The number of credit products has increased over the last 20 years as an economic necessity and a demanding public that needs specialization to solve financial circumstances. From personal loans, educational loans, business loans and even municipal loans.
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The companies involved in creating the various financial products include actuaries, risk management experts, “information and it engineers,” and Wall Street. It was necessary to create, improve or break down credit services and products for better or for worse in order to keep money flowing in a diverse market that needed funds to address niche demographics.
Personal loans
Signature loan – A signature loan is exactly as it sounds. You apply for a loan and give a signature on a promissory note to repay the loan in a certain time. This period is called the “loan term” and can range from six months to five years.
Signature loans usually require good credit and the criteria for loan approval are mostly based on the borrower’s loan and, to a lesser extent, on assets. Not all signature loans have the same parameters for qualifications. Some loans may require the borrower to account for assets even with good credit to show the lending institution for underwriting purposes.
The institution may or may not grant a lien on the assets, but still wants to have documentation showing that the borrower actually owns financial or physical assets. Signature loans usually have lower interest rates than other types of consumer loans such as payday loans, credit card advances, title loans, and some car loans.
More on that later. Who are the lenders for signature loans? They range from large subsidiaries of car manufacturers to banks, savings banks, financial companies and credit companies.
Credit card loans – Credit card loans or cash advances from credit cards are another form of personal loans. These quick loans are more accessible to the general public and do not require a credit check. Getting the original card most likely required a credit check, or at least the secured credit card identification process.
Credit card loans or advances are usually associated with higher interest rates and also other fees for access to cash. Various facilities allow access to the credit card advances of bank employees, check cash registers and ATMs(ATMs).
Fees vary depending on the source used to access the funds. To reduce the fees for cash advances, some use check-cashing facilities to have the card charged and in turn get cash back because the fees of ATMs do not have to be incurred, as cards are charged a fee twice.
First by the ATM company and also their bank. Interest rates on credit card loans or advances are usually higher than on signature loans. There are some states that have usurious laws that have lower interest rates on credit cards. The loan or advance on a credit card is not a “term loan” as with most signature loans.
It is more or less a line of credit that the borrower has access to when they need it, as long as funds are available on the credit card. Interest on consumer loans is no longer tax-deductible as in previous years. They are designed for short-term credit needs, but many have used their credit cards as a regular source of money during economically strained times or between paychecks.
Wedding Loans – A relatively new form of loan to create a niche for the lending industry and meet the needs of the rising cost of weddings is the wedding loan. Due to the cost of weddings, which can be in the six-figure range, sometimes a personal loan or even a business loan from the families involved is required to ensure a proper wedding.
Wedding loans can be secured (using assets for collateral) or unsecured (signature loans) to raise funds for the ever-growing needto pay for the escalating wedding costs and all the different services and products that a successful marriage ceremony would need. The credit criteria and term may vary depending on the amount required and the financial status of the people involved.
Payday or cash advances is a fast-growing market because it usually requires the least credit criteria used for loan approvals. One can have a bad credit for a quick and instant loan. Just having proof of income, proof of identity, and a checking account is all that’s necessary to secure money.
Even today, many current accounts have no checks, you can still get a cash advance by asking your bank to present a one-time check to give to the credit agency. Many payday loan companies and businesses can do ca.oval without faxing documents as they use other means to prove income. Although payday loans come with very high annualized interest rates, they are sometimes the only source of emergency cash advances for those in need.
Automotive, motorcycle, motorhome (recreational vehicle) and Boat – These personal consumer loans are usually not only signature loans, but also asset-based loans. In other words, a financial lien is placed against the asset to secure a loan to buy or refinance the car, the boat, et al.
These consumer loans may sometimes require a down payment of five to twenty-five percent to ensure enjoyment and use of the property. Since they are not funds that are already available like credit cards, they have a “loan term” of one to six years, depending on the consumer’s choices, marketplace, and credit status.
Interest rates can range from very low, usually offered by manufacturers of cars, motorcycles, RVs (recreational vehicles), and boats, to very high if the borrower uses a credit card, financial company, or a “buy here – pay here” lender — or the car dealer who finances the purchase of the car by giving the borrower a term of months and years, to pay off the balance of the loan.
Business loans
SBA (Small Business Administration) loans are loans given to small businesses that cannot qualify for a loan from a financial institution for various reasons because there is no business history, lack of collateral to “secure” the loan, or insufficient credit history.
The SBA is not a direct lender, but acts as an underwriter on behalf of the bank financing the loan for the business unit. If the borrower defaults on the loan, the SBA pays the bank a percentage of the balance to assume the financial risk to lend the funds to the company. There are several types of SBA loans that are not covered in this article, but a future article will be explained in more detail.
Traditional business loans are loans that are either unsecured, meaning that no asset is used to approve the loan, or secured and referred to as “asset-based loans,” where assets from inventory, equipment, receivables, or real estate are used for subscription for loan approval.
Traditional business loans are given to companies that have excellent banking relationships, an established business credit history with trading lines with other companies they do business with, and a good reputation with various credit bureaus such as Dun & Bradstreet.
There are short-term loans with only interest payments with the balance due at the end of the loan, which is usually referred to as a “balloon loan.” There are also longer-term loans that are fully amortized (principal and interest in each payment) that are paid over one to five years or more.
Equipment leasing is a financial instrument that is not technically a loan. That is, based on tax implications and who owns the equipment – leasing is just that – leasing an asset owned by another company. Leasing contracts usually come from large companies or a bank. The lease term can vary from one to five years or more, and there are usually tax advancesparts for the business unit when leasing new or used equipment.
Equipment Sale Leaseback is a transaction to use equipment already owned by the company or municipal entity to secure funds for the current need for operations. The term can vary from one to five years and the amount of funds can vary depending on the credit history and a percentage of the market value of the equipment.
The company then usually rents the equipment back in a monthly payment. The company or tenant usually has different options for what they want to do with the equipment at the end of the term. You can transfer the lease transaction to newer, more up-to-date equipment or software.
You can buy the equipment for a dollar or ten percent of the market value of the equipment. More and more companies are leasing today instead of paying cash or using bank lines or loans.
Merchant Cash Advance is used by companies that need quick money and can’t qualify or don’t want to go through the process to get bank approval for needed funds. A Merchant Cash Advance is also not a credit product, but the sale of assets or credit card receipts at a discount.
In other words, the Merchant Cash Advance company buys the credit card receipts and then usually charges a fee each time the company “settles,” settles, or closes the day’s or week’s sales until the early funds are paid out. There is no term with merchant cash advances because it is not a loan, so there is no set payment amount or period. The withdrawal of the early funds depends on the credit and debit card transactions of the day or week.
Factoring Accounts Receivable Invoices allows a business unit that usually has to wait 30 days or more to get paid by other companies or government agencies. Again, factoring is technically not a loan, but a sale of invoices with a discount for cash now.
In a typical transaction, the company turns to a factoring company and the company primarily reviews the credit of the other business or government entity with which the company does business. On this basis, as long as the company’s client is a solvent company or government agency, the invoices are purchased and the funds are usually issued to the company within three days of the due diligence of the company with which they do business. In other words, the funds are spent after a credit check and processing of the other company.
The dollar amount that is advanced can vary from fifty percent of the bill to eighty or ninety percent, depending on various factors such as the size of the bill to the credit criteria of the other company or government agency, whether it’s a city, county, state, or federal agency.
Medical factoring is a financial transaction that benefits medical institutions such as hospitals, clinics, and various healthcare professionals who have to wait to receive funds for services to patients. Like factoring and merchant cash advances medical factoring, selling assets in this case is invoices for cash now.
In many cases, the healthcare industry receives payments from third-party companies such as insurance companies, Medicaid, and Medicare, as well as from government agencies that provide funds for those who need medical procedures.
The medical institution or the professional, in turn, sells the invoice(s) on a continuous basis or once against cash payment. As soon as there is an interest in selling the receivables, then a factor enters the analysis of the settlement so that funds can be advanced. This process can vary in length, but is usually shorter than the process of bank financing.
Contract and order financing allows companies to bid on large projects for government agencies, hospitals, universities, prison systems, and municipalities, or even sell to larger companies, even if the company does not have the credit or banking authorization or the funds to serve or fulfill a large contract order.
Similar to factoring, which works hand in hand with purchase order funding, it is not a loan, but an equalPurive transaction in which funds are brought forward on the basis of the credit of the government agency or a larger company and the size of the contract.
The funds that are advanced are intended for the cost of completing the order of products or providing services. The profit that is made is therefore not preferred, but the costs of raw and finished material, transport, production, labor, know-how and all other costs associated with the fulfillment of the contract.
Once the contract is concluded or as soon as an invoice is ready to be sent to the client, a factoring company, sometimes owned by the same company, buys the invoice with a discount, and the funds that would normally be advanced to the company are usually used to settle the advanced amount for the material and other services, which were necessary for the execution of the order.
Contract and Purchase Order Funding usually requires large transaction amounts as opposed to factoring, which can be used for invoices as low as a hundred dollars. With the use of contract and purchase order funding, companies that have been excluded from the process of bidding on large contracts can become players in multi-million dollar deals.
Commercial Real Estate Sale Leasebacks are similar to the Equipment Sale Leasebacks presented in this article. Instead of using their own devices to secure cash when bank loans are not desired or unavailable, the commercial properties are now used to access funds.
This can range from office buildings, medical buildings, retail stores, industrial buildings and manufacturing to large utility facilities. This releases cash that is “locked away” in real estate. Many companies find that the business they operate in, whether in retail, manufacturing, or any other area, that holding commercial real estate is not currently in their best financial interest.
They prefer to use funds for their industry. So, a retailer who sells retail goods decides to focus on retail and rent out the space because when these properties are included in a variety of calculations, they don’t fit their financial goals in this day and age.
Yes, commercial property ownership is an asset and can be used as collateral for a loan, but can also be considered a fixed, non-performing entity that does not meet the needs of the company, organization, group, or individual who owns the building. Commercial real estate sale leasebacks are another form of access to funds and has increased over the years.
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Wendy is now a financial analyst and writer. Wendy has been writing about finance and personal finance since she was a sophomore in high school. She has also been writing for several online publications and published in The Huffington Post, and Forbes Woman.
Wendy is a credentialed financial analyst and has experience working with financial institutions and businesses. Wendy is also a certified financial planner. When Wendy's not writing, she enjoys tending to her many plants, watching TV, and spending time with her family.
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