Once upon a time in a magical kingdom called the US of A, “financing” meant providing funds for a project. Nowadays, when we “finance” a project, we actually mean that we’re getting someone else to temporarily provide funds for a project of ours—we’re taking out a loan. The practice of financing (in the latter sense) took America by storm in the last couple of decades, in every setting from premium financing to purchasing widescreen TVs on payment plans. But it appears that this fad may be fizzling because lenders are tightening up their purse strings in the wake of the credit crisis.
How does this affect insurance shoppers and their premium financing? Because some individuals pay insurance premiums with borrowed money, it’s useful to understand the present scarcity of borrowed money: loans are still to be had, but lenders are discriminating between risky and sound investments more than before. If they deem you unlikely to repay your loan, you may face a much higher interest rate, much smaller credit, or a complete denial.
What does a lender examine in order to evaluate the risk of issuing you a loan? It’s all a question of how likely you are to repay the loan and its interest. Specific factors of concern are:
- What is your current income?
- Do you have collateral?
- What is your credit history?
During the last decade, though, we saw myriad loans issued without verification of income or collateral and a great neglect for the borrower’s credit history. We saw cars and appliances sold with “no payments until [some future year]”. Why were businesses so free with their credit? Well, the nature of banking hasn’t changed: lenders make their profit solely from interest on the loans they issue, so when one or two institutions begin offering loans at very low interest rates, the rest of the industry has to offer competitive rates just to keep doing business. Ordinarily, the free market finds the appropriate interest rate and every lender adheres rather closely to it, else goes out of business. But if even just a couple of institutions have an indulgent agenda and government sponsorship, then they can remain in business without abiding by free market principles. And when that happens, the competing lending organizations must match their lending interest rates or else lose their business.
The result is that the entire financial industry transacts with rates that the free market cannot support. Loans get issued in amounts and with interest rates that never should have been. And lots of borrowers will never repay the loans they extracted. This culminates in the credit crisis we witnessed and the crash of the financial industry.
Substantial reorganization across the financial industry (entailing the replacement of much directing personnel) has directed lenders’ focus to more vigorously scrutinizing their loan applicants. If you represent a sound financial investment (one highly likely to repay his or her loan) you can still obtain the credit you want; if not, then you may not find a willing lender.
