Although taking a loan is not always the best first option, financing can be the best way for many people to buy a car, a house or any other major purchase without sacrificing the peace of mind of having their savings in the banks. In some cases, it is even the only way for people who don’t have sufficient savings.
Many people, however, don’t feel like they have the luxury of taking a loan. This could be for being self-employed, have a poor credit history with banks or being out of work and living on savings or retirement funds. Whatever the reason, they don’t present the typical borrower for whom a bank will roll out the red carpet.
Working with unconventional lenders
- Make sure they are legit
- Watch out for unfavourable terms
- Shop around for the best conditions
- Ensure you can handle the worst-case scenario
These borrowers are not always without options. All they need to do is to look beyond the big banks and put some legwork in the process. If they look carefully they can find lenders that specialised in loans that don’t fit the conventional framework. These could be private lenders or smaller banks that are willing to go the extra with a borrower whose situation isn’t ideal just to gain a new loyal customer. Either way, you must take many precautions before you step into any loan transaction.
Know the lender
Do a throughout research on the lender. An address and a phone number listed in the paper or online are insufficient. Check out of the lender has any sort of government licensing. If you’re dealing with an individual, make sure that you get enough background information on this person’s business practices, find former borrowers who can vouch for the business, or at least investigate if this person has been in trouble in the past for fraud or any similar issues.
Knowing your lender also means looking closely for any red flags to make sure that you don’t willingly walk into a fraud trap. For example, a potential individual lender who doesn’t show up for a meeting and claims an emergency typically warrants further investigation. Similarly, if a lender asks you to wire transfer even a simple fee in advance, this could be a scammer. In short, be alert for any sign that your lender isn’t legitimate. Know the deal
Now that you’ve a legitimate lender lined up, you need to learn more about the deal. Just like you’d do with a bank, ask questions about rates, penalties, etc. If your situation isn’t straight forward, you may expect some unfavourable terms, but still you must be sure that they can be manageable in case of default or similar issues.
You also must make sure that the documentation is all clear and complete. If you’re not dealing with a recognised entity or bank, go carefully through all the documents before you sign the dotted line. If you’re not sure what counts as a standard practice and what doesn’t, consult an attorney.
Your lender will probably take every precaution to make sure that the money is safe and can be repaid. Your role is to ensure that you won’t have to go bankrupt or go to jail if you have to default on the loan. The good news is that smaller lenders are more likely to be open to negotiating their policies. So give it a try before your commit.
Shop around
One great way to know what’s standard and what’s not, is to shop the loan rates and terms around. If you find several lenders that are willing to work with you despite your special circumstance, ask for offers and see the terms. Compare these offers and terms to see where they conflict and overlap. You can easily find which ones stand out as fair. Still this must be further explored in terms of how you will handle it.
Shopping around also will give you an idea of the available options, and probably an insight into the reputation of different lenders. The more you get to know upfront, the better chance you will have in making sound borrowing decisions.
The writer, a former Gulf News Business Features Editor, is a Seattle-based editor.
