Types of Debt Finance

At some point in your life, whether it's to buy a home, start a business, or pay for your or your child's education, you will probably have to take on debt to provide the necessary financing. You may also wish to borrow money for that ATV or sailboat you just absolutely, positively need. You can explore a number of avenues when considering debt financing.

Financial Institution Loans

If you wish to finance a major purchase such as a home or car, you'll probably need to borrow from a bank or the credit union where you work. To qualify for the loan, you need to meet rather stringent underwriting requirements, including having a solid credit history. If your goal is to finance a new business enterprise, many financial institutions offer small business loans. However, these loans may be more difficult to qualify for, as banks are reluctant to lend money unless it is to an existing business with a proven track record of success.

Friends and Family

If a bank gives you the old heave-ho, or if you just don't want to deal with bankers, you can turn to friends and family for your financing needs. This frees you from the hassle of going through the bank loan application process, and people you know are more likely to provide more favorable terms, such as lower interest rates and a more flexible repayment schedule. On the downside, you run the risk of straining your relationship with someone you care about if you are unable to repay the loan.

Peer-to-Peer Lending

Peer-to-peer lending offers a small-business debt financing alternative to bank loans or borrowing from people you know. Peer-to-peer lending matches prospective borrowers with willing lenders via websites such as Prosper.com, Kickstarter.com and LendingClub.com without the need for bank involvement. Peer-to-peer lending may not be a viable option if you are wary about providing sensitive financial information such as your credit history to perfect strangers via the Internet. Some lenders may also want to see detailed financial statements and projections.

Home Equity Loans and Lines of Credit

If you already have a home that you've owned for several years, you can borrow against the accumulated equity in the form of a home equity loan or line of credit for your financing needs. The benefit of home equity financing is that it typically offers lower interest rates than other debt instruments such as credit cards. The drawback is that if you default on the payments, the lending institution may be able to take the home via foreclosure.

Credit Cards

A quick and easy way to get the funds you need is to take a cash advance on your credit cards. While you may like to think of your credit card as a cookie jar full of ready cash, convenience can be costly, as you will incur a relatively high interest rate as well as any additional cash advance fees assessed by the card issuer. Consequently, you may want to avoid using your credit card for your financing.

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