Things to Ask Your Bank Officer When Availing of a Loan

 I just had to turn down another call from a credit card a while ago.  It seems, almost every week, a bank calls to offer me a loan.  They won’t tell me the interest rate unless I ask.  They would usually just say, I should avail of this and this sum.  It seems there’s so much money floating around these days.

With such an abundant supply and easy access to credit, it’s easy to feel you’re “wealthy.”  Things with prices that would normally leave you aghast if you had to pay for them in cash, suddenly become affordable.  I mean, divided by thirty-six monthly payments, it doesn’t seem so bad anymore.

I’ll let you in on a secret.  My friend used to own a financing company. I didn’t work for that financing company, but I had to make a computation for a car loan for one of our consultants.  So I computed the loan and prepared the typical loan amortization schedule one would make.  One column for the monthly payment, two columns that would break down that monthly payment into its interest and principal components, and a fourth column to show the remaining principal balance after taking into account that last monthly payment.

I then presented the draft amortization table to my friend.  But to my surprise, he got a bit irritated and asked me why in the world would I want to show all of that at the start.

And so, I learned one modus operandi of some creditors.  As much as they have the power to distract you, they don’t want you thinking about the interest expense on that loan.  They would like you to focus on the benefits of the loan.  That shiny, glimmering body of your Audi S8 and a vision of you stepping out of it, or that wonderful vacation in El Nido with you taking in the sun, sipping coconut juice. The bank loan agent, with his fingers crossed, hopes you get intoxicated by that vision up to the point that you make that last signature on the last page of the loan agreement.  Of course, you also signed a loan disclosure page that details the interest rate, the loan term and even the breakdown of interest and principal.  But the point is, if you got distracted enough, you would have just breezed through all of it without worrying at all about the implications.

Once your hand has made that last scribble that finally commits you to 60 months of installments to the bank, the loan officer gives a sigh of relief.  Another deal closed.  And you, still on fire for that latest acquisition, remain oblivious to everything that took place– as to the bank and the loan officer’s side of the story.

Sadly, this is how a lot of people find themselves entrapped and buried in a cave-in of debt. They see their credit lines purely as privilege that grants them access to every good thing in the world.  Only too late do they realized there was also a cost involved – a cost they should have counted before they decided to avail of the privilege.

So what should a prospective borrower do to counteract this kind of tactic?

  1. Ask for a loan amortization table.You need to understand the relationship between principal, interest rate, time and the monthly amortization (payments) for this to be more effective. The loan officer will quote you a fixed amount that you have to pay every month.  It would be wise to already inquire of him from the beginning as to how that monthly amortization is computed.  That way he’ll know you are really studying his offer and are not just going to sign-off without thinking.

 

  1. Compare interest rates. Some institutions quote interest rates on an annual basis.  For example, the loan officer would say, “our interest is 12%.”  If silent about the term, it usually pertains to a full year’s interest.  Some banks however, especially those offering credit card loans, may quote interest on a monthly basis.  For example, 0.99% per month. So make sure you are comparing apples to apples.

 

  1. Check how interest is computed. Some institutions compute based on a declining balance of principal. Since your principal decreases as you keep on paying it off, the interest computed also periodically decreases.  For example, two financing companies, Company A and Company B, may both quote an interest rate of 12%. Company A computes interest based on a monthly declining balance while Company B computes interest based on an annual declining balance.  Which has the better deal? Company A has the better deal since it takes into account monthly decreases in principal.  Company B charges you interest based on the principal at the start of the year only (which is much bigger than your principal by the time the year ends). At the end of the loan term, you would have paid more interest to Company B than Company A even if they both charged an interest rate of 12%.

Investments are a powerful way to grow money because of the power of interest earned.  Interest compounds your wealth over time.  However, it is the same power that works to suck up all your income when you are the borrower paying the interest expense.

Still, using other people’s money, if done intelligently, particularly to finance or leverage your investments, can also grow your wealth.  Just be sure you check the amortization schedule, the interest rates and the interest computations from the start.