July 30, 2007, 6:00 am

The Way Banks Look at You Part 5: Would You Lend Your Own Money to This Guy?

by: The Financial Blogger    Category: Banks and You
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Why banks are so stupid that they will not lend more than 25K without a strong co-applicant or security? Why would they say that your request is too risky for them? They are making hundreds million dollars of profit; they surely can lend 40K to pay off your debts. What is their problem? As being a banker and also a client at the same time, I can empathize with your frustration. Continuing this series about how banks look at you, I will try to explain the reasoning behind an unsecured declined file.

 

Imagine that you are all alone by yourself, working hard and you accumulated $30,000 in your savings account. It took 7-8 maybe 10 years to grow your saving where it is at now. However, as you do not need this money at the moment, it is gently making 4,25% in an ING account.

 

You have several friends that are not in the same situation. They are not as responsible as you are and get randomly into financial troubles because they can not save money on a regular basis. They sometimes pay their bills late, forget about them for 2, 3 months or call their landlord to tell them that they will pay their rent on the 15th instead of the 1st. Regardless, they always end up paying their bills with the accrued interest.

 

One day, one of them comes to see you for an important matter. During the past years, he applied for many credit cards and lines of credit with great promotions on rate and lending conditions. He travelled, bought a new car, dressed with very nice looking clothes…. and maxed out all his credit cards.

 

You know that there is an obvious possibility that payments will be late, that you will have to follow-up with him and maybe harass your friend to get your money back. It might damage your friendship and you might also never see a part of the amount he is asking for. I am not even counting the effort you will have to make in order to see you monthly payment.

 

So my question is the following; would you, know from your experience that this loan will bring nothing but trouble, lend money to this friend of yours? If so, imagine that he is your friend’s friend and that you rarely heard of him. Would you still lend him money even if he makes an hour speech about how he is responsible and this was all bad luck? Now, you are starting to see banks’ point of view. They want to lend money to people that will not bring trouble. They do not want to go after their money every two payments. Follow-up requires man power and that costs money. As you probably know, banks do not love to waste money. They are in the business of money to make money, not to give it away for free. Several people think that banks are like governments, they owe the population something. Unfortunately, banks are like any other company, their goal is to provide services in return of profit.

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Comments

As a related note as well, never go to a bank and say you need money tomorrow! It makes them very nervous. Anyone who needs money fast tends to scare the risk-adverse banker. To continue your analogy, if a friend said “I need some money. NOW!” you would begin to ask questions wouldn’t you?

Don’t they have loan sharks for people like your “friend”?

Mike

by: The Financial Blogger | July 30th, 2007 (9:16 pm)

TMW, you are so right! Being a banker myself, I always have my hand near the “decline button” whenever somebody is asking for money NOW. If an individual is in such a need for money, therefore he is in trouble. If he is in trouble, then, I do not want to lend him money!

FP, I guess loan sharks are there to “equilibrate the market” and take great profit out of people misfortune or credit misbehavior!

cheers,
FB

Ask yourself whose money is being lent out. I would not like to lend the banker money for 2 to 4% like I do just for him to look at the decline button when I go there looking for a mortgage. I don’t think anyone disagrees with you that borrowing for consumption or bill payments are usually poor credit risks, but I think you should think about how banks look at you in general, especially if you a normal middle class person. Basically the terms are cash cow, victim, chaching. Something like that.

by: The Financial Blogger | August 1st, 2007 (7:51 pm)

Hi CR,
This is how the bank system was created; with our money. We need banks for mortgages or any other loan. I do not think they see normal middle class person this way. If you think so, I guess you might also think that all companies look at people this way. Banks are there to make profit, like any other company.
Cheers,
FB.

Hi FB, I understand about what the banking system is supposed to be. I do not believe that we need banks except for infrastructure and security of money. Banks make themselves indispensable by cornering the market in a way; much like realtors, for example, make themselves indispensable by controlling large pieces of the chain.

As a banker, perhaps you can clarify some of the many quirky offerings or demands at most banks that are clearly designed not to add value but to take it away.

by: The Financial Blogger | August 3rd, 2007 (3:54 pm)

Hi CR, I do not think that banks are more evil than other companies:evil:
In fact, many products are on the market simply to make money. That is not only the case for bank. I think that we must look at the root of the problem: A big lack in financial education.
I would be curious to know what do you have to say against bank. Maybe I could explain a little be more their side of the game.
Cheers,
FB.

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