Banks and private lending companies can help you when you need money. However, one might be more advantageous than the other. You have to be vigilant in choosing where to apply for a loan in case you need extra cash.
Bank Loan vs Private Lending
To help you choose the best institution you can for financial help, here are the pros and cons of both banks and lending companies. Study each advantage and disadvantage and weigh them appropriately before committing to one.
Here are the advantages of taking out a loan from banks and private lenders:
- Tax Benefits. If you acquire a business loan from a bank, the interest you are paying for the loan is considered a tax-deductible expense. The yearly interest that you are paying will be deducted in your 1040 Schedule C Tax.
- Low-Interest Rate. If you want a low-interest rate, a bank can provide you a better deal. They have the cheapest interest rates available for borrowers.
- You Can Maintain Control. When you acquire a bank loan, you do not need to give up equity for the loan to be approved. Other loan sources, such as angel investors or venture capitalists, will require you to give up your equity. You will just have to pay your loan on time to avail of this advantage.
- Fast Release of Cash. Private lending does not have to comply with strict protocols. They can release the loan quickly for you to use. With their fast turnaround, private lenders have become the most chosen loan providers for people who are in need of fast cash.
- Few Requirements. Unlike bank loans, private lending companies demand fewer requirements. Private lenders usually only need one or two valid identifications, your address, and proof of income. However, submitting these requirements on time is not a guarantee that the application will be granted. It is still up to the institution if they will approve the application.
- No Repayment Penalties. There are times that you can’t pay your obligations without penalty. This scenario can happen to all of us due to some circumstances, and paying a repayment penalty wouldn’t help your situation. Private lenders often do not charge their applicants a repayment penalty, which makes them more favored in terms of monthly installment loans.
- Flexibility. Private lenders offer several options for individuals who have different lifestyles and capacity in paying. They give individuals who have a bad credit score to still avail of a loan despite their credit standing. However, If you have a bad credit score, you will have to compromise with the lender and follow specific rules.
Here are the disadvantages of borrowing from banks and private lenders:
- Strict Requirements. Banks follow a strict protocol in loan applications where they require the applicant to submit various documentations. The bank will also ask you for collateral before they consider your application.
- Repayment Burden. If you choose to acquire a bank loan, you will need to periodically make payments and potentially face an early repayment penalty. Failure to make timely payments can result in asset seizure. Even if you manage to pay late, the bank will report your late payments to the credit bureaus and hurt your credit score.
- Complex. The application process of a bank loan is time-consuming and difficult. There’s so much paperwork you need to do, and the interest terms are complicated. After completing and submitting all paperwork required, you will still have to wait for weeks or even months to qualify for the loan.
- Irregular Payment Amounts. Long term loans can have interest rates that can change any time, which means that the equated monthly installment is not constant. The interest rate of your loan will change according to the market influence. There is no assurance that the market will change in your favor.
- Higher Interest Rate. The number one disadvantage of private lending and acquiring a loan from a private lender is the higher interest rates they impose. So if you have a bad credit score, it’s expected that you’ll be charged with a higher APR.
- Short Term Loan. If you are seeking a loan that will take years to mature, a private lender is not a good option for you. Lending companies offer loans in the short term, which usually only lasts between 6 to 12 months.
There are so many private lenders and banks where you can acquire a loan. Every private lender and bank has its own unique rules in lending. You have to do your research or talk to a representative for each institution to fully know these rules.
There are so many loan providers that you can choose from, and, understandably, you might be having a hard time choosing due to the advantages they all possess. However, you should also take into account the disadvantages each institution brings and balance both their pros and cons before jumping into a decision.