Monday, December 24, 2007

Lenders: Not the money police

You can get a loan for virtually anything you can imagine. Homes, snowmobiles, cars, sheds, if you can name it someone out there is willing to cut you a check for it, so long as you pay them back with a nice, healthy interest rate.

This is not necessarily a good thing. It more often than not breeds irresponsible spending. Think of most of the reasons why someone would need to take out a loan. Chances are the list you'll compile, whether it's short or six pages long will mostly contain items people want, versus need. A vacation to Caribbean, a new boat, a second home in the mountains, et cetera.

It may be a bad connection to draw, but I like to think of it as a toddler being denied a toy until after he finishes his vegetables. He wants the toy now, and often enough he'll try to get it and throw the consequences to the wind.

So what if his parents punish him for making a poor decision?

But you're not a child and lenders are not your parents. This is not how the real work works. It is not the responsibility of the loan officer to be the money police. They're in business for a reason, to take your money so they can pay their own bills.

It doesn't matter what type of loan you'd like to take out. Irresponsible or not, if you have the credit history to back up your claim that you're fully capable of paying it off you're going to get the loan.

As long as your monthly debt does not exceed 50% of your net income or 35% of your monthly gross income, 9 times out of 10 your loan is going to be accepted under one term or another. Sure, you may end up paying a pretty high interest rate. Or you may be advised to refinance this or that. Sure, the loan officer may have personal reservations about giving you a loan for $5,000 so you can go on a ski vacation with your fiance.

But business is competitive. They know that if they reject your request you're more than likely just going to drive down the street to another, maybe less credible bank.

Which admittedly is the most likely scenario. So as long as you do not pose a significant default risk the money is yours.

But if you have the credit history to back up the fact that you'll repay the loan, what's the big deal?

It's not a big deal per se, but it puts you into a situation where you could potentially harm yourself severely. The lender isn't going to look out for you. That's not their business. They're not your friend. They don't care about you. They only care about being repaid.

It's your business. In the adult world of personal finance no one but you is going to look out for your best interests. Your lender, whether it's a bank or a credit card is not going to make sure you have a comfortable emergency fund or research the fact that while your employer of ten years is a really nice guy, he's about to declare bankruptcy and lay you off.

There is only one way to avoid getting yourself into trouble, but thankfully it's easy. If you don't need it (i.e. a car to get you to work, home repairs to keep you under a roof), don't borrow it.

Instead do what you did when you were a little kid, save. You remember that, don't you? The world of a child finances, scraping together every nickel and dime so they can afford something small and mundane, like a lego set.

The same logic carries over to the adult world. If you instead put your money into savings account not only will you not have to pay finance charges, interest rates and worry about the unforeseen (being laid off, medical issues, a car accident, et cetera) but you'll also get a small amount of interest from the savings account itself. So you'll end up with more money than you started with.

Sure, it's a piece of common sense, but it bears repeating. The most important aspects of one's personal finance is typically the easiest to understand. So long as you logically examine your wants and needs with a grain of salt, you'll do fine.


Anonymous said...

you sure do have a knack for finding interesting images.


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