Bank loans, to take or not to take? Now that is the question. This issue is perhaps highly contentious, with compelling arguments for or against the idea. Bank loans are generally a quick and straightforward way to secure required funding, with repayment spread over a period of time.
Bank loans are a form of debt. Debt comes with interest, a cost. And that’s why I’m sounding a note of warning! Exercise caution before you take them! Believe me, it pays to really take many things into consideration before taking the plunge!
Now I’m all for securing financing to meet your strategic needs. I’m fully persuaded that you can’t achieve major goals without bank loans . Achieving these goals definitely requires major investment.
It’s commonplace to see bankers running after customers to take loans during tough economic times . Today’s banks invest heavily in communication. They promise heaven and earth in a bid to convince eligible patrons to accept their loan offers.
And there are literally thousands of loan offerings out there. Nowadays you can take a loan to pay your children’s school fees, or booking your vacation. You can even take a loan to pay your house rent! Once you’re eligible many opportunities will be dangled in front of you. Caution should be your watchword.
In case you don’t know, your interest isn’t paramount to your banker. Rather, the bank’s interest always comes first. Don’t think for a moment the bank is doing you a favor. Banks exist to provide financial services for profit. And they’ll do anything to make that profit as substantial as possible.
Just check the news. Banks continue to declare huge profits. Their owners and promoters are making stupendous wealth on the back of customers’ efforts. And that’s why I implore you not to rush to take a bank loan. Please keep the following in mind before you do:
Bank loans usually come with hidden fees in the fine print
Now this is quite commonplace. There are certain things your loan officer tells you about the terms to get the required funding. Most times, however he/she neglects to share details considered unappealing. For instance you’re told your monthly repayment before collecting the loan . But the bank reserves the right to change the interest rate anytime during the repayment period.
So sometime after collecting the loan you could be told that due to market fluctuations your interest rate has changed. And you now have to pay more back. The bankers in their rush to sell you the benefits of their bank loans neglected this important fact. And there’s nothing you can do about it. Please make sure to check thoroughly. You deserve to have the most accurate picture before taking a decision. Banks are fond of hidden charges and changing the rules without informing the customer.
Don’t fund your lifestyle with bank loans
Are you thinking of borrowing money from a bank to buy a car? Pay your house rent? Settle your children’s school fees? Bury loved ones? Or to furnish your home? Taking loans to do any of these is completely unwise.
You should, with proper planning and investing be able to live an affordable lifestyle. It’s foolhardy to apply for a loan that comes with interest, and then put the money into something that doesn’t produce income for you. You’ll end up grappling with debt + interest that has no benefit for you either in the short or long term. This is a recipe for financial disaster. Resist the urge to do so because at the end of the day you’ll have nothing to show for taking the loan.
Don’t start business with bank loans
An untested and unproven business idea is not a good reason to go out and take a business loan. By all means give your business ideas expression. But start from where you are with what you have. Structure your business idea and seek for funding from family members or at most, your customers.
There’s rarely any business model that everything goes according to plan from inception. There will be ups and downs. Start up businesses cannot afford the pressure the banks will also bring if you fail to repay them. Imagine a start up having a rough time driving sales, only to also worry as the end of the month approaches about servicing their loan obligations. Things could really get out of hand in such a situation.
The only reason you should take a bank loan
Have you spent some time running and managing business around your idea? Are there opportunities to generate a sustained and substantial income from this idea? Are the inflows expected bound to generate enough to pay your loan + interest? Is your business bound to be unaffected by market changes? Positive answers to these and many other questions make it imperative to seek for funding when it’s clear the business requires it.
The goal of taking a bank loan should be to invest it to generate returns of far more value than the loan. For instance you could take a loan to purchase equipment for your business. You’ve done your homework, analysed opportunities and you can see that the expanded capacity would generate more substantial returns. This is the only time that taking a loan facility is justified.
Profit is the reason for the bank’s existence
Banks and financial institutions do not exist to make the world a better place, but to make profit. They deploy their resources in the best way fit so as to get the best returns possible. Since time they have provided loans with a view to getting a higher return on their investment.
One of the ways you can know that the bank is looking out for themselves is when you default on your repayments. A once cushy, pleasant relationship between you and the bank is about to fall apart. Bankers are not likely to be sympathetic. All they want to hear is when they’re going to get their money. In fact the bank continues to charge interest on loans where the loanee has defaulted. That’s why I recommend extreme caution before you take a loan.
Collateral is usually higher than the value of the loan
Closely related to the above point is the issue of collateral. These banks want you to drop something whose value is higher than the value of the loan they give you. This measure is just in case you’re unable to pay your loan.
For collateral to be acceptable it must be significantly more valuable than the loan. So let’s say for instance one defaults in repaying back the loan. They will eventually dispose of your collateral to cover for the loan. The question is, would they refund to you the extra funds realized from the disposal of your asset when it exceeds what you owe? The answer is no. That’s further proof that profits come first.
Be on the lookout for better terms
The bank that wants to give you a loan deserves your commitment to paying it back. However, they don’t deserve your loyalty. So if the opportunity presents itself get other competing banks that you have a relationship with involved. Try to compare their terms with a view to getting the best deal.
Ensure that you read the fine print and understand what it entails. Run it by your advisers and other stakeholders so you are sure of what you’re getting into. By all means do not just accept everything the bank tells you. Negotiate where possible! You deserve to get the best deal that favours you.
Keeping your loved ones in the loop
It’s vital you keep your family members in the loop. After all they’re the ones likely to be affected if you’re unable to meet your obligation as and when due. Your loan would definitely affect the family’s finances. So let them be in the know and also understand the reason why you’re taking the loan.
Avoid putting a strain on your family relationships by not telling them, especially your spouse about your plan to take a loan facility.
Don’t trust your bank
Your bank is only looking out for its own best interest. They’ll try to sell their products and services at the highest rates possible. They’re out to make as much as they can. Their staff see you as a means to meeting their targets which ties into the bank’s corporate aim.
Your own bank will almost never offer you a competitively cheap loan, simply because it finds it so easy to sell expensive products to its existing customers. You’re the one who has your best interests at heart.
How will this bank loan affect my finances in future?
A debt to income ratio is usually a very good way to measure what comes in against what you owe. At no time should you pay out more than one-third of your monthly income to repay your debts. It’s definitely not a good idea to be unable to live off what’s left when you make your loan repayment.
Please don’t put yourself under unnecessary pressure just because you can. Try to take a loan amount that you can pay much quicker with minimal pressure. It’s best this way, because you can’t predict what might happen in future.
The final word on bank loans
A bank loan is not a substitute to proper financial planning. Loans are best taken to invest in expanding capacity for existing profitable ventures. Taking loans for any other reason should be discouraged without further delay.
It’s clear that those who qualify for loans already earn a good income. With better and more efficient management there should be no need to take a loan for personal purposes, such as for buying cars or paying school fees.
I hope this causes you to think more seriously about approaching any bank for a loan. This decision could be costly in the long run, especially when all aspects are not properly considered. Due diligence is required before taking the plunge!