One of the things that people who are strapped with credit debt fail to do is accurately account for their financial condition. Many people, more than you would think, don't know what a financial statement is or how look at their assets, liabilities, income and expenses to calculate their true financial condition and to present that data according to GAAP standards (generally acceptable accounting principles). Without this knowledge and information you cannot develop a balance sheet and income statement and you will not know with certainty what the status of your financial affairs are or your net worth. If you don't REALLY know how to arrive at these numbers, you are in the dark about your financial condition.
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For those who don't understand these terms here is a brief explanation:
BALANCE SHEET-FINDING YOUR NET WORTH
A simple balance sheet is found by taking all the things you own (assets) and assigning a market value to them (things like houses, furniture, futures, jewelry, cars, etc) and adding them up to calculate the asset-side of the equation. Then, for every asset you owe money on, calculate the total debt owed on it and add them up to form the liability-side of the equation. The formula to determine your balance is Assets-Liabilities = Net worth. When assigning value "guesstimation" to the things you own ask yourself how much it would sell for in a yard sale. That's probably pretty close to what it is worth. I mean, you may value your computer system at one value but how much is it worth if you had to dump it for cash right now? That's called street valuation.
INCOME STATEMENT - TRUE CASH FLOW
A simple income statement is easy to prepare if you have access to your sources of cash flow (weekly paychecks for a given month (use net income for practicality)) and all your monthly expenses (credit card bills, loans, subscriptions, utility bills, etc.) What you want to do is calculate all your monthly income for the income-side of the equation. Then, add all your monthly bills (amount due) for the month, this will form the expense side of the equation. The formula to determine your monthly income statement is Total Income - Expenses = Net income. Actually, this shows cash flow more then net income because you are calculating income from net income figures. Anyway, the point is this: do you have a positive or negative cash flow each month? If it is negative, obviously you have a financial problem and may qualify for a debt consolidation loan.
I have helped a lot of clients get debt consolidation loans over the years, many who had been rejected by banks and other lenders and there were a few reasons why these people could not get their own loans:
1. They did not take the time to understand the economics of their situation before going to see the lender.
2. They made a loan request written on the back of a napkin (there is not enough room on a bank application to explain a complex financial situation requiring a consolidation)
3. They did not know how to prepare a professional bank package to impress the lender they understood their financial condition and had a sound plan for recovery.
4. They applied at multiple lenders who rejected them not realizing that each time they applied for a loan they added another credit inquiry by each lender which each lender could see thereby destroying their chances for a loan.
5. Going to the wrong lender for the loan.
6. Not knowing how to communicate with the lender.
The list goes on and on...
The point is this: if you don't know what you are doing, if you have credit problems, if you don't have many assets, if your debts are high, and life sucks, you can probably still get a loan if you know how to communicate with lenders structure the deal. If you don't, you won't.
I hope this article helped if you did not understand these two fundamental financial formulas. It's what you don't know that can hurt you... Things Banks & Other Lenders Won't tell You...
Copyright © 2006 James W. Hart, IV All Rights Reserved
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