Taking a loan in your golden years

Taking a loan in your golden years
Written by Celine Tan of theedgemalaysia.com
Monday, 31 October 2011 07:48


Banks might be reluctant to lend to retirees but there are ways to increase your chances of getting a loan


For retirees, the best practice is to live on cash. Says Ng Chee Yong, a licensed financial planner at the financial care centre of wealth solutions provider CWA, “Whenever possible, pay with cash. A loan is taken to finance items that you cannot afford, a situation that retirees without a steady income should avoid.”

Nevertheless, unforeseen events or emergencies may compel you to borrow. For instance, an offspring may face financial difficulties and most parents would find it difficult to deny assistance. Or you might want to start a business or invest in properties. “After retiring at 55, many retirees start small businesses.

It is not surprising to find them applying for business or personal loans,” says Thoo Mee Ling, head of secured lending at OCBC Bank (M) Bhd. “Apart from that, those who are active in the property market will continue to buy and sell. They need to turn to banks for home loans.”

Louis Loh, business development manager at VKA Wealth Planners Sdn Bhd, says most of his retired clients take loans to buy new cars or refinance their homes.

“Some retirees may prefer to get a loan when purchasing big-ticket items although they can afford them. They think that they will be audited by the Inland Revenue Board if the items are paid in cash.”


Generally, financial institutions deny loans to those who are not earning an income. However, you can obtain a loan in certain situations, especially if you have planned for it. Here are six tips to maximise your chances of getting a loan in your golden years.

1 Take the loan before you turn 60


Each financial institution implements and adheres to a set of lending guidelines. “The guidelines are essential for the bank to manage its risk and returns. These guidelines include risk criteria set out by regulatory bodies such as Bank Negara Malaysia. Age [of borrowers] is a variable that a bank controls through its lending guidelines,” says Thoo. “If you think that you might want to get a loan during retirement, it is best to take the loan before you turn 60. The most ideal time is between 50 and 55,” says Loh.

2 Cut margin of finance and/or loan tenure


“Nowadays, some financial institutions prefer to give out lower margins of finance because they want to decrease their non-performing loans. Generally, banks will give loans to retirees who ask for a 50% margin of finance,” says Loh.

“If you are 56 and want to get a 15-year loan, the financial institutions may be concerned. But, if you want to get an eight- or 10-year loan, they are more comfortable with it. In addition, this lowers your borrowing cost,” says Ng.


Loh observes that it is far easier for retirees to obtain car loans, which have short tenures of two to five years, rather than home loans. “Note that most financial institutions are reluctant to give out loans to retirees over 60 even if they have repayment capacity or are willing to cut the loan tenure.”

3 Document your sources of income


One of the most important aspects of getting your loan approved is your repayment capacity. “Your income [finances] must be able to prove that you can,” says Loh.

“Make your income ‘official’. For instance, if you sell cakes or babysit, legalise your business by setting up a sole proprietorship. This will need few months of planning,” suggests Ng.

If you are going to use rental income to support your loan application, provide proper documentation. “Get your tenancy agreement stamped and keep all records of payments. Get the tenant to bank the rent into your account,” says Ng. Besides receiving a continuous stream of income from these assets, Loh adds that your chances of obtaining a loan will improve if your existing properties are fully paid up.


But, bear in mind that financial institutions only consider income that is consistent and secured. “Lenders generally do not favour lending to insurance agents, unit trust agents, direct-selling marketers, remisiers or brokers. This is because their incomes are based on renewal of sales and the lenders assume that such income will not last for a long time, unless they have a group of people to continue running their business,” observes Loh.

Therefore, it is essential to build up a sizeable passive income stream prior to your retirement. Passive income can be generated from rental, dividends from shares, bonds and unit trusts, or commissions. “[Passive income] complements our pension fund and supports our repayment capacity,” says Thoo.


4 Get a guarantor or joint borrower

Generally, financial institutions prefer to give loans to retirees who have a guarantor or joint borrower. “By guaranteeing the loan, the guarantor or joint borrower, usually a family member, is legally liable for the repayments as well,” says Thoo.


Loh observes that financial institutions prefer a joint borrower to a guarantor. “This is because a joint borrower is seen as having more commitment than a guarantor. However, where the joint borrower has a high debt-asset ratio, the financial institution may consider him as a guarantor instead.”

If you ask an income-earning family member to support your loan application, document the agreement. “You need to put everything in black and white. Inform those involved and communicate your plans,” says Ng.

If you are taking a mortgage loan, determine if the joint borrower will co-own your property. If not, this arrangement is tricky and can affect your estate. Also, note that the joint borrower or guarantor will have to continue servicing the loan should you pass away. “If the loan is not insured, your child will be burdened if you pass away while servicing the loan. The debt will not stop when you die, but will pass on to your legal beneficiaries,” says Loh.

5 Pledge collaterals



Collateral such as fixed deposits, unit trusts and shares can be pledged when applying for a loan. “As a rule of thumb, fixed deposits are favoured because they are liquid assets. Most banks, if not all, will offer a 100% loan if it is collateralised by a fixed deposit. Unit trusts and shares can be offered as well, although the margin of finance varies, depending on the bank’s risk appetite,” says Thoo.


If you pledge your fixed deposit, you cannot use the funds in the account throughout the tenure of the loan, says Loh. “Usually, banks will ask for a RM20,000 fixed deposit or a sum equivalent to 10% of the property’s value. This is the minimum amount needed to auction off the property if the borrower defaults.”



Financial institutions typically do not ask for property as collateral for a personal loan. “They are not in the business of liquidating such assets,” says Ng. The bank will incur a cost in holding a property auction and the price of the property will usually be lower than the market rate, explains Loh.

6 Stick to the same bank


Where possible, build a relationship with your banker. “If you have a good relationship with your banker, it might be easier for you to get a loan. For instance, if you always get your loans from the same bank, it might be more lenient and go the extra mile for you,” observes Ng.

http://www.theedgemalaysia.com/personal-finance/195379-taking-a-loan-in-your-golden-years.html

Your Friends Need Money. Do They Have References?

Your Friends Need Money. Do They Have References?

new_york_times:
http://www.nytimes.com/2008/12/25/fashion/25loans.html

By LAURA M. HOLSON
Published: December 24, 2008
AS a financial planner in Carlsbad, Calif., Candace Bahr tells clients to think twice before lending money to friends and family.
Jake Barnhill bought a truck with some personal financing from Josh Berry.
Melissa Pryor, left, is receiving help from Candace Bahr.
But when her manicurist, Melissa Pryor, asked to borrow $3,000 last month, Ms. Bahr couldn’t say no. Ms. Pryor was being evicted because bankers had foreclosed on the house she was renting in nearby Oceanside. Needing the money to hire a lawyer, she turned to Ms. Bahr, a client she had spoken with every other week for a decade though they were not friends socially.
“It was devastating, humbling,” Ms. Pryor said. “To be in that situation, with all the different factors involved, you are helpless.”
Ms. Bahr asked Ms. Pryor to sign a note promising to repay the loan in a year. Despite her professional skepticism, Ms. Bahr recognized that some decisions, even about money, can’t be judged on business alone.
“You can talk about it all day long,” she said, “but on an emotional level we are all still people.”
With the economy spiraling deeper into recession, friends, family and even unlikely acquaintances like the manicurist are increasingly turning to each other with a hand out. More often than not, these exchanges arouse feelings of guilt and worries that if anything goes awry, friendships and family bonds will be frayed.
In the best case, psychologists and financial planners say, giving money to a pal or a sibling in need can strengthen already close bonds. But there is inherent danger, too, that a loan will put an unspoken price tag on friendship. Then the lender feels guilty, no matter the decision, and the borrower chastened for having asked at all.
“The rules of friendship are tacit, unconscious; they are not rational,” said Steven Pinker, a professor of psychology at Harvard University who has studied language, relationships and human nature. “In business, though, you have to think rationally. The question is how do you switch over without feeling like you are keeping track?”
With bank loans harder to get and more Americans losing their jobs, such emotionally fraught transactions are only likely to become more common. Virgin Money USA, which administers loans among friends and family members, said the dollar value of loans outstanding has soared in the last 13 months to $370 million at the end of November from $200 million in October 2007. Credit counseling companies like InCharge Debt Solutions in Orlando, Fla., are seeing a sharp increase of customers interested in borrowing from friends and relatives.
And financial planners say some clients gave thousands of dollars as gifts this holiday season instead of Burberry jackets or big-screen television sets, to thwart relatives from asking for money later.
Few understand the benefits of sharing among friends as well as Elizabeth Dunn, an assistant professor of psychology at the University of British Columbia. She recently published the findings of a study that showed giving — buying a pal a cup of coffee or purchasing the occasional trinket — made people feel good about themselves and their relationships.
But when a friend asked Ms. Dunn if she would lend her several hundred dollars for expenses not long ago, the professor’s warm feelings turned cool. The loan stirred up feelings of guilt; Ms. Dunn wanted to say no. She knew if it was not repaid, it could damage the friendship forever.
“If you really need help and someone helps you, there is gratitude,’” said Ms. Dunn, 31, who ultimately declined to lend her friend the cash. “But at the same time, there is no shortage of stories about how relationships end or crumble over financial disagreements.”
In an effort to avoid such problems, some people making personal loans are using a middleman. In October, Josh Berry, a 32-year-old operations manager at Maxx Productions, an audio and lighting company for large events near Nashville, wanted to sell his 2004 Chevrolet Avalanche to Jason Barnhill, a colleague.
Mr. Berry’s only option was to finance the purchase himself because the buyer’s credit score made it hard to get a $14,000 loan from a bank. At first, Mr. Barnhill refused; a friend had failed to repay a loan several years ago. Mr. Barnhill lost the money and the friendship. “I could never trust him,” he said.
The two men spent afternoons debating different situations, like what would happen if Mr. Barnhill lost his job. Mr. Barnhill didn’t want to be beholden to his friend and Mr. Berry “didn’t want to beat down his door to get the money,” he said. Both agreed that a personal loan was a bad idea if they were to remain friends.
Finally Mr. Berry suggested the two use Virgin Money, the third-party service based in Waltham, Mass., that was started by the entrepreneur Richard Branson, to collect monthly payments from Mr. Barnhill and transfer them to Mr. Berry.
The distance was a comfort. If Mr. Barnhill defaults, the agreement states Mr. Berry gets his truck back. And if Mr. Barnhill can’t pay at all? “It would be them coming after me instead of him coming after me,” Mr. Barnhill said.
Mr. Berry was forced to face his own feelings about which friends were deserving. “I would not loan money to a person who has a low work ethic or simply is not responsible,” he said. “If they haven’t proved themselves in their personal life, I’m not going to extend my hand.”
The shifting power in a relationship — and feelings that ensue — can be particularly uncomfortable among family members who often have convoluted histories. In some cases, an older brother or sister unwittingly steps into the role of surrogate parent, bailing out siblings at the slightest hint of trouble. In other cases, unresolved childhood rivalries take center stage.
“If there is a way to keep money out of the family dynamic it should be considered,” said Charles Lowenhaupt, chief executive of St. Louis-based Lowenhaupt Global Advisors, which works with wealthy families on financial matters. A wealthy client recently approached Mr. Lowenhaupt about what how to handle a situation with a sister who had lost her job and was in jeopardy of losing her home. The brother wanted to help — she was asking for about $400,000 — and he could afford to give it. At the same time, Mr. Lowenhaupt said, “He knew that she’d come back for more.”
What the brother needed was a buffer. The brother told his sister that he would ask his lawyer to help her get a $400,000 loan at a local bank. What the brother did not say was that he would put up the collateral for the loan. The sister ultimately got the loan, saved her house and was none the wiser about her brother’s help.
“It was a screen between him and his sister so they could have Thanksgiving dinner without incident,” Mr. Lowenhaupt said. “The lender didn’t want to feel beholden to the other. And, if it was just a gift, it could affect the self esteem of the person getting it.”
Few people have an army of advisers to cloak their intentions. Instead, financial planners say, truthfulness is the best defense in dealing with friends and relatives, no matter how painful the conversation. “Someone without confidence may avoid the person or plead poverty,” said Myra Salzer, a financial adviser to wealthy individuals who is based in Boulder, Colo.. “That’s not the way to go.”
A wealthy lawyer from San Francisco said she and her husband have helped two family members in recent months. (She spoke anonymously because she did not want to embarrass her relatives.) In one case, the lawyer gave a family member who was going through a bitter divorce a gift of $100,000. In the other, a family member who lost a job was lent $25,000 in recent weeks with the proviso it would be paid back in three to five years.
In both cases, the lawyer laid out for both siblings exactly what was expected of them. And she did not feel compelled to treat them equally even though each knew what the other received. “Quite honestly, the amount was dependent on the degree of closeness I had with each,” she said. “It is difficult not to be judgmental when you see someone in need. We want to blame someone.”
Unlike Ms. Bahr, the financial planner, the lawyer did not ask the family member borrowing $25,000 to sign a note agreeing to repay it. “The person was in such a low state,” she said. “There was no reason to distrust. It would have added insult to injury.”
But that doesn’t mean she wouldn’t feel any less angry if her relative reneged on repayment. “If they are driving a big fancy car and can’t pay me, I’d be mad,” the lawyer said. “But if they are doing what they need to get their life in order and still can’t pay me, I guess that’s O.K. I just don’t want someone to think I have a blank checkbook.”

http://www.nytimes.com/2008/12/25/fashion/25loans.html?_r=1&ref=business&pagewanted=all