The Advantages of Bank Loans

Banks carefully calculate each loan decision. These companies remain in business by making scrupulous evaluations of each loan application based on the overall financial situation of the borrower. The banks that fail to do so either collapse or must fall upon government support. The advantage to borrowing from a bank rather than an informal lender is that banks can be counted on to follow through on contractual agreements. Banks typically only make loans to individuals who can be reasonably expected to be able to afford the loan and follow systematic legal methods if the borrower falls behind on payments.

Banks carefully calculate each loan decision. These companies remain in business by making scrupulous evaluations of each loan application based on the overall financial situation of the borrower. The banks that fail to do so either collapse or must fall upon government support. The advantage to borrowing from a bank rather than an informal lender is that banks can be counted on to follow through on contractual agreements. Banks typically only make loans to individuals who can be reasonably expected to be able to afford the loan and follow systematic legal methods if the borrower falls behind on payments.

The Evaluation Process

The fact that banks have standards for extending loans bothers many people. No one enjoys having his financial behavior scrutinized by an institution. The benefits of this to borrowers are often overlooked as a consequence. If banks loosened lending standards, individuals without the ability to support a loan might be able to gain approval and take on commitments that would only cause them long-term financial suffering. Defaulting on loans causes the delinquent borrower to take on significant fees and incur damage to her credit rating. Banks would also have to charge higher interest rates on loans if more loans defaulted.

Legal Methods of Collection

Turning to non-bank lenders for loans (such as payday lenders and loan sharks) carries substantial risks relative to going to banks. Banks follow a systematic legal process for collecting on defaulted loans. Some of these non-bank lenders will get a legal judgment first before garnishing wages. Others may demand access to your bank account to schedule automatic withdrawals. Criminal lenders may employ threats and even violence to collect on debts. Banks will always go through a legal procedure before seizing property to collect on debts that can be contested, negotiated and settled. The Fair Debt Collection Practices Act published by the Federal Trade Commission (FTC) prohibits excessive harassment and threats in the process of collecting on loans.

Respect of Contract

Banks deal with a multitude of customers and have a high incentive for honest dealing. There are also many stringent regulations placed on banks that proscribe limits for behavior in regards to loans. This encourages banks to follow all contracts signed with borrowers. When you borrow from a bank, you can be assured that the terms of the contract won't be altered without substantial advance notification. If the loan can be altered, that fact will be written into the initial contract. Banks are also sometimes flexible in renegotiating loan terms, making the contract more of a working agreement than an obligation set in stone.