McLan Accounting’s Banking Financial Guide
Banks are an important part of most people’s lives. They offer a safe and convenient way to store your money, access your money, and even invest your money. Of course, you can also get loans, credit cards, and other financial tools through your local bank. To help ensure you are getting the best from your banks, read through this complimentary guide from McLan Accounting.
Getting the Financing You Need
Getting financing for yourself or your business is often very important. Most people don’t have enough savings for major purchases like homes, cards, businesses, and more. Banks are happy to lend you the money in exchange for you paying interest. While it is necessary to be careful to avoid predatory lenders, financing from a bank can be a great opportunity.
How to Raise Money for a Small Business
Raising capital for a small business is one of the most important, and often most difficult tasks that business owners need to accomplish. There are quite a few sources for financing, and choosing the right one is very important. You can, for example, bring on an investor who will provide you with the money you need in exchange for part-ownership in the business. While this is a good idea in some cases, it is often better to simply borrow the money so you’re not giving up equity in the company.
Types of Loans for Small Businesses
If you know how much money you need to borrow, you can get a great loan from a bank or other financial institution. You can opt for short-term loans, which typically last anywhere from a month to a year or two, or a long-term loan, which will be paid back over the course of up to 30 years. While longer term loans often have lower interest rates, you’ll end up paying a higher amount in interest because of the extended repayment period.
What do Banks Look For
When a business looks at a loan application they will want to make sure that their investment is as safe as possible. If there is to much risk, they won’t be willing to loan out the money. Even if they are willing to lend you the money, they will charge a higher interest rate if they feel that the risk is significant. The banks will evaluate your loan application based on the following things:
• Collateral – Do you have collateral for the loan? Collateral is some asset that the bank could take ownership of if you don’t pay the money you owe.
• Company History – How long has your business been in operation? The older the business, the lower the risk.
• Personal Credit – If you are personally guaranteeing the loan, they will look at your personal credit score.
• Other Debt – What other debts does your company have that you are obligated to repay?
• Cash Flow – Does your business have the cash flow to make the monthly payments on time each month?
Each bank will have a variety of other factors that they look at as well. This is why it is often important to apply at many different banks to find the right one for your specific situation.
What Does a Loan Proposal Consist Of?
If you’re looking to get a loan from a bank, you’ll need to submit a loan proposal to the bank for review. You can include any type of information you would like in your proposal, so make sure do the best you can to include everything a bank will look for. This will include the following things:
• General Details – All the general information about your loan including the purpose of the loan, how much you need to borrow, and details about your business.
• Description of the Business – Let the bank know what type of business you run, how much it makes, its age, any assets, number of employees, and any other relevant factors.
• Management Profile – Adding information about the primary owners and managers of the business can help to provide confidence in your business’s ability to repay the loan.
• Market Details – State what market you are in, information about your competitors, and any other factors that may be relevant to how you will make the money to repay the loan.
• Financials – Provide the bank with financial statements from the past several years to show that you will have the money to repay the loan.
About Personal Loans
Business loans are important if you are a company owner, but everyone can benefit from some type of personal loan. This would include auto financing, a mortgage, a home improvement loan, and much more.
Early Repayment of a Mortgage
If you have a mortgage, you have likely noticed that each month the majority of your payment is going toward interest payments. This is the case for at least the first half of the mortgage terms on a 30-year mortgage. You can, however, add any extra money you have to your payment, and that will go directly toward principal. For example, if you have a 30-year, $250,000 mortgage and you put an extra $5 per month directly toward principal, you will pay your mortgage off 2 years and 4 months early. You’ll also save $21,298.29 in interest!
Should You Refinance Your Mortgage
Another way to save money on your mortgage is to refinance to a lower interest rate. In general, it only makes sense to refinance if you plan on staying in your home for at least five more years. While refinancing, consider getting a shorter-term mortgage.
What About a Home Equity Line of Credit
A home equity line of credit functions like a standing loan from which you can take money, and it uses the equity in your home as collateral. While this is a good way to get a fairly low interest rate source of money, you do have to remember that it is putting your home at risk should you become unable to make your monthly payments. In some cases, this is a great way to get the money you need, but make sure you think through all the risks.
Is a Reverse Mortgage a Good Idea?
A reverse mortgage is when you get a monthly payment based on the equity in your home. The company you work with will pay you each month, and will only be repaid that money when you sell the home or pass away. This can be an effective way to get some monthly income through retirement. Just keep in mind, however, that if the reverse mortgage lasts a significant amount of time, the home won’t have any equity to pass on to your loved ones.
Is Loan Interest Tax Deductible
Some types of loan interest are either fully or partially deductible depending on your situation. The types of loans that typically have deductible interest are:
• Education Related Loans
• Business Loans
• Mortgage Loans
• Certain Investment Loans
Can You End Private Mortgage Insurance Payments?
Private mortgage insurance, or PMI, is required for those who aren’t able to make a down payment of 20% or more. When this is the case, you pay a set fee each month to insure the mortgage company doesn’t take a loss. Once you have repaid 20% of your mortgage, the PMI will end.
Answers to Common Questions About Loans
Read this section to learn more about loans and get answers to some common questions.
What Happens if I Co-Sign a Loan?
When someone has a difficult time getting a loan on their own due to a low credit score, or limited credit history, they often ask a loved one to co-sign on a loan. If you have been asked to co-sign, you need to really think your decision through. When you co-sign, you are agreeing to repay the full amount of the loan, if necessary.
In the vast majority of cases, the lender won’t contact you for repayment unless the primary loan holder has gotten behind in their payments. They can, however, seek repayment from you at any time they choose. If the person you co-signed for doesn’t make their monthly payments, and you don’t make them right away, it can also hurt your credit score.
A good rule of thumb is to only co-sign for a loved one if you are willing and able to take on the full amount of the debt. Of course, you will hope that this doesn’t happen, but if you plan for the potentiality, you won’t be at risk due to the choices of your loved one. In addition, this will help to avoid serious conflict between you and your loved one should they stop making their payments.
How to Get Great Loan Rates
When seeking any type of loan, the most important factor to look at is the interest rate. Getting your interest rate as low as possible will end up saving you thousands of dollars over the course of the loan. Ideally, you are going to want to get a fixed rate loan. This will help to keep your interest rate low since it won’t adjust based on external factors. Other ways to get a lower interest rate can include:
• Increase Your Credit Score
• Put Additional Money Down
• Add Collateral
Home Equity Line of Credit VS. Second Mortgage
If you want to get some cash from the equity of your home, you will have two primary options. First, you can get a home equity line of credit. This is where you are borrowing against your home as you need the money. This is an open-ended option that makes it easy to get money over time rather than just one lump sum. A second mortgage will get you one set amount of money all at once. Deciding which one is right for you will involve evaluating how much money you need, the interest rates, and other factors.
How Much Does a Loan Cost?
Lenders are required to disclose any type of interest rates, payment terms, fees, and other expenses associated with a loan. You will typically receive this information at the time you get the application form for the loan. Don’t make the mistake of just discarding this documentation as ‘fine print’ that can be ignored. If you agree to a loan and discover later that there were fees that you didn’t expect, you will be obligated to pay them.
Answers to Questions About Bank Accounts
Staying informed about bank accounts will help ensure you are able to keep your money safe, access your money when you need it, and get the loans you need. Read through these frequently asked questions to learn more about bank accounts and how to get the best deals.
What Fees Should You Watch Out For?
When using the services of a bank you need to keep in mind that they need to make money in order to provide you with their services. Banks can make money in many different ways, one of which is going to be fees. The banks are legally required to disclose any type of fees they are charging, so nothing should be a surprise. That being said, however, sometimes this disclosure is in the form of some fine print document that people often don’t read.
Some types of fees that may exist include the following:
• Minimum Balance Fee
• Annual Fees
• Interest (Typically on Loans)
• ATM Fees
• International Use Fees
• Overdraft Fees
Each bank will have their own lineup of different fees that they charge. With this in mind, you will want to shop around to find a bank that offers the services you need free of charge so you don’t end up having to pay these fees.
What are the Different Types of Bank Accounts
Banks offer a variety of different types of accounts that you can use based on your needs. Looking at all your options will help you to choose the right one so you can get the best results:
• Checking Accounts – Checking accounts allow you to write checks, use debit cards, and have easy access to your money.
• Savings Accounts – These are typically used for saving money for the future. You usually can’t access the funds with a check or debit card, but can sometimes pull money out of them at an ATM.
• Money Market Deposit Account – This is similar to a savings account that accumulates interest, but you can also write checks from it. The interest rate is usually higher than a normal savings account. You are limited to just six transfers from this type of account per month.
• Certificate of Deposits – Certificate of Deposits, or CDs, provide a guaranteed rate of return over the course of a set term. This can be anywhere from a few days to several years. Once you start a CD, you can’t withdraw the money until the CD has matured.
What Should You Look for in a Bank Account
There are many features and options that you will want in a bank account. The following are some things to watch for:
• Interest Rate
• Personalized Help
• Minimum Deposits
• Minimum Balance Requirements
• Access to Money
• Usage Charges
How Much Does the FDIC Protect?
When you put money into a bank it is insured by the FDIC, which means even if the bank goes out of business, your money is safe. This only applies, however, to accounts up to $250,000. If you have an account with more money than this, you may want to open separate accounts with another financial institution.
Should I Get Overdraft Protection?
If you generally keep a low balance in your checking account, overdraft protection will help ensure your checks will clear even if there isn’t enough money in your account. You can get the money to pull from a savings account, or have the bank extend you a temporary line of credit, which will need to be paid back with your next deposit if possible. Using overdraft protection will typically come with some type of fee, so keep that in mind when signing up.