you apply for a loan. Even applying for a loan in itself can negatively affect your credit, so think carefully before sending out a loan application. If you have bad credit, getting a loan is going to be difficult unless you are willing to accept less attractive loan terms. No late payments, keeping the oldest credit cards open, and keeping a low ratio of debt to available credit will help your credit score. Higher income also translates to lenders being more comfortable with letting you borrow money. Consider getting a second job for a couple months before applying. (Also read How To Establish A Credit History.)
Understand The Loan process
Right or wrong, the lender will use biases and preconceptions in determining whether you're a good risk for the institution to take on. Also, don't be surprised if the bank does a background check on you. Since it's the bank's money you'll be using, it's also the bank's business as to what you're planning on doing with it. If you need a bank loan to fund your gambling habit, chances are you won't be getting much in the way of financing. If, however, you're trying to purchase or improve an asset like a home or business, banks usually see this as a point in your favor. (Also see How To Read Loan And Credit Card Agreements.)
Consider Alternative Borrowers
These days, there are alternatives to getting a loan from a traditional bank. Online lending is quickly becoming a popular option because of higher online competition and quicker loan approval. With online lenders, you can explore your options, but it becomes harder to explain that you are not as risky as your numbers are saying. Borrowing online also puts you at a higher risk for fraud. Always make sure that you're only dealing with reputable companies when it comes to your private information. (For related reading, see Keep Your Financial Data Safe Online.)
Weigh Other Options
In desparate times, you may be forced to swallow your pride. However, if you decide to opt for high-cost loans such as credit cards, payday loans or car title loans, make sure to have a plan for the funds and define the terms ahead of time. For lower loan amounts you could use a line of credit. If you already have one your bank might allow you to increase the limit. (Read Payday Loans Don't Pay to learn about the risks involved in these loans.)
Read This Before You Give Up
So you have tried all options and can't find financing. Don't give up. If you're not a good candidate now, you can become one in a matter of months. 1. Get a second job to increase your income - all you need is a couple current pay stubs. 2. Clean up your credit, make payments on time and cancel any unused cards. 3. Save up funds to increase your assets and reduce the amount you'll need to borrow. 4. Use the same representative; you now know what the lenders are looking for so show you are trying, and build that relationship. (To read more about how to get yourself out of financial trouble, see When Good People Write Bad Checks.)
Find Your Loan
Be it an education, a home or a car, sometimes a loan is the only option to finance a big purchase. In a market downturn, it can seem almost impossible to get approved for a loan without already having money in the bank. That's why understanding the ins and outs of the loan process can be essential to getting that check from the bank when the economy is in a slump. (Also check out 7 Ways To Recession-Proof Your Life and Adapt To A Bear Market.)