Redefining Credit in the Twenty-First Century

There was a time not that long ago when credit was a dirty word, when “reputable” people either bought what they needed by paying cash for it or went without. My, how times have changed. No longer must a person deny themselves even the most frivolous trinket until they have the cash with which to purchase it; they just whip out one of a stack of credit cards and shop to their heart’s content.

Unfortunately, such an aversion to anything short of instant gratification has served to reinstate some of the old judgments about credit and the people who use it, especially with the increase in the number of people who spend themselves into a credit hole. We cannot and arguably should not return to a time when credit once again becomes a dirty word. The answer then is to find a proper balance point somewhere between living a life of punishing austerity and one of mindless spending.

Face it: there comes a time in most people’s lives when they personal loangenuinely need to take out a personal loan, either to purchase something that cannot be paid for immediately such as a home or a car, to repair or upgrade that home or car, or to meet an unexpected expense. Those who still feel the old stigma of indebtedness have one thing in common with those who take on debts without a care – they are likely to approach the process of borrowing without fully understanding that process, or the alternatives available to them once they have decided to apply for loans.

We must look objectively at what is available to us from the many vendors in the lending marketplace, and to make informed decisions not only as to the amount of debt we can responsibly incur, but also the best places to go for the kind of loans that will meet our requirements. Making those decisions haphazardly or delaying them can be costly, in more ways than one.

Interest rates are creeping upward

Interest rates Low interest rates are one important though not the only factor to consider when taking out a loan. In the event that you’re feeling a bit complacent because you assume that the currently low rates will last indefinitely and you are prone to delaying taking out a loan as a result, you might want to reconsider that attitude. Lenders have been engaged in a personal loan price war for several years now, making the inclination to be complacent pretty understandable. But the fact is that the low rates that have been the foundation on which that price war has been waged are already creeping upward, and are quite likely to continue rising for the foreseeable future, particularly for those borrowers whose credit history is less than perfect. And that is not a good incentive for delaying on taking out a loan that you have deemed necessary.

Could peer-to-peer lending be a viable alternative to a traditional personal loan?

An upstart alternative, both for borrowers and for investors, is peer-to-peer (P2P) lending. The P2P industry is really coming into its own and growing rapidly, though not without controversy. The industry has been getting more and more attention of late, in somewhat equal parts due to its promise to investors of higher interest rates and to the increased risk that comes with its promise of higher earnings.

It is no secret that the best way to attract investors is to hold out the carrot of higher returns, while the best way to scare them off is to tell them not only that they might not make a profit, but that they stand a chance to actually lose their investment. The carrot for investors is that P2P loans are made at significantly higher interest rates than are standard personal loans made by traditional lenders, allowing P2P investors to potentially earn 5 to 6 percent interest on their investments. This is considerably more than they could make from interest-bearing accounts in banks.

An unlikely champion offers an enthusiastic ‘Yes!’

In order to minimize the “stick” of greater risk, P2P lenders lend only a portion of any given investor’s funds to a single borrower, thus spreading the risk around. If a single loan defaults, every investor loses a little bit, rather than a lot. In its brief history, this has proved to be an effective method of minimizing risk to any specific investor, to the point that even former pensions boss and regulator Christine Farnish has emnbarked on a crusade to champion the P2P lending industry’s growth in the often dysfunctional world of financial products.

Ms. Farnish has assumed the role of chief executive of the peer-to-peer finance association (P2PFA), singing its praises to consumers, even as she lobbies for effective but fair regulation of its policies and practices. As would be expected, she has faced more than a little criticism from some very powerful individuals in traditional financial circles, but she remains steadfast in her belief that P2P offers real benefits to investors and borrowers alike.

She describes P2P to investors as being “less risky than the stock market, where you can lose all your capital if you’re not careful.” She dismisses what she considers misinformed accusations from people like one-time FCA chief Lord Adair Turner that the P2P incurs excessive risk, saying, “We only lend to creditworthy customers and apply strict credit underwriting rules to all our members.” And being a P2P investor herself, she definitely puts her money where her mouth is.

It is now impossible to credibly deny that credit and indebtedness have become integral elements in virtually everybody’s financial lives. Whether you patronise a traditional bank or one of the newer types of lenders, shop carefully, only borrow as much as you need and know you can pay back, and make sure that the loan will be a solution rather than a source of additional problems.

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