Why Banks Lend Money

credit history

Do not forget the fact that banks are businesses and make money through interests, fees, and other service charges. Banks will happily give consumers loans knowing that they profit when the borrower pays them back with interests. If the borrower can’t pay back the loans, this will affect the borrowers credit score and, on the worst case scenario acquire the borrowers’ assets, which is known as collateral.

In this case, the borrower’s credit history will be marked and credit score deeply affected. The borrower may probably never be able to borrow money from a bank for a long time.

People, especially young people, need the maturity to understand that banks are there to help what you purchase what you want in life, but if you miss a promised payment, they can hurt you and affect your future. All in all,  banks are very helpful financial services that provides us financial tools that help us achieve our goals. All you need to do is be responsible in paying them back. Period.

Nothing Personal… It’s All Business!

I’ve personally known people who lost their homes and cars because they couldn’t pay back their loans after losing their jobs or after having some kind of financial emergency. The banks don’t care about your personal life. The banks will do whatever they can to get back the money owed to them.

What if you Really Can’t Pay?

Good news is there are always options the bank will be willing to provide. The bad news is that these options can come with a catch. Refinancing, for example is not always easy to do or the right thing to do especially when facing financial difficulties. But if for example a borrower refinances to extend out their loans to make smaller payments, they are just paying more in interests as they stretch out their payments. The bank makes more money out of the convenience of extending the debtor’s time to repay.

It’s a beautiful money-making system ain’t it? That is if you know how to use money.

This is why we must consider our options very carefully. We must properly analyze the pros and cons of the financial decisions we make in our life.

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Although some people may see banks as evil institutions, I see banks as a very important service/tool to grow financially- that is if you know what you are doing. Therefore educate yourself financially and read your contracts carefully. If in doubt, always ask questions.

Banks Are Not Evil Lenders

As customers of banks, banks are a convenient financial service for us. If we ever need money to buy a house, a car, or even pay for tuition, banks are there for us. For some, it seems that due to the lack of financial knowledge, the banks end up owning their customers, because the customers failed to do their part.

Banks are a business and in every business (at least in the capitalist system), businesses need to make money. It is a two way street, it’s just business. Banks are a very resourceful financial service if you are simply responsible. Period.

What Banks Look For

When someone is about to lend you money, the first thing they consider is your ability to actually pay back the money. Therefore, just being a wealthy individual doesn’t automatically qualify you for a loan. What helps determine banks that you can be a trustworthy borrower is your credit history.

The Importance of Credit History

Credit history will show all the things you’ve done with borrowed money. Your credit history is important because the banks use your credit history to determine what kind of borrower you will be.

Credit history will show how much money you borrowed and whether you actually paid your debts back on time.

Your credit history can also show how many times you missed the payment deadline, what you used the borrowed money for and etc. So yes… try not to mess up your credit history.

Most people who do not have any credit history are usually those who always pay with cash. When you pay with cash, banks will not have a credit record for your. It doesn’t matter if you are rich are poor. When you pay with cash, you lose that opportunity to build credit history. This is why it is wise to get a credit card as soon as you can and use them responsibly to build a solid credit history.

Without credit history, your chances of borrowing money could be close to zero so this is why having credit history is important.

A Stable Lifestyle Matters?

Banks can consider your stability- a stable lifestyle. What this means is they look at  how long you can hold down a job. The longer you stay at one job the more you will appear stable. Instability on the other hand is when you change jobs every so often banks start to question if you are stable enough to hold a job. Being unable to hold down a job may decrease your ability to show you can pay off any borrowed money.

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But then again, others can argue that if an individual stays at one job because he/she is not ambitious enough to find a better job because of incompetence, does that give that kind of person a better chance at securing a loan?

This is why you should concentrate on building a solid credit history especially when planning to borrow money. This brings us to “the point system”.

The Point System

Call it prejudice or whatever you like but I can assure you that banks use some kind of point system to classify and determine whether or not you can be a good customer/borrower. Check this post for more on Bank Points.

Ever wonder why application forms have questions such as “Are you single/married?”, “number of children?”, “any dependents?”, “own any property?”, and etc. If you say yes to all of these, you are not much of a flight risk. If you say no to all of these, you might have a hard time securing a loan because you can just runaway whenever you like.

Additionally, if you state that you have a house, that gives them collateral for something they can take if things go awry. But at the same time you are able to secure a loan. But again, the system is never perfect. I have a relative who has 5 kids, a cheating wife who overspends, an unstable job, and a house that is worth crap and for some odd reason can get a loan. Compare that with my brother who I wrote about in another post here who has a stable good paying job, has no outstanding debts, but has no kids and no house. It’s also worth to mention that he didn’t have that much of a credit history to begin with because he paid in cash/debit when he first got a job. We can see why he has more difficulty securing a loan than my relative.

Like life, banks and system aren’t perfect. But they do work… if you know what you are doing!

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