Keeping the banking theme ticking along, we thought that it would be great to look at the questions that you should be asking before applying or refinancing your bank loan.
Even though many of us dislike the banks and we especially frown upon the profits they make year after year, if used correctly and wisely, the banks can be utilised to help us create financial freedom in retirement.
Using the banks’ services to build wealth is a simple strategy. We borrow money from the bank for as little cost as possible and then use that to get a greater return than what the bank is charging us. This strategy can be used for capital, business or personal gains.
Most of you will find that at some stage or another throughout your life, you will need to apply for a bank loan of some type, either to make a major purchase like your home or that investment property or maybe to keep your business operating or simply keeping alive the dream of creating financial freedom in your retirement.
Organising a bank loan can be a time-consuming process for any person which makes it important to ask yourself the right questions in order to not only give your application the best opportunity to succeed but to gain some reassurance that the loan is the best option to help you gain financial freedom.
There are a number of items that you all should consider before committing to taking out a bank loan:
1. What is the likelihood you will qualify for the loan?
It is important to attempt to have an idea early on about the likely success of your loan application.
Generally, the best way to gauge your chance of success is to contact someone to help, like Lucy Ramuno @ Chan & Naylor, and to enquire about the specific requirements that need to be covered before applying. Usually, the right loan broker can be used advantageously here.
Caution – there is a need to be careful. If lenders check your credit record and deny your request based upon what they find, this can have a very negative impact on your credit score. As a result, it will be even more difficult to borrow in the future because banks could look at that denial and decide that you’re too much of a risk. A worst-case scenario may then require you to consider alternative funding methods usually with much higher costs attached.
2. How much cash do you actually need?
Before applying for your loan, it’s good to have an idea of how much cash you will require. One way to determine this is to create a cash flow projection. Such a projection will help you align the requirements of your loan repayments with the terms and conditions attached. Always allow for a little more than what you think!
3. How much are your assets really worth?
Many people make the common mistake of overvaluing their assets, such as their private residence.
Generally, we always think our home is worth more than what the bank thinks it’s worth. As a result, you may submit an application with unreasonable expectations.
Bank or lending institutions will always value your assets below the value you believe they are worth or even what we paid for them, and therefore, will only lend a percentage of the assets’ value.
That percentage can vary dramatically depending on the bank you approach, as well as the age of your assets you are using for collateral. The idea here is to shop around and get different options.
4. Is your cash flow healthy enough to repay the loan?
You will most likely have to provide the bank with your latest tax return and even financial projections, so it’s important you present them with a plan on how you expect to meet your repayment obligations. Your wages and current liabilities are a couple of factors that will always be taken into account. Your cash flow represents how well you are positioned to meet any loan repayments. The healthier your cash flow is, the more likely you are to have your loan approved.
A loan should always be secured to increase your capital growth or financial freedom, not to fund any of your current expenses. There’s no point in borrowing money to cover current costs, as you won’t generate additional revenue. You will find yourself in a very similar situation when your loan expires.
The important thing here is before securing any loan, no matter what the purpose, identify the areas of your financial situation that can lead to growth, such as increased rental or investment income or capital appreciation.
Need help organising your bank loan? Contact our internal broker, Lucy Ramunno – firstname.lastname@example.org. Lucy can also be contacted on (03) 9370 4800 and has already helped hundreds of our Chan & Naylor clients with their finance requirements. It’s a free service to you so what are you waiting for. Keep your money in your pocket and don’t pay too much to the bank. Let us help!
Before you go, have a look at our accounting and advisory services designed to help you achieve greater financial success.
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The Chan & Naylor Group has national offices in South West Sydney, Sydney, Pymble and Parramatta in New South Wales, Wheelers Hill, Melbourne, Moonee Ponds and Hawthorn in Victoria, Brisbane and Capalaba in Queensland, and East Perth in Western Australia that can assist you with your accounting needs. Contact us here today.
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