How to prepare for taking a loan in three steps?

  • January 28, 2020

This does not mean, however, that you don’t have to prepare to take a loan – you have to. It is necessary and above all worth it. Taking a loan is a business decision. The better you prepare for it, the greater the chances that it will bring the results you expect.

Getting a loan can be a challenge. The chances of getting it will be all the greater, the higher the lenders will assess your credibility, and therefore the probability that you will pay your obligations on time.

The conditions under which you will receive the loan also depend on your credibility: part of the loan price is the “included” risk of problems with its repayment, so the higher the creditor estimates the risk of problems, the higher the price of the loan.

Pay your debts on time

bank

Bad news: in a short time you can do little to successfully build your “credit reputation” – in a short time, unfortunately, it is easy to just ruin it. The good decisions you make today will, of course, build your credibility, but their effects will not come immediately.

If you have so far been late with repayment of loan installments, then 3 or 4 installments repaid on time are probably not enough for the future lender to state that everything is all right. (But after a year it may look different.)

The good news is that if you have run a solid business so far, in particular – you have paid your debts well – then … you don’t have to do much.

Do not take more than you can pay back

Do not take more than you can pay back

Your credit past is not everything: lenders primarily want to predict your credit future. Assessing your story is one of the most important premises. The second is the ratio of repaid installments to your revenues.

As a simple and very universal rule, you can assume that the monthly sum of installments of your obligations (where we consider all the expenses related to the loan: capital part, interest rate, insurance, and all fees as “installments”) should not exceed half of your monthly revenues.

Many lenders have adopted this exact threshold as a necessary condition for granting the loan. If you’ve ever come across a DTI, that’s exactly what we’re talking about.

DTI is an abbreviation for English debt to income and it means the percentage ratio of the monthly sum of installments of liabilities to the monthly income. The aforementioned simple and universal rule boils down to keeping this ratio below 50%.

Limit the number of credits

Limit the number of credits

A relatively frequent mistake of micro-entrepreneurs is incurring too many liabilities, and this is not even about the total value, because they are often loans for small amounts, but for their number. Meanwhile, many loans mean many repayments to plan and many opportunities to simply overlook one.

Like a small mistake, but – completely unnecessary – a flaw in the image of a solid borrower. Therefore, if you have many loans, it is a good idea to consolidate them in one way or another. Less monthly repayments mean less operational problems and therefore less risk of errors.

The second point: make a plan

The second point: make a plan

If you have reason to believe – or you know for sure – that potential lenders positively assess their creditworthiness, the time has come for the next step, i.e. choosing the right loan offer. At first, reject those institutions with which for one reason or another (non-transparent procedures, reputation, other) you would rather have nothing to do with and those that you know that obtaining credit in them will be too difficult for you. The offer of those remaining on the battlefield should be assessed mainly in terms of price, but …

Follow the APRC (Actual Annual Interest Rate)

When presenting their offer, potential lenders will definitely emphasize its most attractive elements: once it will be no commission, once the interest rate will be low, and again something else. However, it is often the case that the zero commission is accompanied by an unattractive interest rate and the obligation to take out insurance, while the low-interest rate is accompanied by a high commission and more or less exotic additional fees.

The APRC reduces all these fees to one common denominator, and if that was not enough, the APRC has a very useful indicator in business. (You can read on our blog about how to easily calculate the APRC yourself and why it should be the basic method of assessing the attractiveness of a loan .)

Realistically evaluate your loan repayment options

It is true that at Good Finance we do not require a business plan or similar documents from you, but if you are thinking of taking a loan to implement a business project, as a working capital loan or as an alternative to deferred payment, it is worth building even the simplest repayment scenario and make sure that on repayment of subsequent installments of obligations you will have funds.

On the wave of enthusiasm, we often make very optimistic assumptions – for example regarding sales – but for the needs of such plans, it is also worth building a moderate and pessimistic scenario. And only having them in front of you, decide to take a loan.

Third point: apply

money

Be prepared for the fact that you will have to prove your credibility with a solid amount of forms, documents, and credentials, investing a lot of time, effort and nerves in the whole process. Because trying to get a bank loan can be a real … hmmm … character test ;-).

Well, unless you decide on Good Finance – then all you need is the NIP number, series and number of ID cards, log in and password for your company bank account, mobile phone and any device with Internet access – because that’s how you will submit the application.

“Application” is said a lot, it won’t take you more than 3 minutes to fill out our form (unless you try very hard :-)). You will get the answer after another 15 minutes, without leaving your home, without having to meet with a bank adviser, without providing a heap of forms and documents.

Credit without proof – Bank special offer

  • January 25, 2020

Lenders typically require proof of funds such as a salary certificate or a copy of the employment contract, sometimes also copies of bank statements from recent months. In some cases, they do not provide proof of income, they do not have to do without proof of credit from unknown customers.

Usual waiving of evidence

Usual waiving of evidence

Pawnbrokers do not provide evidence of income because the pledge is sufficient security. The credit card installment function is also granted as a loan without proof of the current income. When applying for a card, most credit card issuers are satisfied with a statement by the customer about their monthly income.

In return for the waiver of proof of income, the credit card is initially equipped with a small limit, which can be increased after some time with regular payment of all credit card statements. Mail order companies also in most cases approve payment in installments as a loan without proof of the amount of income.

The amounts financed are lower in the mail order business than usual for cash loans. In addition, the retention of title up to full payment offers additional protection for the merchant, given the loss in value of the goods. Similar to mail order companies, department stores and specialty stores do not provide proof of income for installment purchases for small amounts to be financed.

No evidence of faster loan processing

No evidence of faster loan processing

Some commercial banks offer their call credit up to a fixed amount without proof of salary. These are small loan amounts of two thousand or three thousand USD, while the usual proof of income must be presented if a higher disposition limit is desired. Granting the loan at a precisely defined amount without proof of income speeds up the process of processing the application, because by far the majority of customers choose the amount specified for the simplified lending as the framework.

When determining the amount of the overdraft facility, most banks use an automated process that takes into account the amount of incoming payments but not their origin, so that credits other than income are also included in the calculation. Banks are now offering a loan on the Internet without proof of income.

This procedure is used for faster loan processing, because it takes time to check the submitted salary statements. The fact that the borrower does not have to enclose any evidence with his loan application does not mean that the bank does not report the income.

The credit guidelines applicable in the EU oblige them to carry out a household bill, so that no bank can forego the demand for monthly income and for regular payment obligations. Of course, the customer must provide honest information in the loan application, even if the bank pays the loan without proof of the accuracy of the customer information.

How much will we pay for an additional loan year?

  • January 18, 2020

The Polish Financial Supervision Authority has been able to remove new housing loans for more than 90% of real estate from the market. This was possible thanks to the introduction of limits on the minimum own contribution. Financial supervision also limited the maximum repayment period for housing loans to 35 years and additionally recommended that real estate should be credited for no more than 25 years.

This is evidenced by the large share of new “mortgages” with a repayment period of 25 years – 35 years. People choosing such housing loans should be aware that they will have to pay quite a lot for each additional year of financing the apartment by the bank.

An additional loan year may cost, e.g. USD 2,100

An additional loan year may cost, e.g. USD 2,100

The cost of extending the mortgage repayment period can be discussed without reference to numerical values. However, it seems that examples of specific housing loans are more suggestive.

The table below presents the results concerning just such model loans for USD 250,000, which, depending on the analysis option, have an average interest rate of 4.25% – 5.00% and a repayment period of 20 years, 25 years, 30 years or 35 years. It is worth mentioning that each sample “mortgage” has a commission paid in cash and equal installments.

The table below shows what (depending on the interest rate) are the financial effects of extending the repayment period of an example loan by 5 years. Such operation results in both an increase in the total amount of installments (i.e. the amount returned to the bank) and a decrease in the level of the monthly installment.

An example of choosing a repayment period of 30 years instead of 25 years with an interest rate of 4.5% will mean a decrease of the monthly installment by less than 9% and an increase in the sum of installments by 3.5% (USD 10,715 / USD 2,143 for an additional repayment year). It should be emphasized that the calculated increase in the sum of installments would be much larger if Good Finance experts did not take into account inflation (2.5% per annum) gradually reducing the value of money.

In relation to the data from the table above

In relation to the data from the table above

It is also worth presenting other results regarding the loan with an interest rate of 4.5%. These results will be particularly interesting for people who care about the lowest level of monthly installments. It turns out that reducing the installment by every USD 1 results in an increase in the total sum of credit interest by:

  • 58 USD with an extension of the repayment period from 20 years to 25 years
  • 87 USD with the extension of the repayment period from 25 years to 30 years
  • USD 122 with an extension of the repayment period from 30 years to 35 years

The above results confirm that the reduction of the installment becomes more and more expensive as the repayment period of the housing loan is extended.

A payback period of more than 25 years is not worth it

A payback period of more than 25 years is not worth it

The results of the sample calculations also indicate that as the repayment period is extended, the percentage decrease in the loan installment is getting smaller (see table above). In the case of a “mortgage” with an average interest rate of 4.5%, choosing a repayment period of 25 years instead of 20 years will reduce the monthly installment by 12.1%. The corresponding reduction in the monthly payment will be only 6.6% if a person taking a model home loan chooses a repayment period of 35 years and gives up the 30-year option.

To the disadvantage of those choosing the longest loan repayment period, there is one more circumstance now. It is associated with restrictions introduced by the Polish Financial Supervision Authority.

The said institution obliged banks to take into account a repayment period not exceeding 25 years when estimating creditworthiness (even if the client chose longer credit). This restriction means that extending the loan period, e.g. from 25 years to 35 years, will not result in an increase in creditworthiness. Such a change can only result in a lower installment and an increase in the total cost of the housing loan.