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28
Aug

Lending 101

Contributed by National Bank of Arizona

“Money can’t buy happiness, but it will certainly get you a better class of memories.” – Ronald Regan

This statement resonates with everyone because most dreams, such as starting a business, buying a house or a car, going to school, getting married, seeing the world, or financing an adoption, turn into dollar signs before they turn into memories. This is where different lending products can come in handy. They can help you achieve your dreams and goals, without spending the time earning and saving money to pay for them.

Whether you personally need financing or your business does, there are a couple of things to be aware of.  First, there are a lot of different types of financing options and you need to sift through them to find which is right for you; and second, what lenders require when you are applying for a lending product.

Lending products come in different shapes and sizes, pending your needs as a borrower.  So, let’s break down these products into secured and unsecured lending. Unsecured lending is a loan that isn’t protected or “secured” from default by collateral, such as a car title or a house deed, and will depend heavily on the five C’s of credit: character, capacity, capital, collateral and conditions. Secured lending, as you can guess, is a loan that is backed by collateral. This type of loan generally comes with a lower interest rate, higher borrowing limits and a long term in which to repay the loan.

In terms of personal lending, here are some examples of unsecured and secured lending.

Unsecured Lending

  • Student Loans
  • Lines of Credit
  • Credit Cards

Secured Lending

  • Auto or Mortgage Loans
  • Home-Equity Loans
  • Home-Equity Lines of Credit

Wait, did you catch that too? A line of credit, what’s that?

Well, it is borrowed money like a loan. But, unlike a loan, a line of credit is flexible because a loan for $20,000 means that you have $20,000 right now. You will begin to accrue interest right now, and once you pay the loan back your transaction is finished. End of story. A line of credit, on the other hand, is having access to $20,000 to use right now, but you only borrow what you need.  For example, you use $5,000 of the $20,000, you then are only charged interest on the $5,000, not the $20,000 you’ve been approved for. Depending on your agreement, you will have to pay this money back in a lump sum or over time, but you are able to borrow that money again once it’s paid back.

A line of credit works much like a credit card; however, where a line of credit differs from a credit card is in the world of cash and interest.  If you need to get a cash advance from a credit card, then you need to be prepared to pay the high interest and fees associated with this type of transaction. To get a cash advance from a line of credit will be less expensive. Additionally, with a credit card, you aren’t charged interest until your balance carries over. Such as if you don’t pay your monthly bill in full, then there will be interest charged on the amount carried over. On a line of credit, interest accrues as soon as you access the funds.

Let’s not forget about business lending. Here are some examples of unsecured and secured loans.

 Unsecured Business Lending

  • Small Business Administration Loans (SBA Loans)
  • Term Loans
  • Lines of Credit
  • Business Credit Cards

Secured Business Lending

  • Equipment Financing
  • Asset Lending

Additionally, loans come in the form of variable or fixed rate, which refers to the type of interest you will be charged.  A fixed rate loan has an interest rate that doesn’t change over time, so you know what your payments will be each month. Keep in mind that the interest rate on this loan may be higher than what you would see for a variable rate because it is fixed.  Variable rate loans have interest rates that fluctuate over time according to a base rate used between banks called prime rate. This means that your payments can change monthly. Variable rates can save you money if you plan on paying off your loan early or having the loan for less than 10 years.

The key to finding the right lending product for you or your business is to look at:

  • What you need the loan for?
  • How much you need the loan for?
  • When would you like to pay it back?
  • Will you need to borrow again?
  • What do you have to back the loan?

The world of lending is extremely competitive. That being said, lenders don’t just hand out money, which brings us to the topic of what lenders look for when lending.

The five C’s of credit: character, capacity, capital, collateral and conditions.

Character refers to you as a borrower and your credit score; do you pay off your debt?

Capacity your ability to pay back your loan; do you have a job and how long have you been working with that company?

Capital is the amount of money you have in the bank; is your money consistent or did it come from one generous gift?

Collateral is your assets; what can the bank seize if you don’t repay your loan?

Conditions the state of the market; what could impact your ability to repay your loan?

Bottom line: to successfully navigate the world of lending you should speak with your banker to see all of your options. Do your research. You can never be too informed when it comes to borrowing money and don’t borrow more than you need, because it isn’t free money!

Have more questions? Join Eddie from National Bank of Arizona, plus a panel of local lending resources at the upcoming panel and workshop, Raising Capital: Lending. Wednesday, 9/27 9:00 AM – 12:00 PM, Gateway Community College. Registration Below.

Raising Capital – Funding Basics and Lender Insights

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