People are considered to be financially illiterate when they lack the education and understanding of fiscal matters and the existing relationship between the financial decisions they make and their future. Financially illiterate people are characterized by the inability to manage personal and commercial financial matters efficiently. Such matters entail insurance, real estate, investment, retirement, and taxes. Such person’s risk making grievous errors in judgment, especially in taking loans, which could lead to destruction of personal fiscal health, bankruptcy of businesses and loss of property. We shall examine why alternative loans can be very dangerous for the financially illiterate people in businesses, big or small.
Alternative loan solutions simply refer to the monetary relief services that are offered by institutions and persons outside the conventional credit system. The point of alternative lending is to offer higher loan amounts without very rigid qualification and repayment terms. Most platforms do not even consider a borrower’s credit history or credit score. However, they retain the right to effect such scores positively or negatively. Given the relative ease in which alternative lenders give loans and award high amounts of the same, understanding the implications of such loans can be very crucial for any business. These loans may be good for an enterprise’s cash flows and operations but could prove disastrous for profitability and lien status.
With recent financial laws being passed by numerous states and the federal government interpreting laws to weigh in on the controversial alternative loans industry, many people are trying to grasp the nuance in title loans, payday loans, and registration loans. Small intricate details vary, and the variations pose far-reaching financial and legal implications for lenders and borrowers. In some states, payday loans have been totally banned while the federal government has generally questioned the legality of way payday loans operate.
The registration loan seeks to offer the financial gains that lenders and borrowers used to enjoy from payday loans before states like Arizona banned them. Loan applicants seek to get fiscal relief to solve issues that a month’s salary can handle, but the issues cannot wait until payday. Such issues may include:
- Making emergency medical arrangements that fall outside insurance coverage
- Beating examination fee deadlines
- Paying police ponds, making bail and settling fines to avoid jail time
- Grabbing lucrative but fleeting investment opportunities
Though such loans were previously offered by simply making agreements with lenders that the month’s’ pay would be diverted to them to deduct their principal amounts and accrued interests and fees, registration loans require that loan applicants offer their duly registered vehicles as security. The borrowers surrender the registration to their vehicles to the lenders but retain their titles. One cannot obtain loans for vehicles not registered under their names.
The differences between title loans and registration loans are significant. Unlike title loans, registration loans accept significantly old cars that have covered certain amounts of mileage that title loan lenders cannot accept. However, the loans offered on vehicle registration, as opposed to vehicle titles, are much lower in quantity. The lender only offers about ten percent of the resale value of such vehicles. The point of such loans is not for the lenders to recover their money through repossessing the assets on registration but to take the borrower’s payday cash. Therefore, the loans are supposed to have much shorter lifespans compared to title loans. The best way to regard registration loans maybe as the offspring of payday loans and title loans: with much of the payday genotype traits weighing in on the child.
Advantages of Alternative Lending
Other alternative lending schemes include Buy Here, Pay Here Auto Loans, Check Cashing, Open Loop Prepaid Cards, Rent-To-Own Transactions, Refund Anticipation Loans, Peer-Peer Loans. They all have similar traits such as online platforms, cost efficiency since they are not required to hold reserves, flexible loan qualification requirements, diminished value of collateral requirements, automated processes and sometimes, transmission of debtor information to that parties who provide financial transaction services like PayPal and Amazon.
Many small businesses, especially startups, seldom enjoy successful loan applications from traditional banks despite meeting several very demanding requirements. The lack of a credit history severely disfranchises many institutions and the long application and approval periods further dampen the situation. Alternative lenders often provide instant loans making it possible for small businesses to promptly make use of the credit capital, stabilizing their cash flows and building a sustainable scheme of operations.
Financially illiterate people do not understand the implications of using lien as collateral for loans. They do not sufficiently appreciate high-interest rates for what they are. They fail to understand the value of having their details protected and circulated in a regulated fashion. Such people fail to understand that alternative lenders keep scores and could adversely affect their credit history and put their credibility to question. They fail to understand how diminishing hidden charges can be for their cash flows and how lost liens on business could mean loss of large profits for a lifetime just because of a one-time financial aid. Though alternative loans could prove utterly useful in growing small businesses and assist individuals to maneuver had economic times, they have an equally large potential of stifling and smothering borrowers. The secret is always to understand what you are getting yourself and your business into; to consider the possibility, and impossibility, of making such loans work for you and not against you.
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