Loan Repayment

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					Loan Repayment
By Richard Okumoto

You have borrowed money and are in debt, now what? Borrowed money must be repaid at some future point, or possibly over a period of time. Before discussing loan repayment, let’s take a step back and understand how and why you found debt or debt found you. What is debt? When you borrow money you incur debt in the form of a loan. Just as purchases vary, loans also vary. Loans come in all sizes, shapes and forms; some good and some not-sogood. Just as you shop for goods, you should shop for a loan. Besides good and not-sogood loans, there is also Good Debt and Bad Debt. Good Debt includes borrowing money for a college education, buying a home or buying an asset which will grow in value beyond the cost of the debt. Good debt is for things that will pay back more than you barrowed. Debt that is incurred for purchasing items for consumption is considered Bad Debt. Bad Debt includes money borrowed for a vacation or a clothes shopping spree. Why? Because when the moment passes, you have nothing left of value, “Poof” it’s gone. That doesn’t mean you shouldn’t spend money for the clothes shopping spree or on that exotic vacation, it means that you should spend what you can afford, without incurring debt. What does debt look like? As previously mentioned, debt comes in the form of a loan, which varies in size, shape and form. There are certain common elements to any loan. These common elements are defined below:  Principal: the amount that you borrowed.  Outstanding Principal: the amount that is still owed to the lender at a given point in time  Interest Rate: the percentage that you will be charged on the amount that you borrowed, the principal.  Loan Duration or Loan Period: the time period in which you must pay back the amount that you borrowed and the interest.  Loan Type or Payment Terms o Revolving loan: credit cards or bank lines-of-credit which have no specified payback period, but which usually require minimum payments each month. o Term loan: a loan to be paid back over a specific time period; car loans or home mortgages.  Lender: The person or company that lends the money.  Debtor / Borrower: The person or entity that borrows the money.

Miller / Okumoto, Inc.

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June 2009

 Collateral: Something of value that the borrower will forfeit if the loan is not repaid. What is the “Wow” factor of debt? The “Wow” factor of debt comes in two key forms; how much debt costs you and how long it takes to pay it back. The Bahamas Vacation Let’s say that you need $10,000 for that fabulous vacation in the Bahamas. Yes, you feel you definitely deserve it. A week of sunshine, beautiful landscape, a calming ocean and the relentless personal service that caters to your every desire. You don’t have $10,000 today, but, you have a credit card with a $10,000 limit. Ah, everything is solved and you can take your one week of heaven without impacting your bank account. You rationalize that you can pay back the credit card debt or loan at $200 per month without breaking your spending budget. You are off to the Bahamas to enjoy your grand vacation. After you return your grind begins again, months later you want to take another vacation, but you can’t! You don’t have enough money available on your credit card to borrow another $10,000 for a vacation. What happened? Let’s take a look:    Six months after your vacation, making the $200 per month payments, you still owe $9,536 on your $10,000 Bahamas vacation. (Assuming a typical credit card rate of 16%) At $200 per month, that one week Bahamas vacation will take you approximately 7 years to pay-off. The total amount of the vacation, once you pay-off the loan, will have cost you $16,600.

General Tips for you to remember:       Borrow only what you need Borrow only Good Debt Avoid borrowing Bad Debt Understand the terms and conditions of the loan If you have problems understanding the terms and conditions of the loan, seek advice, and If you do borrow money, pay it back as soon as possible to reduce the total cost of the debt

Miller / Okumoto, Inc.

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June 2009


				
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