In Search of a Loan: Where To Go When Banks Say No

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Whether they are big nationals like Bank of America (BAC), or local and small, U.S. banks are making it tougher than ever to get loans. According to an April survey on bank lending practices by the Federal Reserve, about 55% of U.S. banks said they’ve tightened lending requirements in the last three months, up nearly 30% since January. The majority of domestic banks also reported that they had tightened their lending criteria on prime, nontraditional, and subprime residential mortgages. Meanwhile, default rates on outstanding mortgage loans have reached 7.3%, a record high.

So, where should you go for dough when the banks say no? The majority of people looking for a loan seek out friends and family, say Jeanne Fleming and Leonard Schwarz, the authors of Isn’t It Their Turn To Pick Up The Check? “We live in a world where housing has become so expensive and an awful lot of people look to their parents for help with down payments on a first home,” says Schwarz. “I don’t think that was true a generation ago.”

If you are considering making a loan to a friend or family member, or if you are the one requesting the loan, proceed with caution and get it in writing. According to Fleming and Schwarz, 95% of adult Americans have lent money to friends or family members, and close to 50% of these peer-to-peer loans aren’t repaid in full. “There are two virtues of putting loan of any magnitude or complexity in writing that have nothing to do with challenging the integrity of the borrower,” says Schwarz. “It gets rid of ambiguity and it fleshes out expectations.”

Write down the amount of the loan, when it will be repaid, and if interest will be paid. If your mother gives you money for a down payment and specifies a repayment date, you know it’s not a gift and there are no misaligned expectations. “People can feel bad about asking to put the terms of the loan in writing but I think it is always a good idea,” says Fleming. “And, it can save a friendship.”

One way to add structure to a personal loan and eliminate possible tension is to structure a peer to peer loan through Virgin Money Loans. Virgin will draw up documents, do payment processing,  as well as send reminder emails and year-end reports for claiming tax deductions. The service is not free and fees vary according to the size and nature of the loan. For example, the "Handshake Basic" will convert your loan terms into a promissory note and set up a repayment schedule for $99.

Of course not everyone considers the bank of friends and family a viable resource. “There are people whose first instinct is to borrow the money from somebody close, and other people feel like it’s their responsibility not to impose upon their friends,” says Schwarz. For the latter, peer to peer lending websites like Prosper.com and Lendingclub.com provide an alternative by linking up folks who do not know each other first-hand. The website facilitates a loan, and both borrower and lender usually get a better interest rate than if they went through a bank or credit card. These sites also charge fees, which vary by loan, for their services. Prosper.com and Lending Club for example, charge lenders a 1% annual loan servicing fee and also charge borrowers a closing fee of around 2%, depending on the size of the loan.

Even with these charges, according to Schwarz, using a web-based site to create a "paper trail" around your peer to peer loan, increases your chances of the lending process going smoothly. “The bank of family and friends exists in the universe of relationships and interpersonal ethics,” says Schwarz. “And peer-to-peer lending is in the world of commerce, where the law tends to be the first line of ethics.” 


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