What are you likely to do when the loan hawkers come calling? You see these people pitching tent from banks at every street corner giving the most enticing stories you have ever heard. You probably have received a call from your bank about an ‘offer’ they are giving you for being their loyal customer.
Usually, bank sales officers analyse customers’ accounts and single out those with regular cash inflow to sell money to. Interestingly, many of the customers who receive such calls usually get excited and are quick to submit their loan applications to take advantage of “the offer”. Consequently, many people find themselves trapped in a debt pit.
Isaiah Opiyo, a financial advisor gives a few tips on why you should not excitedly take up the loan ‘offers’.
1. Lack of Prior Planning
As part of personal financial management, borrowing requires prior planning and consideration. Often, the consideration is on a trade-off between using one’s savings, or borrowing from a bank, to finance a particular financial goal.
A good number of those who take up hawked loans are devoid of prior plans on how to spend the money. Research shows that those who secure loans without proper financial plans tend to lose control of their budgets and use the loan for their expenditures — creating debt circles.
Remember that a debt circle starts with lack of borrowing plan, which translates into lose of control of expenditure and eventually inability to repay.
If you get a loan call when you have no prior plan on how to spend the cash, reject the offer. Wait until you are ready for a loan, when you have put in place a plan for the money, before seeking borrowing.
2.Lack of proper repayment plan
A good loan plan entails having a detailed repayment schedule which shows how you will service the loan. You need to ask yourself how you will repay the money from your income without creating financial problems. If your prevailing financial health cannot allow you to part with cash monthly, do not rush to secure a loan hoping to change your financial situation. While considering how to spend loan money, you should compare the cost on interest with the returns you expect from the money.
For instance, if it is to finance a business venture, the revenue generated should be sufficient to cover the interest cost and still earn you some profit.
3. The income to debt ratio cap
Each time you plan to apply for a loan, you should be guided by the debt to income ratio which is a universal guideline on what amount of debt you can service with a particular amount of income.
The recommended debt to income ratio is 26 per cent which implies that the debt should not exceed 26 per cent of your income. This ratio is an important guideline since it can serve as a cap on the maximum amount of loan that you can comfortably service.
If you surpass the recommended ratio, do not bother to take up a new loan since it would only worsen your financial problems and drag you into a debt pit.
4. The Interest on Loan
Many customers who receive loan calls are often duped that “the offers” do not attract interest rates. This is a fallacy; they too attract interest rate charges as well as a penalty for defaults as do other loans.(Business Daily)
So before you take up the offered loan, and you are ready to take a loan, take time to look around and be sure you will find a fair and affordable package for yourself.