Loan Companies
When the concept of lending and loans was officially adopted by institutions banks were the first to start lending as a profit earning business. At that time there was no concept of any other institution lending money to borrowers. Other sources of loans were from family and friends or advances from employers etc. Once the industry started developing more institutions started lending to borrowers. Rules and regulations to govern the lending process and pay backs was devised. Banks had the advantage that they had huge reserves of money and lending money was not an issue for them. They could even lend huge sums of money to interested borrowers like businesses etc. Loan companies have always charged interest rates higher then those charged by banks. Initially people did not trust loan companies for taking up loans as they thought these companies were cheating them with high interest rates. The loan company charged high interest but they were not bound by as many rules as a bank was and hence their loans were usually available at easier terms. Banks had stringent policies of whom they could lend to and who did not fulfill their criteria and most of the people were rejected loans by the banks. At that time banks were very sad places in the term that they were highly regulated and the environment was not customer friendly. A person dealing with banks was under stress of making the right decision and the environment offered no comfort to take time, think and process the information. Banks also did not indulge into marketing their products and services. A finance company on the other hand although charged more than banks they also had relaxed rules of lending and most people coming to the loan company got a loan approved.
The loans company had money to earn and they were not concerned with the risk involved as badly as the banks were. Law has always protected the lenders and they are confident that they will get their money back in one way or the other. The loans companies engaged in aggressive marketing of their products and that was why people knew who they could turn to in case they were rejected a loan by the bank. These companies had loan officers that were paid on the amount of business that they earned for the financing company. On the other hand the bank employees had set monthly pays. Now the loan officers working for these companies had an incentive to give out loans to more people as they got commission on each person that was given a loan. That was why these agents or loan officers provided the borrower with special treatment and friendly advices that made him felt as if he was now in safe hands and the decision he as making was right. That was how these financing companies got business even with their high interest rates.
After banks relaxed their lending policies and started loaning out money to more people along with aggressive marketing campaigns and gimmicks that attracted more customers and brought them back to the banks most people actually turned to banks as they were offering lower rates of interest and had more reliability as compared to most loan companies. At these times the only people that were rejected loans by the banks were either those who did not have any collateral to offer or those who had bad credit history. The financial companies then started catering to these customers and in such cases their high rates were also justified. The more risk associated to lending money to a borrower the higher would be the interest rate offered to him. These companies were already charging high interest rates and they charged even more to people with bad credit. These people had no other option but to accept the high priced loans. People who did not have enough awareness about their credit rating and how loans work were scammed to earn undue profits from them. These people were charged the same interest that a person with bad credit was charged even if he had a good credit rating. The loan officers of a personal loan company would never advice such a person to seek a loan from some place else and get a lower rate because the loan officers were paid commission on the rate that they charged to each borrower. A series of different scams associated with the finance companies started. Anyone who did not have enough awareness would get scammed into paying a lot more then he should be paying and the debt cycle would be extended to several years.
One type of loan that has been banned in several states was the payday loan. Several payday loan companies offered small loans to people and charged a minimal fee on it. Critics of payday loans say that the entire concept of a payday loan is a scam. So much so that a person is in a better position when he is desperate for money then the position he gets himself into when the loan is due to be paid back. Payday loans range from $100 to $1000 and a fee of $10 to $30 is charged on each $100 loaned to the borrower. People who take up these loans have to pay back within two weeks. An analysis shows that these payday loan companies earn up to 390 to 780 percent on these loans when we look at it from the ARP point of view. As the main target market of such loans is students and middle to lower middle income class they are being taken advantage of without knowing it. A cash advance company will not even ask for your credit rating and why would they be interested when they are earning as much as they are.
Other scams include consolidation loans related scams that a financial services company that originated a loan for you will never give you best advice on loan consolidation as they are earning from the unconsolidated loan. It is advised to consult a different financial company to get your loans consolidated. Always choose the company that you can trust completely and do your homework on the loan that you are trying to get so that you are not scammed.
