Bond Purchases by Banks Make Acquiring Personal Loans Difficult

November 6th, 2010 Brock Hailes Leave a comment Go to comments

It seems that banks are making a habit of using their free capital to lend money to the government via bond buys, which means that business and personal loans are not being distributed. Fed Reserve Chairman Ben Bernanke is not happy about this action because it means credit is not being extended when it could. But he believes new global banking rulescould turn things around.

Banks Take Advantage of Low Interest Rates

Rather than dishout moneyon business or personal loans that could default, banks would rather take advantage of a sure thing, which is to use cash available at near-zero percent interest rates set by the Federal Reserve andlend it back to the government by purchasingbonds.

According to recent reports, the biggest banks bought about $127 billion in Treasury bonds since June 2010, compared with $47 billion in the entire first half of the year.As a result,commercial and industrial loans outstanding have fallen by about $68.5 billion this year.

Increasing the Flow of Credit Is a Must

Bernanke acknowledged that having banks using their money to loan to the government is not as beneficial to the economy as distributing loans to the public. Placing money in the hands of businesses helps to pay taxes and employ workers. And offering personal loans to consumers helps to fund those businesses, whether they’re buying new clothes or taking on newcar financing.

In order to convince banks to lend to the public, the Fed plans to pump $600 billion more into the financial system throughwhat is known asquantitative easing to aid the economy and boost the flow of credit.

But since the allure of government debt will still be stronger, the job of new global banking rules will be to force lenders to hold a greater percentage of capital if they choose to invest in riskier securities or make new loans.

What If I Want a Personal Loan?

If you are on the prowl for a personal loan, it could be a bit difficult to get one unless your credit is near-perfect. Of course, you could start with your bank or credit union, but don’t be surprised if you’re turned down, even if you have a great track record with them.

This is why some have chosen peer-to-peer lending as a backup option. This form of lending allows regular consumers to lend to others under specific terms. Sites like Lending Club, Prosper and IOU Central allow users to connect and handle all transactions online. Typically, credit scores can be a bit lower and interest rates are usually reasonable.

While it’s true that having loans extended to you is more difficult than in the past, it’s not an impossible task to accomplish. So before giving up hope, consider all of your options.

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