Taking out a loan can be intimidating, but it needn’t be. Our Head of Structured Finance Gilles Stuck has been in the lending business. In this #WealthInsights podcast and article, he explains the six most common mistakes people make when taking out a loan and how you can avoid them.
Wealth Insights Podcast: Six things to avoid when taking out a loan
Click on the player below to hear the conversation between Mi and Gilles:
The objective of borrowing money is to be able to achieve financial goals. The more serious side of entering into a loan agreement is the commitment to honour contractual obligations such as paying interest and repaying capital. “As important as it is to find the right type of loan structure to maximise financial gain and flexibility, it also pays to become aware of the common pitfalls borrowers stumble into,” says Gilles Stuck, our Head of Structured Finance. Let’s shine a light on them, so you can navigate your lending journey with ease.
Mistake 1: Ignoring the worst-case scenario
Gilles Stuck: “If you’re borrowing money, you should have a plan and the means to pay back your loan in full, plus interest and any charges or penalties that may arise. This may sound simple, but in my experience many people do not consider all possible ‘worst case’ scenario costs and end up in tricky situations. Consider, for example, that the property market could slump and the bank asks you to reduce your loan amount to better align their risk with the property’s value – are you set up for this scenario? The key message it to make sure your loan suits your individual situation, needs and limitations. Leveraging is a great tool that can lead to financial gain, but take the time to ensure it’s aligned with your personal risk profile and risk appetite.”
Mistake 2: Not having a hedging strategy
“Hedging is all about protecting you from risk. It’s ultimately a risk management technique to protect your assets and investments. It seems obvious that borrowers would consider hedging as a matter of course during the lending process, however, this step is often overlooked. Here I refer to my oft-used motto: hope for the best but plan for the worst. Despite a higher initial cost, using derivative options to hedge against share price drops in single stock loans may pay off in the long run. Embedding this into loans can bring benefits such as removing margin call requirements and therefore allowing higher loan amounts.”
Mistake 3: Not understanding all parameters in your loan contract
“I specialise in the field of structured finance. This is an area where we create bespoke lending solutions for clients whose needs don’t fit into the standard products and procedures. Like in any other area of work, the devil is in the detail. Complex lending structures come with complex interconnections between all loan elements. Focusing on ‘big-name’ or attention-grabbing loan aspects, such as spread and debt quantum is a mistake. Of course, these need to be considered, but not at the expense of other critical parameters, such as margin calls or mandatory prepayment events. Don’t get caught out in times of crisis. Before signing on the dotted line, take the time to understand your loan and how all of its components relate to one another.”
Mistake 4: Ending up with an unsuitable loan structure due to lack of transparency
“If you want your loan to work for you – to increase your ability to reach financial goals – it needs to be fully tailored to your personal financial situation. It’s common for borrowers or their appointed external advisors to withhold information. But being secretive about your financial big picture backfires if you require a bespoke financing facility. This can result in having to pay higher than needed interest rates, having a mismatch in your risk analysis or missing out on opportunities for financial gain.”
Mistake 5: Trying to rush the process
“A bespoke financing solution should meet your exact financial goals and needs. Getting this right takes work. And it takes time. We’re set up to deliver solutions fast – but there is no getting around the steps that need to take place before getting to a solution. Ensuring the right risk level requires knowing your situation in-depth. Legal paperwork can be complex, especially in the case of structured finance where solutions can be multi-jurisdictional or involve complex holding structures. And due diligence is of course not something to be rushed. Make sure you ask your lender to explain what a realistic time-line for your lending structure looks like and work with this estimation.”
Mistake 6: Losing time because of disorganised paperwork
“One big delay in time-to-market arises when you have disorganised paperwork. Once again, it sounds simple, but the impact it can have is huge. Taking advantage of the market often has a lot to do with timing. Don’t let disorganisation of your documents be the reason for missing out on an opportunity. Get your paperwork in order before applying for a loan – and, if you need support, of course ask your lender to advise you on exactly what paperwork is needed when.”
Wealth Insights Podcast
Our monthly Wealth Insights podcast focuses on the most important moments in life – whether it is starting a business, building up a fortune, moving abroad, preparing for retirement or transferring wealth to the next generation. We ask the relevant questions and provide answers from a wealth management perspective.