How to bewary of Loans
its about Loans, I am sure once in a while people will have to take loan in their life, unless you were born sitting on a gold mine or oil field, but even so with only oil you can’t produce money until someone comes with machinery to mine it, so you still need a loan to buy your machinery yada yada yada. Let me post it here so we can learn from this loan segment of Business in Asiaone.
|Don’t be chained to loan woes
By Lorna Tan, Senior Correspondent
It must be tempting to splash out a bit now that the worst of the
After all, some firms have started restoring pay cuts to employees and year-end bonuses have been paid.
With the mood improving, the urge to snap up that big-ticket item with cash or a loan is getting stronger.
Using cash is one thing, but excessive borrowing can lead to financial trouble.
‘Loans can help us to purchase high-value items or essentials that
And the same principle should apply, whether for a home loan, a car
‘Consumers need to ensure that loans taken are well within their means,’ said Mr Gupta.
Here are eight things to consider when taking out a loan:
Number 1: A need or a want?
Before taking a loan, ask yourself if the item or service is meant to satisfy a need or a want.
Ms Tan Huey Min, assistant director at Credit Counselling Singapore,
Take time to consider if there is an alternative to borrowing now or
However, if the purchase is for investment purposes, then perhaps it
Number 2: Interest cost of borrowing
Consumers should be aware of the type of interest rate that is stated in the loan agreement or marketing material.
And when considering loan options, compare like with like, said Mr Gupta.
Some loans use the annual percentage rate (APR), which reflects the
The simple interest rate is calculated by applying a flat rate on the original principal amount for the entire loan tenure.
The APR is interest calculated based on the declining principal balance over the tenure of the loan.
As the borrower makes monthly repayments, the principal is reduced
Sometimes a loan comes with a zero per cent interest cost if it’s
Number 3: Current debt service ratio
Before taking the loan, calculate your debt service ratio. It is the
It provides a useful guide to how much of your take-home pay – that
Debt payments are monthly expenses like mortgage, car loans,
To put it another way, out of every $1,000 of after-tax and CPF income, you should spend $350 or less on debt repayments.
Ms Tan cautions that if the consumer already has a high amount of
And even if your debt service ratio is less than 35 per cent, it is
Make sure you know your cash inflow and outflow before taking on another loan
Number 4: Loan tenure
It is worth considering the optimal loan tenure as it affects monthly repayments and interest paid.
Generally a longer loan tenure means smaller monthly repayments but
For example, Mr Mark Tan takes a $10,000 loan for a period of five years at an APR of 18per cent per annum (pa).
His monthly repayment is $254 so the total interest he will pay over
If he takes a loan period of three years at an APR of 18 per cent
So to minimise the interest payable, a shorter loan tenure may be an option, but the repayments will be higher.
Some financial experts suggest you make the highest repayments you
When deciding on a loan tenure, consider your monthly commitments
Number 5: Early payment options
Not all loans allow customers to settle early, so read and understand the terms and conditions of the loan before signing up.
An early settlement fee is usually imposed if a loan is paid off early.
For example, if you redeem your GE Money personal loan before the
Home loan customers are urged to look beyond interest rates and consider factors such as the lock-in period and penalty fees.
Another potential cost is the loan cancellation fee. An investor who
Cancellation fees can range between 0.75per cent and 1.5per cent of
Number 6: Late payment fees
Most loans stipulate late payment fees. These are over and above the
Pay special attention to fees incurred for late payment.
For instance, credit cards typically charge a one-time
So keep track of the payment dates and remember to pay before the
Number 7: Payment flexibility
Avoid defaulting on loan repayments as it will hurt your credit
You might hit cash flow difficulties at some point, so it is worth
For example, Mr Gupta says that GE Money’s James personal loan,
Such features offer flexibility in managing your cash flow,
For those who can’t meet their monthly payments, experts suggest
Number 8: Other loan terms and conditions
Make sure you understand the key fees and charges stipulated by a
If you are acting as a guarantor for a loan, be clear about the
Ms Tan says: ‘In the eyes of the creditor, the guarantor is the
This means that even if you are willing to act as a guarantor, you
She recalled a case in which a person (let’s call him John) became a
When Jim defaulted on his car loan, the car financier pursued legal action against both people.
Jim could not repay and became a bankrupt. In the end, John assumed
Well if you have read all the way to this end, I might think that you are interested in managing your finances as well, I am always finding ways to monitor my finances as I dont earn alot, I try to make do with what I have and do not buy luxury goods, well I used to, foolish me, but that was when I was not married, but this time its all different, life is not all about the materials that is drape on you nor the beautiful bags you carry, but I am not saying it does not boost morale. You can still spend within your means. As for me now, its not first priority as priority changes!