Did you know most Private Institutions (private lenders) offering Debt Consolidation Loans or Home Equity Loans don’t have your best interests at heart? If real banks have declined you, I advise you to heed their warning.
Pay attention to what this “rejection” means because believe it or not, it could be a silver lining that ultimately gets you back on track! Here are the facts about Debt Consolidation Lenders and the Debt and Home Equity Loans they offer. Making the best decision is about being informed!
How to outsmart (the very smart) Private Lenders who offer Debt Consolidation Loans
The best way to outsmart the allure of Private Lenders is to know about:
- The Bank Act
- How real Banks operate
- What the Bank knows about your debt that you don’t know
- What a Private Lender is
- The Private Lender Money Motive
- Why Private Lenders are Risky for You
1. About the Bank Act
First things first!
In Canada our Banks are governed through the Bank Act (1871). This Bank Act is reviewed and updated on a regular basis as per the laws of Canada. The Bank Act governs how our Banks in Canada are allowed to operate. They have laws and regulations they must follow.
As a result, Banks are required to have a high degree of transparency when dealing with the public. I’m not suggesting they are angels, and I am confident I could write a fairly massive article on problems with Banks. However, for the average consumer, with average money needs, our Banks have a high degree of accountability, which means dealing with them offers you low risk alternatives.
There is no such Act governing Private Lenders. They are not regulated stringently or diligently, and, as a result, they aren’t transparent. Banks have hoops they must jump through in order to operate. Private Lenders have no such hoops. Therefore, private Lenders offer a high level of risk for consumers because much of what they do is either under-regulated or not regulated at all.
If you decide to deal with a Private Lender for a Consolidation and/or Home Equity Loan, be aware that they are not really regulated, which could be exposing you to risks you don’t fully understand until it is too late.
2. How Real Banks Operate
The key to avoiding Private Lenders is to understand how a real Bank operates in relation to your application for a Consolidation and/or Home Equity Loan. This will put your situation into perspective and help you make empowered and informed decisions because you have a bit of savvy about how the financial world operates.
Private Lenders and Banks are two very different entities.
We deal with banks everyday, and, as a result, they are part of our money community. However, your friendly Bank isn’t so friendly when it comes to lending money. In fact, they can get very picky with whom they provide credit to because want to make sure the money they lend is paid back!
Therefore, for a Bank, making money is about offering products that provide a return but with a significantly reduced risk. So, when your Bank declines you for a Consolidation Loan it is because they have determined you are too risky. Don’t be discouraged. This is very important information because it helps you develop a realistic picture about the real level of risk in your debt troubles.
3. What the Bank Knows about Your Debt that You Don’t Know
As mentioned earlier, Banks are about reducing their risk because they want their money back. This is how they keep their money and make more money. Therefore, as part of their decision making model, Banks run your numbers to determine level of risk. Calculating your debt-to-income ratio usually does this.
Essentially, the debt-to-income ratio is an easy calculation showing how much of your income is dedicated to a debt payment (it also includes mortgage and car payments). If your debt-to-income ratio is too high the Bank deems you a credit risk because you don’t have enough money, on a monthly basis, to make ends adequately meet. The Bank believes you are a high risk for default.
Sometimes, a Bank can be convinced to provide a Consolidation Loan if you are willing to offer up your home as collateral. This only works if you have enough equity in your home to pay them back.
However, if you have no equity in your home they will probably decline you. This is because the Bank is always focused on ways to get their money back if you don’t pay. If you have a little bit of equity, or no equity in your home, this means the Bank gets zero dollars when your house is sold. Therefore, from a Bank’s perspective, accepting a home with no equity for the purposes of collateral is pointless.
4. What is a Private Lender?
Inside the financial world there is a large range of Private Lenders, but for the purposes of this article I will discuss those associated with Consolidation and/or Home Equity Loans. According to the Cambridge Dictionary, a Private Lender is “a person or organization that lends money to people who are having difficulty getting loans, usually at a higher rate than a bank would charge.”
Private Lenders exist because there is a market for their product since Banks don’t lend to everyone.
What is their product? High-risk money.
What are they selling? “Debt help.”
5. The Private Lender Money Motive
Banks and Private Lenders share one thing in common – the goal of making money. Banks seek to make money by reducing risk. Private Lenders seek to make money by exploiting high-risk financial situations. Although the Private Lender sees an opportunity by lending to people deemed high-risk, this doesn’t mean the Private Lender is throwing caution out the door and being risky.
The Money Motive of Private Lenders is to lend out money to high-risk people at high interest rates. However, and most importantly, there is a very big secret that they aren’t sharing!
They have ways to significantly reduce their risk, which can equal “having their cake and eating it to!”
But, I will get to that a little later. First we need to check out the interest rates they charge and what this really means about how much money they are making from your debt crisis. A debt crisis, from my point of view, that they haven’t solved but have possibly made worse.
It is fairly commonplace for Private Lenders to charge 25% on loans. I have even seen interest rates as high as 30.99%. What does these mean to your pocket book? A $5000 loan, structured over 5 years means that you pay them back almost $10,000!!! Imagine seeking a home equity loan for $30,000.
Do I really need to do the math for you?
High interest rates are charged for a few reasons:
- You are paying for their other clients who have defaulted (remember, they provide high risk loans to high risk people…people who default. Therefore, they have to reduce their risk by charging really high interest rates)
- They are attempting to get back as much money from you as quickly as possible
- They are a company with the main motive of making money and lots of it
6. Why Private Lenders are Risky for You
My work with all clients is to increase options. Increasing options is about reducing debt significantly to free up money. It has been my experience that Private Lenders reduce options even more, whilst taking an even larger bit out of your monthly income due to their massive interest rates.
Private Lenders often seek to secure the loan. This provides them with very powerful and creative leverage. This leverage can put you under their thumb and prevent you from using more aggressive debt reduction strategies down the road.
For example, if, in the future, you attempt to go through a debt settlement option, your Private Lender Loan will not be included if it is secured. You are probably stuck paying it back in full. Therefore, your goal of getting out of debt and rebuilding your life has been significantly altered and the timeline significantly increased.
Private Lenders employ savvy techniques to significantly reduce risk and this is where they start thinking like banks! Below are top three ways they will secure your loan:
- They may require a co-signer
- They may require securing your house (collateral)
- They secure liens on other assets like your car and/or furniture
The Problem of a Co-Signer
People usually don’t understand the significance of a co-signer and often believe it is a bureaucratic rubber stamp. I assure it is not! Basically, a co-signer is the same as collateral, except in this situation, the collateral is a person. If you don’t pay the debt, the Private Lender will go after the co-signer.
A co-signer is 100% responsible for the debt! Therefore, the Private Lender can use this as a threat that provides a great deal of motivation to continue making the payments.
The Problem of Using Your House as Security
Banks require a large amount of equity in your home before they will give you a Home Equity and/or Consolidation Loan. Therefore, why would a Private Lender agree to accept your home as security when you have no equity in it?
Firstly, it forces you to continue to pay their really high interest rate loan, at all costs. After all, you are probably afraid of losing your home and this is what is under threat. Secondly, should you decide to deal with your debt by going through a debt settlement process, you are unable to include them in negotiations because their loan is in the “secured” credit category. You must pay them back in full!
The Problem of Lien on Your Furniture
The threat of having your furniture seized can be a strong motivator to continue paying the high interest rate loan. However, for me, this is much easier to deal with in a debt settlement situation than a secured house or co-signer.
Summing it all up!
It has been my experience that most people in debt want to be able to pay creditors off in full and this is probably the main reason most people try and get a Consolidation Loan or a Home Equity Loan. If you are able to get a loan from a real Bank this is probably an indication your debt is manageable. However, if your loan application is declined by a Bank, I encourage you to recognize this as a red flag. Perhaps your debt is out of control and the wise course of action may be something more aggressive.
And by the way, it is aggressive debt reduction strategies that I specialize in.
It is my opinion, based on extensive experience as a Financial Debt Consultant, that seeking money from a Private Lender, because a bank has declined you, is a risky proposition. It can negatively impact your debt reduction options in the future. If your debt solution doesn’t free up a significant amount of money, every month, it is not a very good option because it doesn’t solve your debt problem.
Looking for an aggressive debt reduction strategy?