How to bewary of Loans

Once in a while when I find something on the internet which I find will be useful to my knowledge I would post it in my blog, Some articles I find like Life motivation, Technology, Advise on finance, money etc..etc.. I would post it up to remind myself and also my readers, I would flip through my old blogs to see what have I done in the past and see what lesson I can learn from it, well this is definitely one advise most people can use,

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
recession – and the belt-tightening that it forced on us – is over.

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
we do not have the savings or the full amount for at the moment – but
it should be something we can afford in the long run,’ said GE Money
Singapore’s president and chief executive, Mr Rahul Gupta.

And the same principle should apply, whether for a home loan, a car
loan, a home renovation loan, one for education, or even one for a
holiday.

‘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,
suggests that if it is a ‘want’ – not necessary and just for
consumption – perhaps it would be better to save for it rather than to
pay a ‘premium’ price (that is, the interest cost of borrowing). For
instance, don’t borrow to pay for a vacation or a new kitchen appliance.

Take time to consider if there is an alternative to borrowing now or
borrow a smaller amount instead. Better still, don’t buy it at all if
it is unnecessary.

However, if the purchase is for investment purposes, then perhaps it
is okay to get a loan. This could be for renovations that add value to
your home, or enhancing your future income earning ability via training
and education.

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
actual interest cost of borrowing, while others refer to the simple
interest rate. Shop around for the lowest APR.

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
every month, so the interest payable on the principal also reduces each
month.

Sometimes a loan comes with a zero per cent interest cost if it’s
paid via a credit card. Make sure you pay off the debt before the
interest starts to build up. If you miss a payment, you may be
automatically bumped up to the highest annual interest rate of 24 per
cent

Number 3: Current debt service ratio

Before taking the loan, calculate your debt service ratio. It is the
percentage of your monthly income needed to service long-term
liabilities.

It provides a useful guide to how much of your take-home pay – that
is gross pay less 20 per cent employee CPF contribution and personal
income taxes – is used to pay debts.

Debt payments are monthly expenses like mortgage, car loans,
personal loans or even credit card debts. A healthy debt servicing
ratio – debt divided by income – should be 35 per cent or less.

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
outstanding debt to service, it is best to pay down existing debt first
before incurring more.

And even if your debt service ratio is less than 35 per cent, it is
prudent to consider if you have surplus funds to take on another loan
repayment after paying monthly living expenses.

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
a shorter loan tenure may lead to lower interest paid, says GE Money.

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
the five-year loan tenure is $5,236, over and above the $10,000 loan
amount.

If he takes a loan period of three years at an APR of 18 per cent
pa, his monthly repayment will be $362 but the total interest paid over
three years will be $3,015.

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
can manage so that you clear the debt in the shortest possible time.

When deciding on a loan tenure, consider your monthly commitments
and take the appropriate loan tenure based on your monthly cash flow

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
full term expires, an early redemption fee of 3 per cent to 5 per cent
of the outstanding amount at the time will apply.

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
buys a property on speculation and then applies for a loan might be hit
with a cancellation fee if the property is sold before the loan is
disbursed.

Cancellation fees can range between 0.75per cent and 1.5per cent of
the loan amount, and can be quite substantial. For example, if the loan
amount is $1million, the cancellation fee works out to $15,000.

Number 6: Late payment fees

Most loans stipulate late payment fees. These are over and above the
interest charged for late payment, so go through the terms and
conditions of loan agreements thoroughly to ensure you understand them
clearly.

Pay special attention to fees incurred for late payment.

For instance, credit cards typically charge a one-time
administrative fee of $50 to $80 for late payment. This is besides the
24per cent interest charged on the sum that is rolled over.

So keep track of the payment dates and remember to pay before the
due date. Try to have fewer loans or credit facilities and avoid having
multiple sources of credit. In order not to incur interest and penalty
fees, pay your outstanding credit in full.

Number 7: Payment flexibility

Avoid defaulting on loan repayments as it will hurt your credit
history. However, a typical loan tenure is for at least a year, and
sometimes it is hard to predict what will happen so far into the future.

You might hit cash flow difficulties at some point, so it is worth
looking for loans that offer some payment flexibility and provide
rewards for prompt payment.

For example, Mr Gupta says that GE Money’s James personal loan,
which caters to people earning $30,000 and above, offers several
flexible payment options. They include allowing customers to defer two
payments a year, paying only the interest component or paying higher or
lower installments at the start, or end of their loans.

Such features offer flexibility in managing your cash flow,
particularly during unforeseen circumstances. GE Money customers are
also rewarded for prompt payment by having part of their interest
component, or their last installment amount of the loan, waived.

For those who can’t meet their monthly payments, experts suggest
that they approach their lender first for assistance to restructure a
loan. Financial institutions will usually review such requests on a
case by case basis. A responsible lender will work with its customers
to provide a solution.

Number 8: Other loan terms and conditions

Make sure you understand the key fees and charges stipulated by a
loan agreement. This makes you aware of what to expect when a loan is
taken and reduces any surprises after it has commenced.

If you are acting as a guarantor for a loan, be clear about the
terms and conditions of the agreement, especially those related to your
obligations as a guarantor.

Ms Tan says: ‘In the eyes of the creditor, the guarantor is the
‘same’ as the borrower, meaning, both the borrower and the guarantor
are jointly and severely liable for the loan.’

This means that even if you are willing to act as a guarantor, you
should also consider your own ability to make repayments in case the
principal borrower fails to repay.

She recalled a case in which a person (let’s call him John) became a
guarantor for a stranger (Jim), who wanted to buy a car, in return for
a fee.

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
the balance of the loan, which was $30,000, after the car was sold and
makes regular payment to avoid being made a bankrupt by the car
financier.

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!

                               

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