BDO Money Matters | By Mark B. Aragona for Yahoo! Southeast Asia -Thu, 08Nov2012
So you’ve picked out a car or home and now you’re ready to apply for a loan to finance it. While shopping around for loans can be a long and tedious process, it pays to sift through every detail of the terms before agreeing to anything. After all, you’ll be tying yourself to that debt for the next several years. Here are some vital questions that should come up during your loan negotiations:
What are these charges for?
Understand the first rule of getting a loan: everything is negotiable, and that includes bank fees. Before signing any documents, go through every detail and pay attention to the charges involved. You need to make sure you are only paying for things you agreed to pay, and nothing else. Some less scrupulous lenders will slip in charges in the paperwork without you knowing. If you see fees that you’ve not agreed to or don’t understand, challenge them at once.
Can we lower the interest rate if I shorten my term/increase my downpayment?
Never assume that lending institutions like banks will automatically lower their rate if you decide to shorten your term from 20 years to 10, or put up more cash for downpayment. When you approach a bank, don’t be afraid to talk to the marketing assistant or loan officer to see how flexible they are or how much they’re willing to personalize your loan. Negotiate for the best rate you can. Even a 1% change now can later on mean the difference between having a roof over your head or camping out in your own car.
May I use my own life insurance?
Nowadays banks require their clients to apply for private mortgage insurance (PMI) or mortgage redemption insurance (MRI). These are life insurance policies where the lender is named the beneficiary, providing them with a safety net in case you’re unable to pay your debts due to illness, disability, or death.
Both the PMI and the MRI carry expensive premiums due to the processing fees and commissions paid to the bank. The insurance benefits and charges of these policies shrink along with your debt, but that also means your family won’t get anything from these policies. Neither are the premiums paid refundable, withdrawable, or loanable. You may not even realize you applied for a PMI or MRI as it could be bundled with your other bank fees.
As such, it’s better to use your own life insurance as collateral for your loan.You can use an existing one or apply for ordinary life insurance from a reputable company. In the event of disability or death, your coverage will only pay the remaining balance of the loan and the rest goes to your family. Moreover, you get to keep the policy and any cash value after the loan is finished.
What are your prepayment/pre-termination fees?
This is something you’ll definitely want to clear up. As per law, you’re allowed to pre-pay or pre-terminate your loan if you have the means to do so, but note that each transaction also carries its own banking fee. How much you’re charged depends on the amount you’re pre-paying, but on average these fees range from P500 to P2,000.
Can I lock in this rate?
Once you have an interest rate you like, DON’T forget to ask this. Interest rates change regularly due to economic policies and even if a bank is willing to give you a low rate, they may not be able to keep it for you if you don’t ask them to lock it in. Also, ask if there’s a commitment fee in order to process this transaction.
What are your closing costs?
Closing costs can range from 2% to 5% of your loan amount. They may include all kinds of miscellaneous processing fees, credit checks and so on. If you spot any inflated or unneccessary fees, you ought to renegotiate them with the lender before you attempt to close the agreement. Check out our guide to closing costs to get an idea on legitimate fees.
Some banks are even willing to waive fees for long-time clients, but they may not do this unless you ask. So ask. Talk to them. And if your bank doesn’t provide rates you like, you can always shop for other banks or try government institutions. If you take confidence and negotiate from a position of strength, you’ll eventually get what you want.