Loan companies – What should you look for?
When considering different loan companies, there are numerous issues to consider. First, it is crucial to find a loan company with whom you are comfortable, that offers the appropriate services and, above all, has a good reputation in the industry. While experience and durability are important factors, we also need to recognise the flexible nature of companies created since the turn of the century.
Companies such as Quick Loans are positioned between long-standing traditional banks and high-interest payday lenders. As part of the new breed of responsible lenders, it is essential to understand what they have to offer and what you should look out for.
It is safe to say that reputations can take decades to build but can be lost instantly. While the Internet has had a considerable impact in many areas of personal and business life, it has created an environment where there is nowhere to hide for rogue entities. So, before signing up with a loan company, whether for personal or business finance, it is crucial to check their reputation.
While many loan companies will highlight helpful customer feedback on their website, you must look at the broader picture, third-party websites and news headlines. Whether looking at personal finance or different types of fast finance, basing your research on just one form of feedback can be dangerously misleading. One thing you will notice, customers who loan companies have mistreated are not shy in stepping forward and giving their opinions!
As with any financial service, customers must be confident that their lender acts responsibly within an established regulatory framework. Unfortunately, the financial service industry is a fast-moving, constantly evolving giant, with regulators sometimes behind the curve. However, as we saw with payday lenders, eventually, the regulators will catch up with new financial services and bring them under their regulatory umbrella.
Recently, we have seen significant changes to the New Zealand lending code with particular emphasis on affordability. There has also been a tightening of regulations concerning the advertising of different types of personal finance and business finance services. While these regulations have a degree of flexibility, we have seen many of the previous rogue elements falling by the wayside. This creates long-term confidence amongst borrowers, greater business flow, and competition among responsible loan companies. All to the benefit of customers!
Approach to borrowers
When it comes to financial services, it is undoubtedly a case of horses for courses. If you are looking for a no-frills, one size fits all approach to personal finance; there are many options. However, most borrowers prefer a hands-on approach, help and guidance with their application and an understanding lender. Akin to the old-style bank manager who knew your business, respected your word and was flexible where possible, those lenders taking a bespoke approach to individual customers are in great demand.
Whether looking for one-off fast finance, business finance or a longer-term relationship providing personal finance, it is essential to understand how lenders treat their clients. Many companies will openly display their core philosophy, understanding of what clients require and how they intend to deliver. While flexibility in the world of finance is appreciated, lenders must be responsible and ensure that all financial arrangements are affordable. This is in the best interests of clients and loan companies, defaults can ruin lives, and bad debts can ruin company reputations.
While financial regulators are acutely aware of the need to encourage innovation in the finance industry, a lack of transparency is an issue which often forms the basis for customer complaints. For example, all lenders must publish their charges to make them easily accessible to clients and potential clients. They must also be open and transparent with third-party financial arrangements. Unfortunately, for many clients, it is not what some lenders try to hide but the fact that they are not transparent, which can cause friction.
You will see a considerable difference between responsible lenders, aware of their regulatory obligations, compared to those willing to push the boundaries to extend their competitive edge. There is no doubt that a lack of transparency is off-putting for potential clients as it prompts the question, what does the lender have to hide?
Even though different loan companies will have slightly different calculations for the risk/reward ratio, in theory, interest rates will always reflect the borrower’s situation and risks taken on by the lender. However, you will see that some lenders are more competitive regarding interest rates, although they may use assets/security to assist both parties. Most loan companies will have a relatively rigid range of interest rates, dependent upon credit history, personal finance requirements and the ultimate risk factor.
Loan companies who specialise in those with chequered credit histories are often deemed “more expensive”, but it is essential to consider this in relative terms. If you have a chequered credit history, then, unfortunately, you are deemed more at risk of default using standard credit rating practice. Consequently, the potential risk taken on by a specialist lender may be no different in relative terms than that of someone with a healthier credit rating using a traditional bank. It would be best if you resisted the temptation to get drawn into a comparison between apples and pears. Instead looking at other loan companies offering personal finance, for example, to those with a challenging credit history.
Over the years, we have seen considerable changes in regulations and loan companies are now legally obliged to be upfront and transparent. This involves both relationships with third parties and their charging structure. Consequently, this allows potential clients to compare and contrast the charging structure of loan companies operating in similar fields.
Some companies will try to bring in new charges, slightly increase established costs or reduce the timescale after which additional expenses are incurred. You need to compare and contrast this type of small print, as, over time, these little extras can add up. Some lenders will also consider your personal circumstances and introduce a degree of flexibility with penalties and additional charges. While obviously appreciative that loan companies need to make a profit, this approach often suggests a lender with a more client-centric philosophy.
It is safe to say that the Internet has changed how the financial services industry operates. Fast finance companies offering business and personal loans can now connect with customers across countries (and even worldwide) that were previously out of their reach. As this is a very competitive market, from more traditional loans to those with a chequered credit history, many companies will offer an array of different financial services. There is always a temptation to look at different companies for your financial needs. However, many will offer discounts if you take on multiple services.
Therefore, when reviewing loan companies it may be an idea to look at the broad range of services on offer as there may be potential to consolidate your financial affairs. Those that offer extensive services are more likely to retain customers, although customer service and charges will also come into play. In addition, the cost of acquiring a client is relatively high for loan companies due to the competitive nature of the industry. Therefore, many will be open to discounts and special offers if you use multiple services. While not a selling point in isolation, the potential to negotiate an improved charging structure is always an added bonus!
While the traditional old-style banks are certainly making use of the latest technology, many of the up-and-coming new loan companies appear more agile and able to react quickly to new market trends. One of the strongest trends in recent years has been the demand for fast finance. Many loan companies can now offer automated online applications and almost instant lending decisions. Whether you are looking for a traditional loan or perhaps you have a chequered credit history, time can very often be of the essence. The opportunity to log on at your convenience and receive a decision almost instantly can be a lifesaver.
Even though automation has slashed processing times, this has in no way devalued or weakened the decision-making process. Let’s not forget loan companies still have a legal obligation to carry out an affordability test and ensure that customers have the income to cover repayments. Aside from the legal obligations, those who take on risky loans may do well in the good times, but when the choppy economic waters arrive, they will struggle. Loan companies that take a balanced approach to risk/reward and affordability are the ones who are here today and also here tomorrow.
There are many factors to consider when looking at personal finance, such as loans, credit cards and other services. While the Internet has undoubtedly increased choice, allowing companies to reach clients previously out of their reach, reliability and longevity are still crucial. At opposite ends of the spectrum, we have the high-interest payday lenders, and the traditional, more conservative banks. This left a void for individuals somewhere in between, although thankfully this has now been filled by the emergence of a new style of loan company.
When looking for finance, you must compare like-for-like companies in the same space, as opposed to apples and pears. There is more than enough information out there to arrive at the “correct decision”, ensure that you use it.
by Mark Benson
Mark Benson, a renowned and astute stockbroker/financial adviser spending the majority of his finance-related career operating in the United Kingdom. With 16 years+ experience in the financial sector. he still maintains a strong interest in all things financial. Over the years, he has written about subjects such as property finance, loans, pensions, insurance, stock market investments, tax planning and more. Mark believes it is essential to keep up with the latest financial regulations and adapt your finances accordingly, something he portrays in his financial articles.