Now that you've transitioned into adulthood, you find that you think about money more and more. "Finance" is becoming a category that is relevant to your interests. You might be on your way to having your own ride, or perhaps working to purchase your first home. But unless you have the cash flow of Richie Rich, it's likely that you will need a loan.
We asked financial advisor, Ralph Tan, for some of the major things to ponder before walking into the bank to apply for that first loan. Consider this your basic loan preparedness checklist:
1) The purpose of your loan
No one really stops to say, "I want a loan," and then thinks about what to spend that borrowed money on. A loan is intended for a major, important purchase that you need but can't afford at the moment. We're talking cars, houses, your own small business, education, or paying off medical bills. Some banks will encourage you to take out a loan for a dream vacation, but lifestyle expenses like that can ruin your financial discipline. Stick to necessities!
2) Exhaust all options first
Although banks have no feelings, they are not the only source of money. If you've got parents, a rich ninang, or a generous friend willing to lend you some cash, it couldn't hurt to secure the loan from them instead. Chances are, they won't throw in any interest, and will likely be more flexible with your options on paying back. Just make sure that you do pay back completely and on time. You don't want to end up like that kid from Blank Check.
3) Compare and contrast
Read up on different banks' policies on loans and their other services to figure out which one best fits your needs. A bank may give you lower interest rates but may have abysmal customer service or no online banking options. Overall convenience is something you also want to look at when choosing a bank.
4) Define your timeline
Interests tend to be higher the longer your repayment terms are spread out. Know when you need the money. If you're looking to pay for a two-year master’s degree, make sure you don't take a five-year loan. It's a bummer having to shell out monthly payments for something that no longer feels tangible.
5) Lifestyle check
A loan should not impact your lifestyle negatively. Things like cars and houses should be considered upgrades. If you have to cut back significantly on the rest of your basic monthly expenses such as groceries, or perhaps limiting your A/C use to once a month to lower electric bills, then maybe it's not time to take out that loan just yet.
6) Capacity to pay
Face it, you can't just go into a bank, sign some papers, and come out with a wad of cash to spend at the car dealership. Banks evaluate whether you are qualified for a loan, and will be all up in your business, especially with housing loans. They need to be sure that you have the means to eventually pay what you will owe before your loan is approved. As a general rule, your monthly net savings (what's left of income after monthly expenses) should cover your monthly amortization.
7) Understand loan benefits
Different banks offer different perks in order to attract customers. Read the fine print in order to fully understand what you’re getting into and what you can take advantage of. There are banks that offer repayment holidays in which you can avail of a payment break for a month each year without penalties.
8) Loan payment timing
Consider the time of the month by which you will be processing your repayment. If your salary comes in on the 15th, try to schedule your loan payment within a few days of your salary credit to avoid being late or using the money for something else.
Loans and other financial endeavors don't have to be complicated. With these in mind, you should be ready to stimulate the economy with your major purchases!
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