Money to loan
There are many types of needs associated with a person. In many cases, a person is not able to fulfill these requirements by his present financial sources and thus, goes for obtaining money from various sources. No doubt, financial institutions like banks, credit unions etc are the first choice of any person as these provided various types of loans and credit facilities to fulfill the financial requirements of a person. These institutions take money from different sources like savings and term deposits made by its customers for lending. The basic formula of making earnings of these financial institutions is to take money at lower interest rates and provide money at higher interest rates. Thus, financial institutions mostly get money from public at large to make different types of loans. Apart from financial institutions that provide personal loans, car loans, home loans etc, there is one more type of loan that fulfills the needs of a person.
This type of loan is the hard money loan. It is basically an asset based financing in which lender provides money against the quick sale value of the parcel of real estate belonging to the borrower. There are many sources from where lender makes arrangement for the required money to give as loan. One of most important aspects of these loans is that hard money loans are provided at very higher interest rates as compared to the residential and commercial property loans issued by the traditional sources. Sometimes, hard money loans are compared with bridge loans due to some common characteristics. These loans have proved to be very beneficial in cases like foreclosure and bankruptcy avoidance, when a person is not able to get the required money from other sources. Most of hard money loans are provided by private investors. These private investors do not go for a credit check for making loans and this is the reason why people suffering from bad credit find these loans very easy, though they are aware of high interest rates. Almost all the hard money lenders provide from 65-70% of the value of the property as loan. In many cases, where the borrowers are not able to repay the hard money loan taken by them, these lenders sell the real estate parcel to realize the loan amount and this becomes a major source of income for these lenders. This is the reason why a person would find the lender getting the first lien position only.
For any lender, cost of acquiring funds is very important. This is because the interest margin, defined as the different between the cost of acquiring and providing funds, has to be maintained to book profits at the desired levels. Many times, we hear that bank have increased their deposit rates. This is done so as to attract maximum number of customers. Soon after some time, we hear that such institutions have increased the lending rates too. This is done so as to maintain the interest margin and keep earning the existing profit levels.
Other aspects
There are many aspects regarding money to loan that need to be understood by a reader. Most of the lending institutions take money from different sources and provide them as loans. Let me ask a question. Suppose you have received $100 from any source, whish is returnable, and after receiving, you make a loan of $90. This means you are left with only $10. The loan is made for a period of, say, 6 months. If person that had lent you $100 demands his money after 2 months, can you deny him? No, you cannot. In such cases, you will have to make arrangement from different sources to return required money to the borrower.
This is exactly what is happening with lending institutions. Lending is as important as managing enough sum for meeting the demands. It is because these institutions receive money from the public as demand deposits and term deposits. Demand deposits include accounts such as savings account and current account. The holder of these accounts can make demand for his money any time and financial institutions are liable to meet that demand. If it cannot do that, it can be sued and proper compensation has to be made. Thus, financial regulators like central banks etc require a financial institution receiving sum from the public to maintain some amount with them, so that they can easily fulfill the demands of their customers. Even inter-bank borrowing at the corporate level is allowed so as to meet the criteria. This is generally called as CRR or Cash Reserve Ration and is determined by the financial regulators of a company. Thus, money that is used to make loan is basically the money received as deposits.
There are also many lenders that make loans for short term and for short amount. For example, there are many payday loan lenders in United States. These lenders make loan from $50 to $1500 and for a very short term. Generally, these payday loans are required to be repaid within 14 days. Since requirement is not large, these sources do not accept money from people to make loans and this is the reason why these are free to make their own policies. They do not have any obligation to pay and rather, they earn good amount by means of high interest rates. It has been observed that most of payday loan lenders in United States apply interest rate at 350-390%. Even some states have declared payday loans illegal due to the predatory practices adopted by the payday loan lenders.
Private money lenders are the people that have strong financial back up and for generations together; they have been providing money to people against security of some assets. Source of money of these private money lenders is interest rate earned by them and money obtained by selling the asset kept as security, when a person is not able to repay the loan in required manner. Interest rates applied by these lenders are generally very high. Different lenders have different sources of money that is lent as loan. The cost of acquiring this money is greatest factor in determining the cost of loan made further.
Other Articles
