Father Sez

From and to parents - parental advice to our children on personal financial management and life.
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Debt Management 101- taking on only known and well understood debt obligations

Sunday November 11th, 2007 by fathersez

The CNNMoney story of 9th September started like this.

“It seems surprising that Kurt and Vicki Oliver could lose their home to a bank foreclosure. They had great credit, long-term employment and excellent assets and income.”

This story is another one of the sad stories emanating from the subprime mess. However the Olivers do not appear to have been one of those borrowers who borrowed far more than they could ever afford, and took illogical risks.

As the CNNMoney opener states, the Olivers appear to be pretty stable and switched on people.  

Rather, these people seem to be one of those, who just did not read and understand the fine print of the agreements they were entering into. They entered into agreements, having no idea of the liabilities they were taking on. Now, sadly, they are paying the price. 

Sometimes, we see people at supermarkets, squeezing a loaf of bread, sniffing it and checking it from tip to toe, before buying it.  

Similarly, in fact, even more so, reading and understanding the documentation governing the financial obligation that we are taking on should be a must. But the financial dumps are littered with people who took this brokers word, that lawyer’s word, that lender’s word and regretted that day. 

A former boss of mine told me, “if anyone ever presents a deal to me, a deal that needed me make an immediate decision, my answer would always be NO. 

This makes a lot of sense. The same should apply for any documentation that we are asked to sign. We should ask for and get time to read and understand them, and if necessary get an independent trusted lawyer to vet them for us.

If we are asked to sign on the spot and no time is given for us to study the documents, we should just walk away. That’s it. Period. 

No financial institution or intermediary is there for purposes of charity. Their purpose, maybe, their sole purpose, is to make as much as they possibly can from us. Their lawyers (though, usually paid by us), use their full arsenal to protect the banks, and guess who, is left unprotected and exposed. 

I should know. 

I read an ad for a fixed rate loan that offered me substantial savings should I refinance my mortgage. I applied, went through the process and finally got a letter of offer.  

The legal documentation that followed was something else. The agreement provided for the lender to increase rates anytime they wanted, decrease the term anytime they wanted, transfer the loan to someone else at their wish and my cost…..blah, blah, blah. 

Had I just signed the documents, which was what the lawyer wanted, I would have gotten myself an open ended obligation that appeared to have no limits.  

Whilst it is important to manage our debts well, it is even more important that we take on only well understood and accepted debts in the first place.   

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