What makes a policy loan better than a getting a loan from a bank? Everyone is familiar with the conventional way of borrowing money from a financial institution. But,...
What if there was a way for you to get instantly approved?
What if you didn't need to have good credit?
What if you could have flexible terms in the event you can't repay the loan in a timely manner?
What if you didn't have to worry about opportunity costs?
These are valid questions. Many times, borrowing money can cause financial stress. It's even worse if you're not approved to get a loan. So is there a better way?
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Read through this article and you'll discover what may be the best way. But let's first understand how a bank loan works. Let's say we are acquiring a car loan for a new vehicle.
Bank Loan Procedures
Purpose of the loan.
In order to even get a loan, the lending institution must be willing to lend money for the item you are seeking to purchase. For example, a bank will not lend money for the purpose of buying stock or an expensive painting.
Banks won't lend you the money for anything. They have to see some value in the item you are purchasing since it is possible they may acquire it if you are unable to repay the loan.
But, the item in question here is a car. In our scenario, the lender does lend money for the purpose of buying a new vehicle. They can repossess it and resell the item in the event you are unable to pay back the loan.
Credit Check.
Now that you are in consideration, you must get approved for a loan. The lending institution will run a credit check against your credit history to verify that you qualify.
If you qualify, the credit check will determine your interest rate depending on your fico score. Remember, the lower the FICO score, the higher your interest rate will be.
Terms and Conditions.
Once you are approved and your interest rate is determined, you are assigned terms and conditions. You have to pay the loan back with interest within a certain time allotted.
If you fail to pay the loan back with interest according to the lender's terms:
The item you are purchasing (i.e. the new car) is in jeopardy of being repossessed.
Your credit score will take a hit.
You may end up paying penalties.
So, it is in your best interest to pay the loan and interest according to the lender's terms.
There are a lot of strings attached when you are borrowing someone else's money in order to purchase something. And why wouldn't there be? If someone were to borrow money from you, I'm sure you would do everything in your power to ensure the repayment of that loan.
What people often overlook are the risks and uncertainties when borrowing from a lender the conventional way.
What if I lose my job and I can't repay the loan?
What if my credit score is low?
What if I can't afford the interest rates?
Is the loan costing me more than I think?
Now that we have these questions in mind, let's look at an unconventional way of borrowing money.
Life Insurance Policy Loan
Whole life insurance policies provide you the ability to take out a policy loan in order to access cash to make a desired purchase. Let's look at some key components of a policy loan.
No questions asked.
A home, car, and boat are typical things that a lender will loan money to an individual to purchase. But what if you wanted to get a loan in order to buy a painting? How about stock certificates? Or, how about a doodad like a flat screen TV?
A bank will likely turn you down. A life insurance company won't. The policy owner can take a loan for whatever reason...no questions asked.
No Credit Check.
The insurance company doesn't run a credit check to see if you "qualify" for a loan and what rates it can charge you. So, this process will not hurt your FICO score.
And, there is no chance that you will get denied for a loan (as long as you have ample cash value). Since you are the owner of the policy and not the insurance company, you outrank every other potential borrower that is seeking to use the available money within your policy.
Flexible Terms and Conditions.
You have no obligation to repay this loan. If you carry the loan balance to your grave, the death benefit provided by the policy will repay the loan balance.
The flexibility of a policy loan can certainly ease some pressure if you find yourself financially strapped.
Bonus!
There are opportunity costs when you are borrowing money and paying it back along with interest. With a bank loan, the money going towards the balance and the interest is gone forever and can no longer earn you interest. It can no longer work for you.
What some don't realize is that the cash from a policy loan is from the insurance company. That's right, you are not borrowing your own money. You are borrowing against your cash value from the insurance company. Your cash value within the policy acts as the collateral for the loan.
As you are paying down a policy loan with interest on a decreasing principal, the cash value within the policy stays put and continues to earn compounding interest. Remember, you are borrowing from the life insurance policy with your cash value as the collateral. Here, you are being your own bank.
An Example
We recently took a policy loan to finish out the payments on our car. We called up the insurance company and asked for a policy loan for $2249.31.
Since we had available cash value in the policy, we were approved. The representative didn't ask what the reason was for the loan. There was no credit check. We received the check for $2405.24 5 days later (which includes the loan interest paid in advance of $155.93).
Yes, it was that simple. We are not under any obligation to repay the loan. However, it would be beneficial for us to do so to restore the death benefit, cash value, and dividend payable. Plus, if we pay the loan balance prior to the anniversary date, we are given credit for any unearned interest on the amount repaid. For example, if we repay the loan in six months, we are credited six months of interest since we paid prior to the anniversary date.
So you see, this may be the best way to borrow money. Utilize policy loans. Have your dollars still working for you while you are borrowing money.
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