Easy Loans! Bad Credit OK! Have we Learned Nothing from the Last Crash?
Alternative lenders are taking up the slack for both businesses and consumers by offering easy loans, and many of these lenders are using unusual criteria to approve loans. This could result in a financial catastrophe under the right conditions.
A recent article posted at Zerohedge.com made a strong case that the current market conditions are similar to those right before the mortgage crisis of 2008-2009. Banks and traditional lenders have borrowed techniques from alternative lenders and begun advertising easy loans. An annual growth rate in March of 2017 of 4 percent has fallen to 2 percent in early summer, which is the lowest rate since May of 2011.
Banks have been forced to tighten credit policies for commercial real estate, and most of them are reporting a lower demand for business loans.
Commercial auto loans have dropped substantially, and consumer credit default rates have risen to the highest levels since June of 2013. The demand for new credit cards has dropped to its lowest rate in the past five years. Together, these facts indicate a looming recession. That risk has been increased by the return of subprime lending. Time.com reports that interest rates are low, applicants can apply for mortgages over their smartphones and buyers can get approved with just 3-percent down payments.
Offering Expanded Credit Options and Easy Loans Comes at a Price
There’s always a price for expanding credit–it just varies as to who pays the bill. Consumers usually pay for expanded credit through interest charges and short- and long-term indebtedness. However, if lenders miscalculate as they did in the last decade, the result could be a recession, depression or lending crisis. “Lending is cyclical,” explained Mark Calabria in the Time.com article. Calabria,who serves as the director of financial regulation studies at the Cato Institute, continued, “The longer prices increase, the looser lending standards get.”
Homes are recovering dramatically, and mortgage lenders are using the same techniques to market mortgages that other short-term lenders use. Those lenders include alternative lenders, payday lenders and other short-term lending organizations. Buying a mortgage online generates risks, and consumers could easily fall into similar traps that stymied homeowners in the early 2000s.
Easy loans have become easier than ever, and lenders offer online applications, faster approvals through automation, less paperwork and other conveniences. However, these can short-circuit the process of following best practices when buying a home or getting a loan. Fast approvals convince people to accept loans that they might normally consider more carefully.
Easy Loans Online Have Expanded to Offer Easy Credit to Individuals and Businesses
Usatoday.com posted an article that highlights the new crop of lenders. These alternative lenders offer easy loans online with easier approval criteria, and many use social media comments in their approval processes. The article mentions the case of Robert Abendschoen who wanted to borrow $50,000 to expand his comic book business to carry toys for the holidays. Abendschoen was turned down by five banks because he had no collateral, but he got a $5,000 loan from an alternative lender within five minutes of applying.
Many businesses are turning to these alternative lenders as their frustration grows with the tight-credit policies of traditional banks. Entrepreneurs are getting easy loans online for amounts that range from $50,000 to $150,000. Some alternative lenders have borrowed techniques from other companies that offer easy loans. For example, some companies provide fast loans and directly debit the borrowers’ bank accounts. Interest rates are higher than standard business loans, but frustrated borrowers take their money where they can get it.
Could Trump Be About to Cause Another Financial Crisis?
The risks of another crisis include easy credit, online mortgage approvals, increasing home prices and business loans that are increasingly financed by alternative, unproven lenders. According to another article posted at Zerohedge.com, Trump could be aggravating the problem by deregulating the financial industry, increasing interest rates at the Federal Reserve and slashing regulations imposed by the Dodd-Frank Act.
Many analysts believe these conditions are remarkably similar to those that existed prior to the mortgage crisis. Wall Street and bankers were charged with mismanagement, home prices were inflated and lenders were offering loans to just about anyone who applied for credit. The resulting financial crisis froze wages and caused millions to lose their homes and retirement savings while exacting little or no reparations from the lenders that caused the problems. Instead, the government bailout distributed easy money to the housing market and traditional lenders through a process called quantitative easement.
The Trump Administration seeks to remove restrictions on banks and allow them greater freedom to invest their money in riskier schemes and speculative trading. Other administration initiatives could set the stage for an even more debilitating financial crisis. These reforms include:
- Trump is seeking to gut an array of banking regulations and consumer protections.
- Republicans and Trump are committed to reviewing and changing the Dodd-Frank Act of 2010.
- Trump wants the CFPB abolished or reformed to limit its power.
- The Trump administration seeks to limit trade.
- If bank restrictions are lifted, banks could invest in high-risk, high-profit schemes that could cause massive problems and challenge the banking industry’s ability to cover bank deposits.
- Federal Reserve policy changes could generate toxic cycles of government debt and restricted credit.
The Seeds of an Emerging Financial Crisis
Marketwatch.com reports that there are clear indications of déjà vu in the current housing market. Rising home values have generated the following signals that mirror those prior to the previous mortgage crisis:
- ”No Money Down” ads have begun appearing online.
- Major financial websites are encouraging investors to “flip” houses.
- Television ads are promoting quick mortgages.
- People are buying homes that cost more than they can comfortably afford.
- The global economy is in bad shape, and political uncertainties–such as Brexit–complicate the prospects for global economic recovery.
Don’t Let the Hype and Easy Credit Cause You to Make a Bad Decision
The safest way of avoiding the risks of getting easy loans online is to consider whether you really need a loan and if you can afford to make the payments. Alternative financing companies offer a host of loan products online, but you still need to do your due diligence to avoid getting trapped in debt. Mass defaults on loans, a sluggish or recessive economy and banks that are suffering from tighter restrictions and decreased consumer and business demand for loans could easily trigger another financial crisis.
You can protect yourself from economic turmoil by reducing your debt, making wise credit decisions and strengthening your financial profile with increased savings, diversified investments and careful research before borrowing or investing. Find out more about easy loans and their consequences at the Personal Money Store.