In Debt & Loan World: Cash Flow Is The Most Important

   

So you want to take a loan (either it’s a credit card, personal loan, car loan, or even home loan)? Then you need to make sure that your cash flow is in a good shape. It’s not the balance of your saving account nor total debt of your credit card that is more important. It’s the amount of money that you earn (and then spend) during specific period or “cash flow“.

Let’s compare John and Bill condition below as they are trying to get a personal loan:

• John: Have $5000 cash in his saving account, income $400 per week, living expense about $400 a week.
• Bill:  Have no saving (well, few dollars) but earns $800 per week, living expense is about $700 per week.

Who do you think in a better position to get another loan, say for a car loan?

Both John and Bill have a steady weekly income, while Bill earns more than John, but Bill doesn’t have any savings. John have $5000 on his saving account. But the most important item here is that Bill have positive cash flow: earns $800, living expense $700, hence he got $100 per week called ‘disposable income‘. Yes, the fact that he did not put some of the money into his saving account, that could be something need to be improved from Bill. But he does have a cash flow to serve the new loan.

Let say the new loan will require a repayment of $250 per month for the next 5 years – typical car loan. John with his $5000 could serve the loan for 20 months only. (And could be less if John decides to take some money from his saving account for something else – no one can prevent this: if he wants to use it, then no body can prevent him).

On the other hand, although Bill doesn’t have any savings, since he has the cash flow, the lender will be confidence that Bill will be conviniently re-pay the loan within 5 years and granted the loan to Bill.

Maximize Your Cash Flow In Front Of Lender: Some Tips

So, if you want to make sure you have maximum chance to get a new loan, you need to show to the lender that you have enough cash flow to serve the loan:

• Mention all of your income (even casual or ‘informal’ one). For example: you have $50 most of the week baby sitting your neighbor kids, but you don’t declare this to the taxman. You can mention this additional income to the lender.
• Mention also all benefit from government including social security payment, grant, scholarships, allowance, etc where you actually received some money.
• Be ready with the list all your expense in monthly or weekly period and determine which expense can be eliminated to create more room to repay the loan.
• Show the lender that you actually have a budget, even in very simple form like excel spreadsheet or note in your agenda. Mention that you have been following that budget with discipline.
• Usually the lender is not comfortable if you have credit card with high credit limit, although you don’t use the credit, the lender will assume you will use them all and repay the minimum. In this case, you may choose to reduce the limit or put in writing that you will reduce the limit the next day.
• Maintain your credit history: never forget to pay your bill, always tell your creditor if you have some dificulties to work out some plans.

Remember: never apply a loan for lifestyle, for example: holiday loan, or car loan (to upgrade to better model, etc) or even worse ‘TV loan’. Taking a debt is justified if you use the money for something productive that will produce more money.

Good luck with your new loan !

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• Debt is Good: Only for Investing & Business Though
• Your Homeloan Also Depends On Your Credit Card!
• Kiyosaki: “Savers are Losers” – A Sad Truth with a Catch
• A Sweet Revenge: Let The Banks Pay Your Debt

Denis Kristanda  

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