Now that we have hammered out the basics let’s get into the nitty gritty of how loans work and what the principles are. Bear in mind that things may seem a lot simpler from the outside, but once you get into the middle of a loan it may seem a lot more confusing. But take a deep breath: nothing seems confusing once you’ve taken some time to sort through it, and that’s what this book is for—to help you sort through it! Read on through the next paragraphs, and you’ll soon have a firm grasp on the real-life principles of being a borrower. Let’s break this down into steps. Because the process of getting a loan, having a loan, and then taking care of a loan is a serious progression, it will help the potential borrower (YOU!) to have a step-by-step procedure to follow!
Step 1: Preliminaries
The very first thing you need to consider when you are looking into getting a loan is exactly WHAT you need the loan for. This may seem like a no-brainer to you, but can you articulate it to another person? Being able to express what ends your loan money will be going toward to another person in a PROFESSIONAL, and SOPHISTICATED manner is crucial.
So, why is it so important? Besides wanting to appear like a responsible borrower, your lender may require you to tell them. We have said it before, but allow me to reiterate that lenders and banks are businesses—they exist to make a profit for the services they provide, and that service is to let you borrow money. Lenders want to make sure that by letting you borrow money they are making a good investment. Are you going to walk in and tell them that you want a loan to open up a shop that sells only clown shoes and duck tape?
A lender probably isn’t going to feel too confident about letting you borrow that money. Are you asking for a loan to pay back other outstanding unpaid loans on your record? Again, probably not what a lender wants to hear. Having a clear, well-constructed idea of exactly what use your loan will be put to, and being able to explain why giving you that money would be a good idea, is a major component that a lot of potential borrowers fail to take seriously. Whether you are getting a loan to be able to cover your groceries for the month, or you’re opening a business, be sure that you know EXACTLY what the money will be used for and be able to explain it to another person. Between us, it is also good for you to know, as you don’t want to make costly mistakes! Once you have your explanation down, what’s next?
The second thing you need to consider is how much money you need to be able to cover the expense, whatever it is.
Do you only need a few hundred dollars, or closer to a few thousand? The number may only be an estimate, but do your best to make as accurate an estimation as possible. Be advised that it’s better to ask for less than more. If you get a loan for more than what you need, remember that you are going to have to pay BACK more than what you need, and from a business standpoint that’s a poor investment. It’s better to come up short and have to ask for more (and have a closer estimate of how much more you need) than to overshoot what you need and end up paying more than you need to.
Step 2: Cash Flow
Now that you have decided how much money you’re going to need, you need to think about your OWN cash flow. What does cash flow mean? Simply defined, cash flow is the amount of money that you are spending compared to the amount of money that you are earning. You can probably tell that this will be important when it comes to paying back your loan.
When you are considering getting a loan, in addition to thinking about how you’re going to pay it back, you also have to think about your budget. Example: Your monthly income is $4,500, and you have free cash flow (income minus all costs) of $500 per month. If your monthly repayment will be $600 – can you afford it? You short in $100/month. You must understand from where you will cover $100 each month.
Everyone should have a budget, regardless of his or her financial situation. Loans are no different than planning for any other part of your budget, however you DO need to prioritize the elements of your budget. First and foremost, you need to take care of your necessities.
What are your necessities? Simply put, these are things that you need to survive, such as your rent or mortgage, food, bills and utilities like water, electricity, and gas. Once you understand how much money you need to have set aside for your necessities, then think about how much money you typically spend on “luxuries.” Luxuries are considered anything that does NOT directly influence your survival, such as going out to dinner, trips to the movies, nights out on the town, etc.
Now that you’ve figured out your luxuries, consider whether or not you are willing to do without some of those luxuries for a while, should you need to, if you are paying back a loan. When you have a loan, paying it back gets filed under “necessity” along with your food, utilities, rent, etc., so it takes priority over things like frivolous spending trips. If you need to cut back on your luxuries in order to pay back your loan, remember that it’s not forever—just until you’ve finished paying back your loan (and have made your payments on time, of course!). Being a responsible borrower includes prioritizing, so if you’re spending upwards of $500 on “extras” every month, it may be time to think about scaling back and dedicating some of that cash to your loan payments.
Step 3: Choosing Your Lender
Now we come to what may be the most difficult part of the process—picking WHERE to apply for your loan! It’s important to understand that in this phase you have MANY options on your side. The days of only getting a loan from your bank are over, and now you have the option of going to your bank or going to a Foreigner Loan Singapore
Remember: Lenders need you exactly as you need them!
During this phase, it may be a good time to consider precisely what kind of loan you want. Are you looking for a cash loan, or does a collateral loan work better for you? If you are considering collateral loans, what kind of items do you have that you can afford to use as collateral? This is an important step because this is the research step; it will essentially determine your loan experience from here on out, so you want to make the best choice for YOU. Now, should you go with a bank or an independent lender? The simple answer is that you MUST DO YOUR HOMEWORK. Loan terms and conditions will vary from bank to bank, and from standalone lender to standalone lender.
Be sure to look into what each place will offer you as an interest rate, and if they have a minimum OR maximum loan number. For example, many independent online loan resources require you to borrow at LEAST $200 but will loan you no more than about $1,500. This is no different from independent lenders or banks—you may not find minimum or maximums at ALL of them, but be prepared for the possibility and do NOT let yourself be surprised. There is a second part to comparing loan establishments, and that is NEGOTIATION.
This may seem scary, and that’s normal—a lot of people are prepared to simply take what they are offered and to not ask any questions. Well, I’m here to tell you this: that’s exactly what the lender wants you to do. From their point of view, the best customers are the ones who do not ask questions and who know as little about what they want (and NEED) as possible. Uninformed customers are the ones who are the easiest to take advantage of. Do NOT fall into that trap! So, how can you negotiate your terms? It’s simple, but it will require a little effort on your part. Once you’ve “window-shopped” around and found out which lenders will offer you better terms, arm yourself with that knowledge. If you found a better deal at one bank (Bank A), but perhaps a different bank with a higher interest rate (Bank Z) is the only one located in your town, go to Bank Z and tell them that Bank A would give you a better deal and ask them why you should get your loan with them. It may seem a little forward, but when it comes to finances it’s often the best moves are forward. Don’t be afraid to grab the bull by the horns—lenders are businesses, remember? But YOU have to be in business for yourself and find the
best deals for you. Make sure that you find the lowest possible interest rate for the loan that you need, AND make sure that the lender you choose can offer you a repayment plan that works for your lifestyle. If the only option they give you is to put a major percentage down and to make massive monthly payments in order to have you pay off your loan in one year, move along and look elsewhere.
NEVER settle for anything less than what is perfect for YOUR needs and means.
Once again, you have options. Remember in chapter one we discussed the types of repayments: monthly, annual, and semi-annual. This is why evaluating your budget is so important—your lifestyle and cash flow greatly affect the ability you have to pay at a higher frequency than others. If you have the ability to make small monthly payments, then monthly repayment plans will better suit your lifestyle. If you have more disposable income then making bigger annual or semi-annual payments will work better for you.
As you can see there is a LOT to keep in mind when you’re looking in to applying for a loan, but it is critical to your success as a borrower.
ALWAYS think carefully before you accept a loan offer and remember that loans MUST be repaid!
Remember the three steps to getting a loan! Your preliminaries are:
First step; you MUST know exactly what you need your loan for.
Step two is to consider your cash flow—can you afford to repay the loan that you need?
Step three: choosing your lender. Remember to shop around before you decide on a lender to get the best loan deal, because your loans must ALWAYS be repaid!