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View Full Version : Getting a term loan or an overdraft to invest? How much is enough?



Zeng Han Jun
25-11-08, 00:35
By: Zeng Han Jun, CPCG, Singapore

First of all, let me briefly explain what is a term loan and overdraft to those who are not familiar with these terms. Both a term loan and an overdraft is a kind of credit facility that is obtained from traditional banking sources, by providing collateral as a mortgage. Common kinds of collateral can include certain types of machineries, land or properties. By pledging such items to the banks, they will extend loan facilities to you for whatever purpose that you may have. A term loan is a one time off loan facility where you borrow certain sum of money and you pay off the principal plus interest over certain loan tenure. An overdraft is very much alike to a credit card facility, where the credit terms are revolving.

Businessmen and investors often take up such loan facilities to scoop up any investment opportunities that they might come across. This is especially so in times of financial crisis, when the stocks are at attractive valuations and businesses start to put up the “For sale” sign when cash flows are low. Banks are often more willing to extend credit facilities when you put up collateral as a mortgage. Look at the freezing up of the credit market due to the collapse of the financial system. All these on goings are making borrowing a much more difficult task and with collateral, you make borrowing a much easier task.

People often put up properties as collateral for borrowing and I would like to caution consumers against taking up of too much loan against your property. Why is that so? Wouldn’t it be better that you borrow more money now at lower interest rates? The thing is, property prices are dropping and if the amount you borrow exceeds the valuation of the property that you have put up as collateral. You might have to fork out cash for the difference. That is also the reason why banks seldom let consumer take up a loan that is equivalent to 100% of the value of your property, in order to mitigate such risks.

If you are thinking of taking up such loan facilities, try talking to a mortgage advisor or a mortgage broker and have them assist you to determine the amount of loan that you can undertake. Amazingly, although brokers, advisors and bankers often earn, based on the amount of loan that you take up with them, they often give risk management advice that are very useful to customers, so that they do not want to take up too much risk unnecessarily.


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