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Why Savings is Important for Personal Loans

published  First Published: 03/02/2010
Article written by: Darryl Houston
On the surface it sounds contradictory does it not, you have to show you can save to borrow money.
After all if you can save you wouldn't need to borrow money. Right?
Well there is method in the madness.
One of the lending criteria lenders, including the banks use to decide whether to approve your loan application or not is capacity, or whether you can afford to pay the loan repayments.
Even if you are earning a good wage, let's say for example your salary is $100k per annum, it is irrelavent if you have no savings at all.
This is because you are spending the money as fast as you earn it. Your day to day 'living' expences are equal to what your income is, so how can you afford to make the loan repayments when you have no money left at the end of each week?
Now most people will say that they could make the repayments very easy just by cutting back on their spending. Well Ok then prove it!
If you are looking at a loan and the repayments will be say $400 a month, what the potential lender is saying to you is, show us that you can go without that $400 every month. The way to prove this is through savings.
In other words show that over a period of time, generally three to six months, that your savings increase by that $400, and you will have shown that you CAN afford to make the loan repayments.
Now 'Capacity' is just one of the lending criteria lenders like banks look at.
There are basically 6 different areas, which Nigel Brookson has documented in the 6 'C' of credit assessment, used by lenders in Australia.
Savings for many people just becomes too hard, and it is hard because you are required to break a habit, and spending is a hard habit to break.
Goal Setting
But setting yourself a goal, and breaking that goal down into bite-sized targets, is the key to successful saving. You need an incentive to give up some of life's luxuries why cut back on your social life or trim your spending on clothes for no particular reason?
The smaller the goal, the easier it is to set out on the road to saving. You might start with a moderate ambition, such as saving for a holiday. First, think about what you want to do, when you want to do it, and how much you'll need. Then, work back from there to establish how much you need to save each week or month.
Finally, start setting that aside in an account that has low fees, good interest and disincentives against touching it.

Once you've accomplished your first savings goal you'll have the confidence to move on to bigger things - a car, the deposit on a house or an investment portfolio. You may even find that you don't need that personal loan after all.

Achieving a bigger goal may involve making some cutbacks. But be realistic about what you'll give up if you're too hard on yourself, you're unlikely to stick to your plan (a bit like diets, really).
All of us will look at borrowing money in our lives. The primary reason is we want something now, that we don't want to wait for by saving for it.
Large ticket items are a good example, such as cars, bikes, caravans, and of course houses. So borrowing money for these items will be required if you wish to have them now, but if you get into the habit of saving part of your income each week, fortnight and month, you will be surprised at how much you can save up and not miss.
Treat savings as a bill that must be paid. You will not only become a little more thoughtful about wasting your hard earned money, you will be able to make the loan repayments on that personal loan.
One final thought; paying back the loan sooner, by making extra repayments will not only save you money in terms charges, including interest, you will be showing the lender that you can go without a larger amount each week or month, so applying for another loan with larger repayment amounts will be much easier because of your proven past performance.


Related Article: How to Get the Best Personal Loan


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