Loans are a sometimes unavoidable necessity, but we don't like to have that endless debt paying to the bank on our back.
But is it so that it is a necessity? Aren't we deluding ourselves? Isn't it just one of the common beliefs that humanity simply adopted and followed blindly?
How is marketing functioning? We are often not aware of it, but it is affecting us all the time.
Here is one of the stories that explain it pretty well. It is not the result of some research on consumer behaviors, but an anecdote of my colleague.
He's not eating chocolate at all. It is not that he doesn't like it; he is just not eating it. One day, on the way to work, he ends up in the store buying chocolate. He's arriving at work with this chocolate, and he's starting to ask himself what happened. He realizes he doesn't even want that chocolate.
There is no desire to open it and eat it. What triggered him to buy it? Then he remembers. On his way to work, there was a billboard that advertises chocolate. He was driving by that billboard every day. Maybe even not paying attention to it and not reading it at all.
His subconscious mind was registering it and served it to his consciousness until that thoughts became an action.
Today when the concentration of people in towns is so significant, we are the billboards. When some action reaches the critical number of people who repeat that action, it becomes adopted.
We see our neighbor, friend, relative, or colleague buying a new car, and we buy it too. We see other people buying a bigger flat, and we are thinking of it. We see people all around us getting a loan. And we get it too.
The Non-Purpose Loan
I was living in the family house together with my parents and younger sister. After my father passed away and I've got a job, I felt the need to start to live on my own. I didn't decide to move, but to stay in the house and make my apartment in it. The house is significant, and it contains two independent apartments.
When I started my apartment arrangement, the house was already close to thirty years old, and many things needed replacement. I couldn't afford to invest much in the flat renovation. I did the most fundamental works for a living to be comfortable.
Precisely in that timing, the gas fuel arrived on our street, so I first invested in bringing the house's gas. It is cheaper, cleaner, more reliable, and easier to use for the heating and hot water supply than the fuel oil system we were using before.
The next thing screaming for a replacement was the house bathrooms and water supply and drainage system. So I did it too.
As I made all that investment for the whole house and not just for my apartment, the needed amount of money was significant. I needed to find a new source of financing.
I went to a bank asking for a loan. There were two loan models available that fitted to:
- Amount of money I've needed
- My income generation level
- And my client status in the bank.
One model was a non-purpose loan, and the other was a purpose-specific loan. A non-purpose loan provides the money in cash without the loan user's need to justify spending the money. On the other hand, a purpose-specific loan will not just deliver the cash to the loan user, but it will require the user to justify the expenses for which he uses the loan.
The bank did indeed presented me with both models. The purpose-specific loan was favorable compared to a non-purpose loan in terms of the user's interest to pay to the bank. But it required some entry documentation from the contractors that would perform renovation in the house. Required documentation was the offer accompanied by the cost calculation.
Non-purpose loan, on the other hand, didn't require any documentation to be collected from the contractors but was roughly 30-40% more expensive than a purpose-specific loan.
I was not planning to have all the contractors working by the book to provide the invoice. At the moment the bank noticed my unwillingness to collect required documentation for the purpose-specific loan, it readily offered me the non-purpose loan "as the better solution for me."
It was a better solution for the bank and not for me, though. Either way, they gladly sold it to me.
The banks should work for the interest of the people and the government, right? But they work for the welfare of neither the people nor the government. They work for their interests only.
In the end, I wanted the job to be done well and to have a guarantee for the works. Eventually, I hired the severe contractor who did provide me the offer with the calculation and provided the receipt after the done job.
For a minor part of the works only, I hired the contractors that didn't provide the receipt. But since the main contractor recommended them, I could have readily agreed with him to include the other contractors in his offer and get the cost calculation for all the works together.
But I've already taken a non-purpose loan and considering everything; it must be that in the end, I've paid 25-30% more by paying off the non-purpose loan comparing to a purpose-specific loan.
It wasn't the bank's fault, though, because I ended up with a more expensive non-purpose loan; they just used my lightheadedness situation.
I didn't invest enough planning on how I'm going to finance the renovation works. When the obstacle crossed my path in providing the bank's cost calculations, I've chosen to bypass it instead of dealing with it. I was unmindful with my money, wanting to have things done as quickly as possible and missing to plan something as crucial as financing.
I've paid off that non-purpose loan in five years and, in the short term, learned nothing from that experience.
I've created much more debt later on, in much more significant amounts and more dangerous forms. The circumstances that occurred on top of it shortly after made my financial situation almost unbearable for me.
The Housing Loan
I've paid off the non-purpose loan and living in my house apartment for five years. I've realized I want to upgrade my life and start a family. The house was another five years older, and it was time to decide if I want to stay there and invest more money in renovation or look for another place to live.
I was traveling to work half an hour to forty minutes one way each day. I've started looking into different possibilities in Zagreb, the capital where I'm working. My intellect was telling me it is better to have my living place without being under the same roof as my mom and sister.
But my feelings were holding me back from actually making this move as I felt sorry to leave them in an old house without financial possibilities for maintenance.
Two more years passed by, but I didn't do anything as there was no one beside me to help make my mind. Then I met my future wife. We were married pretty quickly and started to live in my apartment in the house, and my mom and sister. Soon we have realized that we want to live on our own. Talking to my mom and sister, we have all decided to sell the house and split.
However, in my head, I was still not clear if I would like to stay in the house where there is more space for a family and a nice backyard or move to a flat in the capital. Finally, I've decided to raise a housing loan and to buy a small apartment in Zagreb.
The idea was that first, my sister moves to this flat. After that, my wife and I would either stay in the house or sell it and buy a flat.
There was only one problem in all that scenario. Despite or because of the sloppy conversations with my wife, my mom, and sister, it was my sole scenario, but not of all of us.
The town where we lived is the satellite settlement. Most people living there migrate daily to work in Zagreb. It was pretty depressing, especially in the house with no young families around us.
Therefore, in the end, my wife and I decided that we will move to live in the flat that we bought. Many young families came to live there. It was the whole new block built, and it is a much better place for us to live emotionally.
Raising The Loan
Now about the housing loan, I've raised to buy the flat. I went to the same bank where I raised the non-purpose loan. Croatian monetary politics still base on the foreign currency - the euro. So is the case with the banks' financial products - besides loans in euro, banks offered loans in the Swiss franc. The loans in our domestic currency, Croatian kuna, were very rare or not offered at all.
Banks offered loans based on Swiss francs with a significantly lower interest rate than the loans in euro. Some bank officials warned people that it is safer to get a loan in the euro in the long run. Croatian monetary politics connects to the euro. If some turbulences with the currencies would happen, then the Croatian National Bank will maintain the euro's exchange rate related to Croatian kuna stable. At the same time, the relation of other currencies to kuna might become unstable.
But some bank officials were saying it, and some didn't. Some asked you if you are sure what you are doing if you are raising the Swiss franc loan without explaining why they are requesting. Others were promoting Swiss franc loans as the cheapest in the long run because of the lowest interest rates, which was the truth but looking at it only from the perspective of that moment.
There were no coordinated instructions from Croatian National Bank as the responsible institution. Looking back, it is not clear why the banks didn't offer loans in Croatian kuna only. Kuna is a stable currency already for decades, and, naturally, you pay off your debt in the currency you earn.
I've decided to go for a loan in Swiss franc. The monthly annuity that I've had to pay to the bank was locked to the Swiss franc. The sum projection that I have to return compared to the projection of the loan connected to the euro was significantly lower in the long run because of the lower interest rate for the loan in the Swiss franc. That was the main reason on which I based my decision to get the loan in Swiss franc.
Besides my monthly annuity locked to Swiss franc currency, the interest rate was variable. And the bank could lower or raise the interest rate of its own free will. Those were the conditions that all of us raising the loans were aware of, but we couldn't do anything about it if we wanted the loan.
But nobody cared much about all of this staff, including me. In 2007, the national companies' stocks were booming, real estate prices raised sky high, and everything looked pinky.
The hard times came very quickly, though. The United States real estate bubble reached its peak in early 2006 and started to deflate rapidly in 2006 and 2007, causing a credit crisis and recession in the US.
A few years later, from the end of 2009, the European Union debt crisis took place. In some EU countries, it was also caused by a real estate prices bubble, similarly to in the US.
Although Croatia was not yet part of the European Union (Croatia joined the European Union in 2013), the European property bubble crash affected Croatia.
As my wife and myself moved to a new flat in Zagreb, we've started to sell the house. We were sure that we would manage to sell the house and close the loan using the house sale money.
But the crisis from the US and European Union finally flowed to Croatia too. Property prices started to drop down rapidly in Croatia, and many owners wanted to sell their houses. But there were no buyers. People were afraid of investments in such hard times.
As the European Union crisis was connected to some union members' debt, the euro currency started to devalue, and investors began to look for safer currencies than the euro. The investors considered the Swiss franc as one of the most stable coins in international monetary relations. So the capital started to move from euro to Swiss franc leading to its strengthening comparing to the euro.
As Croatian currency kuna exchange ratio is fixed to the euro, Swiss franc started to strengthen compared to kuna. My monthly annuities were locked to Swiss franc currency. Meaning I had to pay monthly in domestic cash, kuna, in the amount determined by the Swiss franc to kuna exchange ratio. That ratio was higher and higher, and consequently, my monthly annuity was higher and higher.
Besides, also caused by the crisis, interest rates started to grow too. Both, Franc currency ratio to kuna and loan interest rates have strengthened 45% each compared to its values when I've raised the loan.
My wife didn't work at that time, partly because she was sitting at home with our baby, partially because she couldn't work in her profession before obtaining Croatian citizenship.
My income solely was paying off the loan. Monthly annuity raised from below half of my income to two-thirds of my revenue. What was left of it was hard enough to cover food and bills expenses. This terrible growth in monthly annuity amount happened in three years from the moment I've raised the loan.
In the beginning, I was selling some stocks I had on my side to fill our budget. But since the stock prices were going down rapidly because of the crisis, I didn't get much for it.
After that option was exhausted, I was using overdraft on my bank account. It means that you can spend the money you don't have using your debit card, and you can raise the ATM cash. The amount you can spend that way is limited and depends on your monthly income and bank client status.
You can get the money you need that way, but using the account overdraft was heavily penalized. The interests for account overdraft were as high as 15% annually at that time.
It is one of the products the banks love. First, they trap you in the loan with the conditions unbearable to withstand; then they overcharge you for the additional money you have to borrow from them to survive.
If you're asking yourself why I didn't sell the flat, paid the loan back, and return to leave in the house, well, I couldn't. The reason lies in the Swiss franc exchange ratio increase to Croatian kuna. It rose 45% compared to its value when I've raised the loan.
It means that it was not just my monthly annuity, that was 45% higher, but the remaining loan equity was also 45% higher than its original value. I've got the loan in kuna currency, but the loan value was tracked as the Swiss franc amount. If I wanted to close the loan at that moment, I would have to pay the remaining equity in the sum of 45% percent more in Croatian kuna currency than the amount in Croatian kuna I've got when raising the loan!
It was the senseless situation that after a couple of years paying off our debts, we debtors owed to banks in some cases even up to 50% more of the equity than we've got by raising the loan!
Moreover, as prices on real estate markets fell, I would get 20% less for the flat in case of selling it. In the end, I would be able to pay off only half of the loan. The other half, I would have to continue paying off and not having the flat anymore. I would feel like the complete jackass in such a position.
Many people didn't have another choice. They couldn't pay off the higher monthly annuities any more. The bank confiscated the property they bought, sold it for next to nothing, and claim the rest of the debt from debtors to be paid off.
After some years of living on the edge, high tensions at home, many lost nerves, and living from paycheck to paycheck, I finally hit the limit of my account overdraft and had months of unpaid bills on my credit card. I didn't know anymore how to invent money. Just a few years before this moment, I thought I couldn't stay without the cash.
I was forced to sell everything I still had in stocks. I covered the non-purpose loan I was paying off with that money, the account overdraft, and my credit card debt. Everything except housing loan. We were saved.
There were approximately one hundred thousand loans in the Swiss franc in total in Croatia. The situation was unbearable also for the rest of the people who trapped themself in it.
The nonprofit association called the "Franc association" was founded by the volunteers. They've raised the court case against the banks and their one-way decisions to raise the interest rates. The case was also expanded by the indictment for applying foreign currency ratios in loan payment plans. The act opposed Croatian constitutional law what is logical, as all of us have got the loan money in Croatian kuna currency and not in Swiss franc or euro.
After years, the court made the judgment. It declared one way of raising the interest rates by the banks illegal. But using the foreign currency ratios in loan payment plans was declared legal. The positive part of the judgment was of no use, as the government didn't state the law which would apply this judgment into action. Instead, the debtors could enter into an uncertain court process with the banks and demand its overpaid money back.
However, all that public pressure finally made our passive government do something. They've brought some measures which finally improved the position of us debtors comparing to fat insatiable banks.
The government lowered the interest rate and froze the Swiss franc value compared to Croatian kuna for anyone with a Swiss franc loan. Swiss franc currency ratio to Croatian kuna was also frozen on one level as it started to rerun riot. The currency ratio freeze period was set to last for one year. The government gave themselves a one-year deadline to bring the final solution, which will resolve the situation with Swiss franc loans.
After almost a year, the government declared the law. It obliged the banks to convert all Swiss franc loans into loans connected to euro currency and pay back the overpaid amounts caused by raising the interest rates. Hura!
Banks are not satisfied with this decision, but they had to obey it. It is not the perfect solution, as we still pay our monthly annuity connected to foreign currency and not in our domestic one. The fairest solution would be to convert all loans into the Croatian kuna loans, but the euro is of stable ratio to Croatian kuna, so we sleep well for now.
At this moment, I'm looking into the possibility of transferring my loan to Croatian kuna as well as many others do. It is best to pay off your debt in the currency you earn and avoid any quakes on the world currencies scene.
Update: Croatia will enter the Eurozone system in a couple of years. It means that we will introduce the euro as our national currency. In that case, I should pay my monthly annuity in domestic cash, ie. Euro. For that reason, I'm not considering to transfer my loan to kuna any more.
I am where I am now with this loan. After this stress period with 45% percent of higher annuity has passed, I'm ok now with paying it off.
- Are you thinking about taking the loan?
- Well, don't be deluded with me being ok with it. I'm ok, but I would be even better without it 🙂
- Be FREE of debt in any way you can.
This whole story I've written down about getting the loan is here for you to get a clear picture of how it is to live with a loan on your back. It is of tremendous difference comparing to living without debt.
And it happens overnight. One day you're clean, and the next day you sign, get the money, spend it and start to pay off in a slavery mode.
As well as with the case of buying a car, I will give you some hints to consider before you get yourself into the position of raising the loan.
- Do NOT raise a loan!
- Take your time to understand your position and where you want to be in five, ten, and twenty years from this moment. It's well worth thinking, as paying the loan could take even longer than twenty years.
- If it takes a year or two to bring the decision, so be it. Write down your thoughts about it. Use a diary to come back and see what you were thinking a few days or a few months ago.
- It allows you to rethink, strengthen, or change your core beliefs. Talk to your subconsciousness; consult your intuition. Write down a question for your subconscious mind, and then record the answer that pops up in your head. If the answer is blurry or incomplete, raise the sub-questions and write down the answers again.
- You can apply this method not only for the decision-making process but also for a better understanding of yourself, who you want to be, and your life purpose. It can all help you to understand if you need a loan at all.
- Think well of the situation in which is your country, your region, and the world financially. It is hard to predict if there is some crisis coming. Some experts will scream there is, some others will talk vice versa.
- Be especially careful if you see everything around you booming. Particularly stock markets and real estate prices. If this is so, there is a good chance for that bubble to blow, causing some monetary crisis. It doesn't have to be that your loan will get more expensive to pay off, but you can lose your income source due to such a crisis.
- Be aware of, better to say, be afraid of the capital greediness. Behind smiling faces of officials that are just ordinary people like you or me sits real owners who make the rules and who's only goal is more significant profit. They don't care if they will squeeze the last drop of juice from you as long as you live, work, and pay off your debt. They will be cautious not to push you over the boundaries where you can not survive. They need you alive, but be sure that they will test your limits.
- We in Croatia started to bread after almost a decade of struggling. Ask yourself where the struggle will appear next? Do you live there?
- Is there any other possibility in front of you besides raising a loan? Take it rather than the loan itself.
- Do you live in a family house, and all of you are getting along well? Adopt a place to live on your own inside that house. Maybe you'll not love the idea in the short term but think about this option in the longer run.
- If you will get married and have children, your parents will be of great help to you in handling the kids. They will take care of them when you are exhausted. When you have to go to work, maybe you will not like to put your kid in kindergarten. When you want to go out without your children or even travel on your own, all this would be possible if the children's grandparents are close and familiar with each other.
- You can always move into your own house or flat later, and save the money for this purchase in the meanwhile.
- If you live with your parents in a flat and there is no space for you to start living on your own, consider renting a flat rather than raising the loan and buying a new one. This doesn't have to be a final solution. Take it as a temporary one if you don't like this concept. If you're still alone, you will more quickly pay off the rent than the loan. You will be more flexible in terms of canceling the rent if your income cuts off. You can also more easily change the flat if you don't like it.
- There are much fewer flexibilities available once you get a loan. You can not cut it so quickly. Read through my story above if you didn't so far.
- When you find someone in your life, it will be much more manageable and secure for the two of you to pay off the loan if you decide so. If one of you lost the income, there is another one who can support you both until things get better again. You are not at a high risk of ending up in deep debt and losing the property you've bought.
In the end, if you do decide to take a loan, give yourself enough time to think carefully about the conditions you will sign. Set a goal of getting the loan to yourself and make a list of actions that will lead to fulfillment. Some of the most critical steps for you to consider are listed below.
- Investigate available options on the market among different banks. It may be that you are receiving your paycheck through one bank and the other bank offers better loan conditions for you.
- If you have to move your bank account to that other bank, then do so! It is no big deal. You will get familiarized with the new bank and their services pretty soon.
- Choose a secure, well-established bank with a positive reputation. Do not go for some superb conditions if offered by the bank you don't trust or without any credibility. In the longer run, the conditions that attract you initially can cost you a lot more than savings that are supposed to happen but never will.
- Try to negotiate better conditions for yourself. The banks will not let you know officially of this possibility. But many will be willing to offer you some better terms compared to declared ones if they can keep you as a client.
- Ask your company where you work if they have agreed on better loan conditions for their employees with the bank they're doing business with.
- Do not take the loan which pays off-plan tight to foreign currency!
- Take the loan in your domestic currency only, even if it is a more expensive one in terms of higher interest rates.
- Get yourself familiar with the pay off plan that you will get. See how much more you will pay at the end compared to the value that you will get. If it seems crazy to you, ask for a lower interest rate or squeeze in a smaller period for the loan to be paid off.
Or GIVE UP. Reconsider and abandon this goal and do not take the loan at all. Abandon the need to create debt and becoming the slave for the benefit of individuals who will become even wealthier at the expense of you becoming poorer, drained, and freedomless.