Banks have traditionally been the go-to lender every time an individual needed to borrow money. They are heavily regulated by the government and are required to offer complete transparency when it comes to the financing products and services that they provide the consumer with. In other words, banks can always be trusted to be fair, or at least to make the loan agreements as clear as possible.
Most banks have been around for many years, enabling them to build a reputation that lets potential borrowers know that they have nothing to worry about. In terms of financing, they are considered traditional lenders, in the sense that all banks have a similar functional structure and most loan agreements will be largely the same between them.
This having been said, banks are not the only lenders on the market and some of these can offer unique types of deals or advantages. So, who is it better to get a loan from, banks or other types of lenders? This largely depends on the borrower’s needs and financial situation.
Types of Lenders
Before moving onward, we must determine what types of credit providers there are.
- Banks – These need no introduction. They are financial institutions that offer various forms of financing to individuals and organizations alike;
- Credit Unions – Credit unions are financial institutions that usually revolve around communities. They offer several types of loans, however, unlike banks, the profit that they make is invested into the community. These unions tend to offer lower interest rates than banks, however, their services are locked behind memberships. Only those who are part of the community can access the products of the credit union;
- Payday Loan Companies – These companies operate both online and offline and usually have standard interest rates that they attach to their microloans, such as £20 for a £200 loan that has a duration of one month. Despite their high interest rates, payday loan companies are popular because they have lower requirements in terms of what credit rating the borrowers have;
- P2P Platforms – Only found online, the services of P2P platforms offer a great alternative to banks. The platforms only put borrowers and lenders in contact with each other and ensure that all parties involved follow the terms and conditions that they have agreed to. Anyone can become a lender by creating a user account and specifying that you want to give out loans. P2P platforms rarely perform credit score checks, making them great for individuals that would get a poor credit rating at the bank;
Banks Offer More Stability
Each of the four types of lenders above is useful in their own right, however, banks remain the safest. This is mainly because they are directly regulated by the government and offer complete transparency when it comes to the terms and conditions of a loan.
Furthermore, the interest rates that they offer are less likely to fluctuate as the national economic situation changes. It is also important to mention that they are the safest place to get a secured loan from. Even if a borrower is unable to return the money on time, the bank will first work with him to find a mutually-agreeable solution, before moving to take possession of the collateral.
Other Lenders May Have Lower Requirements
The other lenders presented above tend to have considerably higher interest rates and some do not offer complete transparency concerning the loan agreement. However, unlike banks, most of these companies and services do not perform credit score checks or have lower credit rating standards. These low requirements make them a better choice for individuals with poor credit scores or who have had a bad relationship with the bank.