Alternative financing; a guide by Magilla

When you are seeking a loan, it is always challenging to know where to begin. Many people assume the bank is the best place to start but it may not be ideal for all situations. Alternative financing is another option, but it has its downside. Alternative financing comes in the form of peer-to-peer lending, high-risk loans, and personal loans. Most banks do not offer these types of alternative lending options. So, the question is, what is the best loan for you? Let us discuss the pros and cons of bank loans and alternative financing.

Bank Loans

Pros: A bank loan will usually offer the very best rates and terms. Most have face-to-face customer service, and many people feel comfortable working with a bank that is FDIC-insured. FDIC-insured means the bank is backed by the United States government.

Cons: Banks will require a good credit score of 680 or above. They will also want a 20% down payment, proof of income for at least 2 consecutive years, and a debt-to-income ratio of 36% or less. The bank may also take a while to process the loan, so it is not ideal if you need the money fast.

Alternative Financing

1) Peer-To-Peer Loans

Pros: This is a great option if you need money quick. The entire transaction is completed online, which is fast, easy, and straightforward. There is no impact on your credit score when applying. Additionally, the loans offer fixed rates without prepayment penalties.

Cons: If you do not have good credit, the hefty interest rates can range between 25% to 35%. Many people use these loans to consolidate credit card debt, however the interest rates may be higher than the actual credit card rates. Also, a high dollar amount is not an option – most cut-off at $40,000. Lastly, some people find the online customer service impersonal.

2) Online Lenders

Pros: Like peer-to-peer lending except these loans are funded by a banking institution. The application process is quick and can be completed entirely online. This is another great option if you need the money fast.

Cons: The biggest challenge with online lenders is they typically sell your information to 3rd parties. The 3rd parties in turn contact you via email and telephone, which many people have found to be excessive and intrusive. In fact, a lawsuit was filed against Quicken Loans a few years back for excessive phone calls.

3) Home Equity Line of Credit (HELOC)

Pros: You can use the equity in your home as collateral for a HELOC. This is a revolving loan, and you can draw the money as you need it. It works like a credit card, and you will only be charged interest on the money you draw. A benefit is the flexible repayment terms. Many lenders allow you to either pay interest only or principal plus interest. Oftentimes, lenders will allow you to choose the terms.

Cons: The obvious con is that you need to own a home to qualify for a HELOC. You will also need a strong mortgage payment history and good credit score, typically 680 or above. And this is not the best option if you are looking for a lump-sum of money.

Now you can decide if a bank loan or alternative financing is better suited for your needs. Essentially, no matter which lender you choose, all will want to see a good credit score, proof of income, and a debt-to-income ratio of 36% or lower.