Debt was once considered a bad thing. Our father and ancestors used to avoid debt like the plague. Remember how they used to tell us to live within our means?
However, times have changed. Interest rates have been greatly reduced, making the loans quite affordable. The process has also become more customer friendly. Tax benefits for certain loans, such as mortgages, have made them very attractive.
Also, consumerism has skyrocketed and makes us want to enjoy things today instead of waiting months/years to save enough to buy the things of our choice. For this reason, today we do not think twice before committing ourselves to indebtedness.
Yes, without a doubt, the lending scenario is quite promising today. But we have to be careful.
Not all loans are good. Loans that finance consumption are bad. Unsecured loans such as credit cards, personal loans are often very expensive and should be avoided at all costs. Loans that put pressure on our finances must be reduced.
Asset-building loans are worth a look. While the competitive environment may have made getting a loan affordable and simple, it does have a downside. In their rush to win business, banks may not always tell the full story. Therefore, it behooves us to dig deeper into any loan offer and make the right decision.
1. First of all, a detailed market study of the various options must be carried out. Who are the main lenders? What are the interest rates they offer? What are the other costs and fees you charge? What terms and conditions are likely to affect us? Preparing a comparison chart would be very helpful.
2. Interest is the most significant of all the costs you would have to pay. Therefore, it goes without saying that one should go for the cheapest option. But be careful with the jargon.
Don’t be fooled by banking terminology. For example, flat interest rates may seem the cheapest, but they are actually the most expensive: a flat rate of 8% would result in an effective cost of about 15%. Therefore, choose a daily or monthly balance reduction option instead of a semi-annual or annual reduction option. This will mean a lower effective cost for the same established interest rate.
3. Another concept, the matched monthly installment advance, misleads many borrowers. Using this concept, lenders can quote lower interest rates. But the effective interest that the borrower ends up paying is much higher. Therefore, it would be wise to opt for a simple vanilla loanword instead of exotic variations.
Interest-free loans or other similar offers are too good to be true and should therefore be viewed with suspicion.
4. In addition to interest, there will be other costs, such as administrative fees, processing charges, etc. Calculate how much these other costs add up. This could make your loan more expensive even though the interest rate is lower.
5. Sometimes facilities can run more than you can pay monthly. This can be reduced by increasing the length of the loan (or, of course, reducing the loan amount) and by making it convenient for you to take advantage of the loan. But keep in mind that in such cases, the total amount of interest you pay over the term of the loan will be higher.
6. Make sure all verbal discussions or offers are supported by relevant documents. Don’t go by anyone’s words. What ultimately matters is the written word.
7. Do not give any false information. Sometimes you may be persuaded to state something that is not the truth. Desist from all counterfeiting. This amounts to fraud and could get you into serious trouble.
8. Ideally, one should request zero penalties/charges for a prepaid option. If this is not possible, negotiate for the lowest possible price. This is more relevant for longer-term loans, such as mortgage loans, which have a duration of 10 to 15 years. Over such a long period, circumstances may arise that force you to prepay the loan: interest rates may become too high; your income may have increased substantially leaving you with a lot of extra money; tax structures may have changed making the loan unviable; etc.
9. Double check all terms and conditions before finally signing the documents. Make sure the interest rate, loan amount, tenure, etc. are the agreed ones.
10. Do not sign any blank documents or leave blank spaces in loan documents. Even if you have to spend a few hours to fill out the form completely, do it. Do not leave anything for the lender or lender’s agent to fill out.
Remember there is no free lunch. In this age of information overload, catchy ads, and rampant consumerism, it’s easy to be dazzled and bewildered. Therefore, it calls on our ingenuity and intelligence not to be fooled and make the best possible loan choice.