Personal Finance Advice

Whenever you’re dealing with any sort of financial transaction you need to be sure that you get the terms of the deal in writing.  If your loan officer guarantees you a certain interest rate, get it in writing.  If a collection agency accepts the terms of a balance settlement, get it in writing.  If you lend $500 to your brother and you both agree to a certain schedule for payments, get it in writing.

In other words, get everything in writing.

A verbal agreement may seem like a sufficient contract, but if you ever have to go to court because of breach of a verbal contract things can get tricky.  Unless you have everything in writing, signed by everyone involved, it becomes a “he-said, she-said” situation.  Yes, it may feel a little awkward to request the terms of every financial deal documented, but ultimately it’s the smart way of doing business.

It’s a sad fact, but it’s true: Sometimes loan officers and customer service representatives don’t tell the truth.  More often than not it’s just a matter of them simply making a mistake and not an attempt at being malicious.  For example, the representative you speak to at your bank might think that you qualify for a certain interest rate when in fact you qualify for a higher one, and unless someone contacts you to clear up the mistake you won’t realize the higher interest rate until you’re signing your loan documents.  By then you might be so wrapped up in the process that you don’t notice the higher interest rate at all.

A signed financial document is powerful.  It proves the terms of whatever agreement you have, and can also protect you if you have to go to court over an issue. Suppose you pay off a loan, but never request documentation or don’t hold on to the documentation you receive.  A month down the road you get another statement requesting the regular monthly payment.  If you had the documentation you could easily fax it over to the lender and they would quickly realize their mistake, but without the paperwork it’s your word against the lender.

Always get it in writing, no matter what the financial agreement.  You’ll be immensely glad you did if you find yourself needing to prove the terms of the agreement.

When you need a loan -whether it’s for a major purchase or because you have fallen behind financially and need to catch up - you might find yourself in the position of weighing the options between getting a loan through a financial institution or instead taking a friend or family member up on an offer for a loan.  Both options have pros and cons, and it’s important to examine the situation carefully before making a decision.

Pros and cons of obtaining a loan through a financial institution:

Pro:  By making timely payments you will build up your credit score.

Con:  Financial institutions aren’t incredibly lenient when it comes to late payments.

Pro:  The recordkeeping of your account information is usually meticulous.

Con:  You will wind up paying interest charges in addition to any other fees imposed by the lender.

Pros and cons of obtaining a loan through a friend or family member:

Pro:  Your friend or family member may not charge you any interest.

Con:  Owing someone money can really change the dynamics of the relationship.

Pro:  The payment schedule may not be as rigid as with a financial institution.

Con:  If you fall behind in payments, you might wind up jeopardizing the person’s financial standing.

Which scenario is better? A lot depends on your particular situation.  If you have a low credit score then a loan from an individual might be your only chance for getting your hands on some money without paying a really high interest rate.  On the other hand, if you have hopes of someday raising your credit score then you’ll have to eventually join the ranks of people who borrow money from financial institutions in one form or another so you can demonstrate your ability to repay a debt.

Keep in mind the psychological ramifications of borrowing money from a friend or family member.  How would your relationship with your uncle or best friend change if you were suddenly unable to pay back money lent to you? It’s one thing to miss a loan payment due to unforeseen circumstances to a faceless lending institution, but it’s another thing entirely to miss a payment to someone you have a personal relationship with.

The bottom line is this: If you can get a decent interest rate through a financial institution, then use this method when you need a loan.  Borrowing from a friend or family member should be something you do if you have no other choice, or if you can be entirely certain that it won’t potentially result in problems.

After all, it’s amazing what even the smallest loan can do to change the tempo of a relationship.