One of the biggest obstacles to the nation's financial recovery remains banks who are still unwilling to loan even though they have received billions in financial bailouts. Congress and the Administration seem either unwilling or unable to compel banks to do so. Fortunately there are other alternatives to bank loans.
One thing people tend to forget is banks are "middlemen." If a bank loans you money they will charge anywhere from 8 percent to over 25 percent interest. If you deposit money with the bank they will give you about 2 to 5 percent interest. Although it takes a little bit of creativity one way around this banking dilemma is to cut out the middleman and give both the lender and the borrower a better deal.
Let's look at some examples of how this can be done:
Real Estate Loans - Typically when you buy or sell a house, the real estate agent arranges financing with a bank. If one bank turns you down, have the realtor try others. If this still doesn't work, ask the realtor to come up with alternative types of financing. In some cases the seller will carry the loan for the buyer. One can also seek out private investors to finance their home purchase (or sale). Investors have to put their money somewhere and right now the stock market is very volatile. It's entirely possible that a newspaper ad can put you in touch with a private investor. In some states houses can be bought and sold on a "land contract." Under this type of contract, the title of the home does not transfer to the buyer until the house has been paid off. The buyer makes payments to the seller, who continues to make payments to his bank or financing source. There is some risk involved. If the buyer doesn't pay the seller will have to initiate foreclosure and during that process will have to keep up his own payments to his bank or he, too, will face foreclosure. Keep in mind the real estate agent is also a middleman and another alternative might be to hire an attorney to assist you in the sale. This is particularly adviseable if you are doing something like a land contract.
Auto Loans - It's not unusual for used car dealers to carry their own financing. Beware, however, of the terms. If the dealer suggests an interest rate that is too high, negotiate for a lower one. Also be informed about the real value of the car you are buying. I've seen used car dealers who will sell a $1000 car for $3000 and carry $2000 of the financing. That's no deal. From the point of view of the used car dealer he can gain by carrying financing at a reasonable rate for his customers. He has to move cars and if he waits for the banks to come around he may be stuck with a lot of inventory. If used car dealers can carry financing, what is to prevent new car dealers from doing the same? It doesn't hurt to ask when shopping for a car. If they're desperate enough to sell and they're not strapped for cash flow, they may go for it. Finally don't rule out the possibility of buying a car from a private party and working out credit terms with that seller. Many private sellers are reluctant or unable to carry financing, but if you ask around enough, you may find somebody who will.
Other Purchases - When I was growing up in the fifties we didn't have credit cards. It was not unusual for a mom and pop business to carry their own credit. Doctors also frequently carried their own credit. Most well-run businesses in those days included an allowance in their operational budget to allow for bad debts, and this percentage was usually somewhere between 2 and 5 percent. Today they pay that fee to credit card companies or banks, and still have to eat the losses if a debtor doesn't pay. What's to stop some of today's businesses from continuing that old practice? In most cases they will make more profit than if they allow the banks to become middlemen in the transactions. I believe most consumers are less apt to stiff a local merchant than they are some cold-hearted bank. The customer appreciates the customer service extended by the merchant and this can lead to more repeat business, which is where the real profit lies.
Layaways - Some businesses have started to return to the old practice of accepting layaway purchases. In this type of arrangement a consumer makes a purchase and the store keeps the item he purchased in storage until it has been paid for. The customer makes periodic payments until he has paid off the purchase and then takes delivery on what he bought. If any interest is charged, it goes into the pockets of the merchant, not to some bank. In some cases there is no interest charged, just a restocking fee if the customer cancels the purchase.
How Much Credit Do We Need ? - Aside from the deceptive practices of the banks, and the lack of oversight by our regulatory agencies, part of the current financial problem has been an over-reliance on credit by businesses and consumers alike. The bottom line is credit costs money. If we can find ways to make purchases without credit, the purchase costs less. If we can run our businesses without relying on credit to make expenses, we see more profit. By relying a lot less on credit and by cutting out the banking middlemen, we all gain. Granted, you can't always do this, but the more we can get by without the banks, the better off we will all be.
