Canadian Finance Blog

Getting the Best Value Out of Your Business and Personal Loans

Posted: 07 Apr 2011 02:00 AM PDT

Anyone who's ever borrowed money goes through a learning curve of what they could have done better, what they should have done, etc. Some also go through a grim but educational process of debt recovery, in which they learn the hard way. Whether they were business loans or personal loans, the money came and went, and they didn't get the best value out of it.

That's a situation you need to avoid, and it's quite easy to do just that, with some understanding of the basic principles of lending and borrowing.

Let's start with a definition:

"Getting value out of a loan" means getting exactly what you want. It may be assets, profit, or both. It may be something you've always wanted. These are your objectives. The trick to successful borrowing is figuring out how to do that, while minimizing your risk and protecting your budget and income.

Think of a loan as a project. You need:

A clear set of goals- Exactly what are you trying to achieve with the loan?
Absolutely reliable figures for your loan, repayments and budget costs, with no "vague" areas.

Assessing and managing risks

Pretty straightforward so far, isn't it? The area which causes borrowers the most trouble is the second point, and this is the part that must be 100% nailed down before you even ask about a loan.

Lenders try to help borrowers, and it's in their interests to ensure that any loans are viable from day one. The problem is that borrowers often paint a much too rosy picture of their ability to repay and budget issues. They don't necessarily even understand the advantages of low, longer term repayments. The result is a messy process, juggling repayments and expenses.

In business, that can be catastrophic. In personal finance, it can be a credit rating killer. Guesses don't repay loans. Everything has to run on rails to work properly.

The low repayment option does, in theory, cost more. Over a longer period, it may be significantly more. However, the low repayment, longer term approach also protects borrowers a lot better than the short term, hectic fast repayment schedules.

Risk is measured as much by time as by amounts of money. Over a short period of time, any extra cost or expense can easily derail a high-repayments loan. It only takes one or two extra hits to seriously damage a budget working on narrow margins. Low repayment, longer term loans have much wider margins, so the risk factor is considerably less. These "margins for error" are usually the difference between a successful loan and a train wreck.

Getting value out of your loan

Do things properly and you'll never get a call from the debt collectors. Getting value out of your loan also means:

The loan achieves exactly your intended goal, getting you what you wanted without even scratching your budget or lifestyle.
Your business is improved by the new asset, literally bought on easy instalments. You've actually made money on the loan, acquiring a valuable asset.
The loan was taken out and paid at almost zero risk.

This is the other side of borrowing, and these are lessons worth learning. Do your numbers, get your facts straight, and borrowing can be a breeze.

Author Bio: Tim Millett is an Australian freelance writer and journalist. He writes extensively in Australia, Canada, Europe, and the US. He's published more than 500 articles about various topics, including debt recovery.

Getting the Best Value Out of Your Business and Personal Loans originally appeared on Canadian Finance Blog on April 7, 2011.

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