Expenses

Personal Loans: Do you have an action plan?

February 28, 2007

You’ve all seen the ads: just call this number for low-interest personal loans or easy payment plans or “loan now/pay later”.

They sound attractive, and can entice people to borrow to purchase whatever they want. So, for many people, taking out these personal loans is a convenient way to purchase what they want, when they want it, without committing cash upfront to the purchase. Such loans go for all sorts of purchases: cars, hi-fi, skis, holidays, renovation, … But …

Yet, too often they give precious little thought to the structure of the deal, to looking around for the best interest rates or, worse still, reading the actual loan agreement, in their rush to secure financing for whatever they are about to purchase. In fact, it is quite likely that they spend more time researching the product reviews or service manual for their intended purchase than looking for a good value loan.

Now, as an investor+blogger, you will know that loans are not ‘evil’ per se. In fact, a loan at a good time can be a very good way to invest, e.g. it can allow early purchase of a service or product that can increase your personal productivity greatly (a car loan), increase the value of a house significantly (a loan for renovation), or even allow you to start a new business (an equipment loan).

But. as responsible people, we really need to spend the time to understand the nature of the loans, the latest interest rates and finance news, the terms of the loan as well as the term of the loan, and whatever penalties may apply. It helps us to manage our risk and provide planning options, both of which greatly benefit our wealth management.

So here is my action plan, for responsible borrowing:

When you have identified a product or service that you would like to borrow money for, create a time line of at least one month prior to the purchase of the item to secure a loan. Do NOT commit to purchasing just yet. And certainly, avoid using any affiliated loan that comes with the service/product (e.g. car loans are often sold along with the car), until you have completed your research.

The first week: Look for all the specific loan information you can find. Go to the bank and inquire. Search the internet. Read the ads on the newspaper. Make phone calls, if you need to. Collate your information.

The second week: Now, begin to analyze the information that you have at hand. Be prepared to read all the literature you collected. Create your list of loan priorities: rates, availability, terms, penalties, etc.. Prioritize that list. Then create your shortlist of appropriate lenders.

The third week: Begin the process of contacting the lenders. Check the rates they are offering, the requirements they have for loans (e.g. payment protection), etc.. Do not commit just yet. You may have several candidates that are at the top of the shortlist.

The Fourth week: Do not be afraid to walk away from a lender, at this stage. Do not sign any agreement if you are not happy. You still have other lenders that are on your shortlist. If you have the benefit of dealing with people face-to-face or on the telephone, information about these other lenders may be very useful when you need to negotiate the terms.

But be prepared to walk away if the terms are unfavorable to you, or change late in the process. Some lenders do this, in the hope that borrowers will not notice, or find it too late to change.

A final note: if you can delay purchasing and lending, this will stand you in much better stead. You no longer have a deadline to purchase within, BUT it’s likely that the lenders will have targets to meet to qualify for bonuses from their company. Therefore, if the lender starts saying things like ‘offer good for 24 hours’, s’ign now and we’ll throw in xxx’, or similar type offers, you need to be aware: they are trying to create a sense of urgency, and usually it’s for their benefit, NOT yours.

Sponsored by Select Loans.

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