BDO Money Matters | By Mark B. Aragona for Yahoo! Southeast Asia -Fri, 14 Dec 2012
Loans always carry risk, but you can learn to manage that risk if you know what to watch out for.
It helps to start by examining the life cycle of a loan and determining the pitfalls that accompany each part.
Stage 1: Applying for a loan
Beware of making inaccurate statements on your application. Do not attempt to falsify or omit important details. Banks ARE going to do a background check, and it will be that much harder for you if they find out that you left omitted existing financial obligations or falsified the amount of money you make.
Do NOT apply for someone else. This means you’re lending out your name and your credit-worthiness to another person. This person may seem reliable to you, but remember that misfortune happens to everyone. And when they’re unable to pay what they borrowed, you’ll be left holding the bag. Apply only for yourself and for solid purposes.
Make sure you are applying for the loan amount you need, NOT what your agent thinks you do. Some agents may try to convince you to apply for a higher loan amount, as this entitles them to a higher commission. Don’t fall for this; you’ll end up over-leveraging and paying more than you should. Decide early on the exact amount you need, and stick to it.
Stage 2: Receiving the loan
Once you have the proceeds of your loan application, you’d probably think you’re golden. But there are other pitfalls to watch out for:
Use the loan proceeds for your intended purpose only. Once you come by a large amount of money, there’s an immediate temptation to treat yourself to something nice. So you spend on one or two luxuries, then a few more, and before you know it you don’t have enough to use for what you originally planned for. Stick to your plan or be prepared to suck up the loss.
Tell your immediate family about your financial obligation. One story goes about a man who took on a loan and got married shortly after, without informing his bride. The wife found out later that she was equally liable for the loan because they purchased their family home—a conjugal asset. Bottom line: whether or not you’ll need their support, it’s best to tell your family members that you’re taking on a large obligation. Don’t leave them with unpleasant surprises.
Stage 3: Servicing the loan
This last step is the longest and thus carries the most critical dangers:
Don’t entrust your payments to a third party. There’s no end to the number of so-called brokers eager to help you manage your payments, restructure your debt, or otherwise make the debt collectors go away. They may ask you to pay through them or divulge sensitive information about your finances. Once you do, you may never hear from them or your money again. Avoid these scammers like the plague they are.
Pay on time. The simplest task leads to the largest pitfall. When people obtain cash, there’s a great temptation to use it for other things rather than service their debts. But late payments only cause more problems as interest and late fees snowball, dragging down your cash flow and lowering your net worth. Better to first rid yourself of the weight of financial obligations before paying for investments and luxuries.
If you’re having financial problems, tell your bank. Everyone goes through hard times. If you’re having difficulty paying back your loan, explain your situation to the bank early on. Running from your creditors not only increases your interest payments, but as you due dates expire the bank exerts more and more pressure to get you to pay. This tires you out and uses up the bank’s good will, which lowers the chance for restructuring your loan.