The process of lending and borrowing money has changed over the years, but the actual event, someone who lends money and someone who borrows money has not changed.
Gone are the days of going to the bank, seeing a loan manager, filling out a paper application, and then waiting for the loan committee to meet and make a decision on your request for a loan.
Today everything is done online.
The application process is streamlined, basic information, your income, your expenses, and also a credit check.
Credit scoring changed everything, and streamlined the lending process.
A numeric score is assign to us to determine our ability and probability of repaying a loan.
And that leads us to being a lender, a lender of money, granting loans, and granting loans to make more money. Because that is what the business of lending money is all about, making more money, and making that money via interest.
Interest: the extra you pay when you borrow money.
A lender lends you £1,000, and charges interest, or an APR/annual percentage rate, so they make money. Lend £1,000, make £1,100, or possibly make much more, it depends on the interest rate.
And keep in mind, it is a relationship between us as borrowers and the lenders; a relationship that my go on for years.
The Lender’s Responsibility
As a lender who lends money and wants to make money off of lending money, they have a responsibility, to themselves, and to others such as shareholders or owners of the bank or company, and the bottom line responsibility is to make money.
In order to achieve that responsibility, they need to make sound lending decisions. They need to lend to borrowers who will repay the loan.
So using credit scoring, and also looking at affordability, the ability to repay the loan, the lender makes a decision as to grant the loan or deny the loan.
If it is not a clear cut decision, such as a borrower with a low credit score, or has had financial issues in the past, the lender may still grant the loan, but with a much higher interest rate. The interest rate reflects the risk the lender is taking in granting the loan.
The higher the risk = the higher the interest rate.
This allows the lender to make more money by taking a higher risk.
Risky investments usually have a higher rate of return, due to the risk involved.
Lenders need to:
- Lend money to make money.
- Find suitable borrowers.
- Vet the borrower based on affordability and credit score.
- Charge a higher interest rate for riskier loans.
- Collect the loan to insure they make money.
The Borrower’s Responsibility
The bottom line (pun intended) as a borrower, is to repay the loan as agreed.
When you ask for a loan, you are requested to provide certain information, such as your income and your monthly expenses.
As we are living in a digital age and loan applications are done online, there is a certain amount of trust on the part of the lender; meaning they may or may not ask for proof of your income or expenses.
It is expected you will be honest in completing the application. In addition, the lender will rely heavily on your credit score. If you have a high or good credit score, you are likely to have your loan approved.
As a borrower, you can borrow money for any purpose. It may be to buy a home, a car, have a credit card or even to consolidate other loans. Once the loan is approved, it is your money.
As a borrower you need to:
- Only borrow money when you need to.
- Be specific about the purpose of the loan.
- Be as accurate as possible when stating income and expenses. (You may need to document or prove these).
- Pay the loan as agreed.
- If you have financial difficulties, contact the lender to advise them.
On the surface all this seems like common sense. However, it is not always as easy as we may think.