You already understand my general mindset about loans…
Here are some mistakes clients make that are a surefire recipe for ruining their lives:
Mistake #1: Taking a Bank Loan Without Planning
Your bank overdraft has grown. The bank called to offer a loan to cover the overdraft increase and the fact that you exceeded the credit limit the bank approves for you. On the surface, the bank’s offer seems better because the interest rate is better and fixed loan repayments will force you to deal with the situation you’ve gotten into.
But there are two common traps here:
1) If the overdraft is growing, it means your expenses are higher than your income. If you add another expense of a monthly loan payment, what will happen to your cash flow next month when it includes the loan too?
2) You took the loan but didn’t reset your bank account credit limit so you can’t go into overdraft—what will happen? Your overdraft will pop up and appear again.
Mistake #2: Taking a Loan Without Changing Habits
You told yourself “this time I’ll really be on top of it.” But you didn’t get professional help, didn’t set yourself up with tools to track expenses, and didn’t agree to lower your standard of living—chances are you’re boarding a one-way train to financial ruin.
What’s the principle here?
Don’t rely on the bank to offer you good solutions to get out of overdraft.
Take a moment to understand what loan would be the right solution for you,
and add the loan repayment as a line item in your monthly expense sheet to make sure you can handle it.
What else should you watch out for? Keep reading
Mistake #3: You Didn’t Check the Total Repayment Amount
You didn’t do the calculation that the bank deliberately doesn’t want you to do: the bank talked to you in terms of ‘prime plus’ and the plus is always a small number that doesn’t sound threatening. For example—a loan of 60,000 NIS for five years at ‘prime plus 4.’ The important question is: how much did this loan actually cost you in shekels?
Here’s how to calculate:
Take the monthly repayment and multiply it by the number of months in the loan period. Then subtract the amount you borrowed: in this case, a repayment of 1,278 times 60 monthly payments equals 76,680.
The difference between the total repayments and 60,000 (the amount you took) is 16,680. In short—a very expensive decision.
Mistake #4: You Didn’t Use Your Bargaining Power
You didn’t negotiate, didn’t compare prices, and didn’t check suppliers:
Your bank is the first to offer you a loan. Think they’ll necessarily offer you the best deal for you? No and no.
Here are some places worth checking before taking a loan: a loan against your provident fund, a loan from your workplace, and if you’re really in trouble—Ogen Association.
The time to negotiate loan terms is before you take it! Think of it this way:
You’re going shopping—compare possible loans like you would compare phone models before buying (between us, this is a much bigger financial decision). You could buy three phones with the money you’d save between a bad offer and a good offer.
Step by step
- First thing, make a list of all your debts together, and understand why you’re not managing to reduce the debt right now (income level? unnecessary expenses? too many debt payments at once?).
- Start the process by agreeing to make a temporary change in your standard of living.
- If the root of the problem is in your behavior—get professional help and don’t rely on yourself to “be on top of it” this time.
- Before you sign, calculate exactly how much the interest on the loan will cost you, in shekels not percentages!
- Check prices. Don’t go with the first loan the bank offers you, and don’t choose a loan without comparing it against at least two other offers.
What should you do?
You’re about to take a loan—this is a major financial decision that can also have long-term implications for your life. Slow down! Check several options. Even when you’re under financial pressure, it’s still your finances. Don’t let banks lead you to decisions that aren’t good for you. You have plenty of room to maneuver if you take the time to find solutions.
