Negotiation is a skill that comes in useful whenever you wish to land a good deal. And thanks to the large number of financial institutions in the market today, potential borrowers can bargain extensively, as far as loan terms are concerned. In fact, even if a borrower is getting the best deal in his opinion, there is always room to negotiate further. This is because lenders often price their loans keeping in mind the scope for negotiation. Unfortunately, most borrowers fail to negotiate the way they should. So, this blog will share with you 4 smart ways in which you can go about it.
Understanding negotiation
Generally, a consumer’s bargaining power can either help him to negotiate the price of a product or service, or it can improve the quality of the service at the same payment terms. So, when it comes to a loan, it is essential to understand the nitty-gritty and the hidden expenses.To negotiate right, keep these 4 pointers in mind.
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Proper research
It is essential to do your homework before applying for a loan. Different financial institutions might offer different kinds of loans. So, you need to approach the right one. Also, research will give you access to the fundamental terminologies associated with the loans. Find out if a loan has any hidden expenses, so that you can negotiate the terms better. Lastly, proper research will enable the borrower to compare the terms of the loan across various financial institutions. Such comparison will enable the borrower to start the negotiation conversation with a predetermined target in mind.
Speak responsibly and go prepared
As per the previous point, proper research will allow you to understand the terminologies and the nitty-gritty of the terms of the loan. And speaking in the language that lenders understand will demonstrate confidence. Knowing precisely what you want will give the borrower an edge at the negotiation table and also a chance to control the negotiation conversation. Few terminologies associated with almost every type of loan are balloon payment charges, financial covenants, loan to value ratio, guarantee, tenure, upfront transaction costs etc. So, these terminologies should be well understood by the borrower in advance.
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Focus on prepayment charges
Most financial institutions charge a fixed percentage fee on the prepayment of a loan, i.e. one lump-sum payment. This may seem counterintuitive, but this is true. Such charge is levied because the early repayment of loan affects the cashflow of the lender, i.e., lesser interest is collected and it results in an asset-liability mismatch in the balance sheet of the lender. However, negotiating the prepayment charge will give the borrower flexibility in times of dynamic interest rates. Such flexibility will allow the borrower to repay the loan as and when there is an opportunity for the same.
Use your own judgement
As a borrower, you should know that as long as you have a good credit score or can offer valuable collateral,you can negotiate on all loan terms. So, from interest rate and tenure to processing fees, prepayment charges, annual fee, and commission, practically everything can be negotiated. However, for secured loans, think carefully before pledging any house, land or other asset as collateral. Remember that in case of default, the financial institution can repossess and sell the same. And this can affect your financial stability in the long run. Also, a long tenure might mean smaller EMIs, but will lead to high total interest cost.
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To conclude, negotiating loan terms after researching and gathering relevant knowledge is advisable. Compare multiple lenders, go through terms and conditions carefully, and assess your repayment capacity before zeroing in on one.
