Risks to borrowers

Before taking out a loan, the question “Is it really necessary to borrow for this spending need?” is rarely asked. However, it is important that this is considered before deciding to take out any credit, whether unsecured or secured. The first benefit of sitting down and thinking through the pros and cons of an important decision is that it can then be made calmly and carefully. Momentary emotions are quickly brought under control and do not affect important financial decision-making. And the specific measurement by numbers in the following 5 headlines give a much more complete picture.

1. BORROWER’S FINANCIAL HEALTH

In the assessment of the cash flow of income & expenses, there are two factors to be considered:

ASSESSMENT OF THE ASSET SITUATION:

What is the current list of assets (savings, land inherited from relatives, cars, houses, etc.)?

Liquidity: In case it is necessary to use a part of these assets to pay off a debt, which one can be sold first, can it be sold in part or in whole, how long could it take to sell, etc.?

The purpose is to increase ability to repay the loan if there is a sudden interruption of income for a period of time or an increase in expenses because of family problems (illness, care for a sick relative, house repairs, etc.).

For example, if Mai’s motorbike were to become badly damaged and she had to use all her money, including the fixed monthly payment for a laptop, to repair it, she would have to try to sell a part of her assets to pay off her debt. To do that, she’d need to consider her list of assets to see which items or amounts could be extracted and converted into cash as soon as possible to pay the loan. Mai would likely determine that the two funds she could use in this case are bank savings and her old bicycle. Instead of first waiting for someone to buy the bicycle, Mai could go to the bank and withdraw her savings and so this asset would be used first to pay for her loan.

2. PURPOSE OF THE LOAN

FOR LOANS USED TO BUY ASSETS WITH POTENTIAL TO INCREASE IN VALUE IN THE FUTURE (HOUSES, LAND, APARTMENTS), MANY FACTORS SUCH AS PROPERTY VALUE, LOAN DISBURSEMENT RATE, CALCULATION, AND LIQUIDITY OF ASSETS MUST BE CONSIDERED.

For example, in the future, Tuan wants to buy a house in Da Lat to have a permanent residence, so he needs to determine what the estimated value of this house is now and what it will be in the future, as well as whether he will be able to sell the house to get his money back quickly in case of an emergency.

As the liquidation value of consumer loans and/ or partially used loans for work purposes (vehicle, phone, laptop, electrical appliances, furniture) will decrease over time, the following factors need to be considered carefully:

Use value: Is the item to be bought is absolutely necessary and is there an alternative that could satisfy your needs?

Similarity: Is there an item with similar features at a reasonable price and in line with your budget that you could purchase, instead of borrowing extra? Studying this question carefully can help the function of the product to be understood compared to similar items on the market.

For example, if Mai wants to buy a laptop with a modern, youthful design and a reasonable price tag, she could consider other models with similar advantages like Acer, Asus, etc. However, if Mai wants a laptop with high security and good performance for her work and for long-term use, she could consider taking out a consumer loan to buy a high-value laptop like a MacBook or Microsoft Surface. Mai should consider and compare the value of the laptop to be purchased based on her own purpose and needs.

3. BORROWER’S CHARACTERISTICS

The characteristics of the borrower can be assessed by AGE, HEALTH and PRESSURE AND RISK TOLERANCE (Risk appetite).

In terms of age, when you are young and your income-generating journey is as long as Tuan’s and Mai’s, you are more likely to repay debts and more flexible than your parents or people in their 50 - 60s, whose labor capacity is reduced.

In terms of health, if you are healthy, your ability to generate income will obviously be more stable than a person with health problems, so it will also be more feasible to pay off a loan, and vice versa.

The last factor – the ability to withstand pressure and risk – is somewhat subjective and more difficult to assess. The reason is that only you, not any finance companies, can evaluate the factor. Only you can feel and evaluate your spirit when facing loans and having to spend sparingly in the coming months to repay your debt. After previously learning about the Information of loan package and Options for preventing risks, you can now take a quiz on risk appetite assessment to help you understand more about the characteristics of the borrower.

RISK APPETITE

Let’s test your risk appetite by taking the following quiz.

RISK APPETITE RESULTS

60 - 80: NOT RECOMMENDED

You have an unstable source of income and too little understanding of the credit market. In addition, your actual need for the loan is not enough for you to take it out. You should consider accumulating more savings or find a more suitable spending alternative.

81 - 120: NOT SO IMPORTANT

You can consider borrowing, but you need to have a stable income for at least 6 - 12 months. Understanding the loan package information is crucial since it’s useful for you to find a good interest rate and prepare future risk management options for yourself.

121 - 180: BALANCED

You are in a comfortable situation to take out a loan for your spending needs. The repayments may be in the scope of your ability and calculations. However, it is also necessary to carefully consider the loan details, including loan value, loan term, and other binding terms in the contract.

181 - 230: RECOMMENDED

A stable income and a low percentage of income to repay are two main factors for you to consider when applying for a loan. Remember to carefully consider details such as loan value, loan term, and other binding terms in the contract.

231 - 300: IT’S A MUST

For you, borrowing is essential, so there is no reason to not take out a loan. You have a stable income, rich knowledge, and experience of consumer credit. The loan is also insignificant compared to your ability to generate income. The important thing with this loan is that you can achieve your goals and financial needs as expected.

4. DETAILS OF A LOAN PACKAGE

The details of a loan package include the loan value, loans to assets ratio, loan interest structure, monthly principal and interest, prepayment penalty, and other conditions in the credit contract.

For example, Tuan collects a lot of loan package information from different financial institutions. In order to choose the right package, he needs to compare the above criteria between the loan packages as well as the associated conditions and set his priorities. The better interest rates will come with higher requirements for disbursement to be approved as the basic principle is that high profits will come with great risks. He also gives priority to loans at large banks or finance companies, since they always have superior reputations and offer better interest rates than small-scale ones.

5. INCIDENT PREVENTION PLANS

Anticipating possible bad situations for your income and assets during the loan repayment period and preparing solutions for those bad situations will help you stay in a better financial and mental position when taking out any loan.

If, upon assessment, you feel that the loan package is too risky for you and your family, you can temporarily stop and prepare more before using credit for consumption and accumulation purposes.

For example, if a fixed monthly loan exceeds the balance that Mai can save every month, requiring her to borrow more from relatives or cut down on basic expenses such as meals in order to pay for it, Mai must reconsider or even refuse the loan.

Finally, after going through the above 5 assessment steps, if you still feel confident about getting a loan, you can now also be assured that the risk level of the loan decision has been reduced and its reliability is also quantified much more. In fact, if you are well prepared, have specific plans, and feel confident, dealing with financial pressures will be much easier and more effective.