There are lots of ways to borrow money in America. From mortgages to credit cards, we seem to have access to lenders capable of meeting virtually every need. It is probably safe to say that the average consumer isn’t fully aware of all the possibilities. Are you?
Most of us are familiar with the basics:
- Mortgage lenders
- Retail banks and credit unions
- Credit card companies
- Payday lenders, title lenders, etc.
In each of these four cases, lenders work directly with consumers. They finance homes, new cars, and consumer goods. They can even help meet short-term debt obligations. But they do not represent every available option. To drive home the point, how much do you know about the following five types of lenders?
Commercial Banks
The neighborhood bank at which you conduct weekly business is a retail bank. Retail banks meet consumer needs. They offer checking and savings accounts. They offer auto loans, mortgages, and certain investments – like IRA accounts and CDs.
Commercial banks do not meet retail needs. Instead, they meet the needs of businesses, government entities, etc. They deal in exceptionally large sums of money and are capable of facilitating transactions worldwide. They represent the big money in America.
Federal Reserve Banks
Federal Reserve banks are commercial banking institutions that serve but one purpose: lending to commercial and retail banks. As strange as it sounds, commercial and retail banks regularly tie up their assets in a variety of investments designed to earn profits. So when they need money themselves, they borrow from the Fed.
The Fed also establishes baseline interest rates. It controls the national money supply, thereby allowing the government to influence the economy by manipulating both factors.
Private Lenders
Private lenders are an interesting breed. They can be individuals who choose to loan out their money for whatever reason. They can be groups of investors who pool their money for the purposes of lending. They can even be licensed financial service companies that write mortgages or finance expensive consumer purchases.
The finance company that helped you purchase your new furniture is considered a private lender. But guess what? That family member who loaned you the money you needed for the down payment on your house is technically a private lender, too.
Hard Money Lenders
Hard money lenders are a subcategory of private lenders. They make loans based on borrower assets. As a hard money lender in Utah, Salt Lake City’s Actium Partners specializes in hard money loans for real estate investors. Investor properties are the assets used to secure Actium loans.
Peer-to-Peer Lenders
Digital technology brought us peer-to-peer lending about a decade ago. This particular model isn’t as popular as it once was, but it’s still out there. Peer-to-peer lenders are essentially private lenders who utilize the internet as their main channel for doing business.
Peer-to-peer firms consist of groups of investors who pool their money. Loan applications are made online. They may be approved strictly on the strength of the borrower’s assets, or lenders may go the more traditional route of investigating credit history, debt ratio, etc. If a loan is approved, it is likely to be funded electronically.
Borrowing money in the modern era does not necessarily mean going to the bank or credit union. It doesn’t necessarily mean applying for credit cards. There are lots of options out there. The five types of lenders described in this post prove as much. Perhaps some of the options we have today will not be around 50 years from now. Who knows? Everything is subject to change.