TAKE CHARGE OF YOUR MONEY
Taking a loan? Read this first
INQUIRER.net
First Posted 09:04:00 04/29/2008
(This is part of Take Charge of Your Money , a partnership between INQUIRER.net and Citibank to help readers handle their personal finances well.)
Question: I need to get a personal loan but don’t know where to best avail of it. There are finance companies and banks that offer this. Even my credit card is offering me a loan. One of their telemarketers called me the other day offering me one. Where is the best place to get a loan? And what should I look out for? — Samantha
Answer: These days, when one needs money urgently, the borrower has more options than the so-called “5-6” informal loan sharks in the community. Those loan sharks can charge up to 20 percent interest on a very short time frame. Fortunately, there are now a number of legal entities where people can avail of loans at more reasonable interest rates and affordable payment schemes.
Why get a loan
Determine first why you need a loan. Where will the proceeds be used? Knowing the purpose of getting a loan will help you choose the right loan product for you.
For instance, to raise funds for home improvement and repairs, you may be better off getting a housing loan from a bank or financial company. They will take into account the fact that it may take a while for the repairs to be done, and will give clients longer-term payments. These loan products may even be tied with government loan programs such as those from Government Service Insurance System, Social Security System and Pag-Ibig Fund. They can also give you a higher loan amount, based on the value of the collateral you provide, which may be your house or lot or both.
For a child’s tuition fee, there are products geared toward this purpose. Check with your bank. Often the product will offer low interest rate and a shorter term, such as 6, 12 or 24 months. It is also possible that the school will offer payment terms that will help you better manage this expense.
Apply for a business loan from a bank or a credit cooperative to finance the working capital requirements of your business. The terms will be based on the viability of your business.
A car loan can be availed of when purchasing a new or secondhand car. Usually, the seller has a tie up already with the banks or financial institutions to make it easier for car buyers. The collateral is the vehicle itself: If you can’t pay anymore, they’ll take your car back.
On the other hand, if you will use the loan proceeds for any other purpose (such as to pay off other debts or take a vacation), then look for a short-term all-purpose personal loan. Although pawnshops offer this as well using jewelry and cell phones as collateral, they may offer a higher interest rate than banks and financial institutions.
Some banks offer a line of credit with your deposits in your savings or time deposit as collateral. A line of credit may also be offered when you have a high credit limit in your credit card. This is probably what the telemarketer called you about.
The most expensive type of loan is the character loan, which is unsecured by collateral. You need not tie up an asset to back up your loan application. However, due to that very reason, the interest rate may be higher.
What creditors look for
Not everyone who applies for a loan is granted one. Creditors look for the presence of the 4 C’s in a loan applicant:
1. Character. If a person would like to borrow money from you, you would first gauge if that person is trustworthy right? After all, he may just take the money and run. Banks and financial companies look into a person’s character for the same reason. They look into a person’s credit history, so dealings with credit card companies will be studied. They will also double-check your employment.
2. Capacity. Creditors will gauge if you have the capacity to pay back the loan. This is why documents such as income tax returns and property titles are scrutinized.
3. Collateral. This is tied up with number two. You should have sufficient assets to cover the loan payments.
4. Conditions. Creditors also study the external environment and base their decision on granting a loan on those conditions. Factors such as the interest rates in the market and unemployment scenario are taken into account.
What to look for before availing of a personal loan
Now if you have zeroed in on the purpose of getting a loan, and believe you have the 4Cs of credit, it’s time to shop for the right lender.
Here are things you have to consider before making the decision:
1. Interest rates. Is the interest rate reasonable? Some loans have fixed rates throughout the term of the loan, while others have variable rates as the term progresses. Find out which would be more advantageous for you.
2. Terms of payment. Are the terms reasonable enough for you?
3. Ease of payment. Do you have to travel for an hour or two to pay the amortization? It would be better if you can pay it at the nearest bank branch or pay it online.
4. Customer service. Are you comfortable with the way the bank or financial institution has been dealing with you?
5. The fine print. Read the fine print for conditions and other terms which may affect your loan status in the future.
Your duty
Once you have decided on a loan, be committed to pay it off on time. Not only will you avoid penalty fees on top of the interest; you will be safeguarding your good name and credit rating as well.
(INQUIRER.net and Citibank invite readers to ask questions regarding financial matters. Send your questions to personal_finance@inquirer.net or comment through our personal finance blog called MoneySmarts)
*Disclaimer: Readers are solely responsible for their own investment decisions and should thus conduct their own research and due diligence and obtain professional advice. INQUIRER.net will not be liable for any loss or damage caused by a reader's reliance on information obtained from our web site. INQUIRER.net receives no compensation of any kind from companies or industries or funds that are mentioned here.
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