When you go to borrow money, you will be asked a lot of questions by whoever is doing the lending, whether you are approaching a bank, a friend or a finance company. You will be asked how much you want to borrow, what you are borrowing for, how much you earn and the total value of your existing bills. These are all questions your lender will ask for their peace of mind, knowing you have the ability to repay the money.
However, the questions you are being asked should also prompt you to ask questions of yourself, because your lender’s view of what you can afford only shows half the picture – only you truly know whether you can stick to your budget, or whether it has been slimmed down to the bare essentials in the last few months to make your finances look better.
Just because it can be easy to apply for a loan for a car, a house, a boat, a holiday or just to give you some breathing room until payday, doesn't mean borrowing money is always a good idea. You still need to take care with your decision, realising that while it is common to live it debt, it isn’t necessary. Instead, while questions are coming at you from every angle, take the time to answer them honestly for yourself too. These five questions will help you take an honest look at your borrowing.
1 – How much do you need?
Before you can make any repayment plan or be assessed for eligibility as a borrower, your lender will ask you how much you need. The lender is asking so they can assess your application and determine an interest rate and repayment schedule for the chosen term. However, when you ask yourself this question, you should be focussing on what your borrowing needs really are.
This means making sure you are not borrowing more than you need, as there is a difference between how much you need and how much you want. You may need $15,000 to buy a new car but you may want $20,000 to buy the car with all of the options and extras. Therefore, don’t take your borrowing lightly, instead make sure you can tell the difference between your needs and your wants.
Also make sure you secure the price of the item you are borrowing, before applying for finance. Know about all the costs involved in the purchase and the cost of any inclusions which may have been added – using the car example, many car dealers will add paint protection to the price of your car, and you have to ask to have it removed.
2 – Why do you need it?
This is your chance to think twice or three times about your purchase and whether it is truly something worth borrowing for, going into debt for, paying interest on, and not owning outright for several years, if ever. Ask yourself whether you really need the item you are borrowing money to buy, especially if you have a bad credit rating; sometimes using a credit card wisely or repaying a loan quickly can go some way to repairing a credit rating, but if you have yet to learn from the mistakes which got you your bad credit rating in the first place, do you really need it?
3 – How are you going to repay the money?
Your lender will want to know the answer to this question so they can organise a direct debit or salary crediting for your repayments, and you should ask yourself this question to make sure you have room in your budget for the repayments each and every month for the rest of the term. Your lender will assess your income and your expenses, apply a stress rate in case interest rates go up one or two percent, but only you can know whether you can meet the repayments.
You need to have a plan to meet your repayments, whether you are going to take a part time job during the term to repay the extra repayment amount or if you plan to cut back on takeaways or give up the second family car to save on expenses. While all of these plans look good on paper think about your spending and savings habits in the past, and whether you are going to be able to stick to these changes you have made.
Also understand the type of loan you have, for example a loan with a variable interest rate can see your repayments go up or down depending on movements in the official interest rates and decisions by your lender. You’ll need to make sure to not get too comfortable when rates go down, because you’ll need to be prepared when they go back up. You should also ask your borrower about features of your loan such as additional repayments and whether there is a penalty for this, and what happens if you miss a payment.
4 – Is there another way to get the money?
Before you automatically borrow money for an item you need, think about whether there is another way you can get the money which would be more appropriate to your purchase type. For example, if you are looking at borrowing money for a holiday, consider saving as much as you can as you plan the trip and you can get away with borrowing less or not at all for a true indulgent, relaxing trip. Or if you are borrowing for improvements on your house, look at a home equity loan which allows you to redraw from your home loan at a much lower interest rate than a personal loan.
If you want to borrow to pay for your child’s education or specific lessons, think about a family loan and whether your parents or a sibling is able to lend you the money, so you can avoid interest and keep it all in the family. Or if you are having trouble paying your bills think about a more sustainable solution than borrowing from a pay day loan, and ask yourself whether selling assets, investments or shares for example could be a better solution.
5 – Who are you borrowing from?
Your lender will ask a lot of questions about you, but don’t forget to ask some back as well, because when you are borrowing money you need to know who you are borrowing from. Do your research and compare loan products and lenders, learning about the provider, who they are owned by and affiliated with and how secure their business and lending is. It can be important to know about how secure your lender is by checking their credit rating, because if they fail or flail, your loan could be sold, and the new owner could force you to repay the balance in full immediately.
Financial Planning, Money Mantra