Tuesday, 16 April 2013


Are you thinking of taking a loan?

 Please read this before you take the next step.

 Financial experts have repeatedly advised people to avoid debt. They explain that this is because people who are in debt find it more difficult to get their finances in order and are, therefore, less likely to attain financial freedom. And one sure way of getting into debt is by taking out a loan. Does that mean it is wrong to take a loan? Well, according to experts the answer to that is ‘no’ when you are building or buying a house, for instance, and ‘yes’ when you are thinking about financing a birthday party. They explain that it is not out of line to take a loan when you don’t have enough cash to make a needed purchase. They, however, warn that taking out a loan, like other financial decisions, is something that should be taking seriously, especially as it means you are getting into debt.

The focus of this article is on personal or unsecured loans, which Investopedia.com says defines as “a loan that is issued and supported only by the borrower’s creditworthiness, rather than by a type of collateral.”
It adds, “An unsecured loan is one that is obtained without the use of property as collateral for the loan. Borrowers generally must have high credit ratings to be approved for an unsecured loan.”
Some of the things you should consider before taking out a personal loan are explained below.

Determine if you need a loan
As earlier stated, you are better off avoiding debt. So, you have to be sure that you need a loan or that it is the option you have left before you go ahead with it. To do that you should ask yourself: “Do I really need to make this purchase now?”, “Can I save money and execute the project – instead of paying interest and becoming indebted?”, “Is there a less expensive option to what I want to get and which is within my means?” etc. All this are aimed at ensuring you are not taking a loan needlessly. You also have to consider what you want to use the money for. Is it really that important? Would the money solve the problem you want to solve? Or would it put you in a more precarious situation? For instance, if you want to build a house and you borrow money that will not be enough to complete the building, even when with the addition of your savings then you may end up in a fix. This is because in addition to paying back what you borrowed, you will still be paying rent, while the house under construction is likely to start falling into ruins before you pay it off and focus on the building again.

Are you creditworthy?
Personal loans are given based on how creditworthy you are. It is therefore important that you determine whether you are creditworthy before you go for a personal loan. When it comes to unsecured loans, lenders take higher risks because there is no collateral for them to fall back to if you default. Hence, they will investigate you to determine if you are creditworthy. You can determine that by looking at how good you are in paying your bills, among other things.

Cost of the loan
Exactly how much will the loan cost you? You do not only need to find that out, you also need to determine whether it is worth it. How much are you expected to pay monthly? What interest rate and taxes come with it? In several banking halls across, there have been incidents involving people, who come to make a withdrawal only to find their account virtually empty when they expected to have way more than what they saw in their account, even after servicing their debt. Some of these people find themselves in such situation because they failed to do their homework. It is important to be sure that if you are being charged a 20 per cent interest on a N400, 000 loan what you have to pay back is N440, 000. Experts advise that before taking a loan, you should check out the rates and loan terms, watching out for clauses that may mean you have to pay more after a while as that may derail your repayment plan.

It is one thing to know the cost of the loan, and it is another to know if you can afford it. You need to honestly determine if you are capable of bearing the burden that the loan will place on you. Will you be able to meet your most basic needs and pay your bills? Or will the burden of the loan have an effect on your other financial responsibilities and drive you further into debt?

Means repayment
It is important that you think about how you are going to pay back the loan. So, you earn close to half a million now and that makes you confident that you can afford the loan. But is your job secure? If you are expecting a promotion next month (to ease the financial burden), what if you don’t get it? Your repayment plan shouldn’t be based on assumptions.

Compare rates, offers
Many banks will tell you that their rates are the best. Of course is not their place to tell you that Bank Y has better rates than they do. Experts say it is your responsibility to find out what rates other banks charge on loans. They stress that the interest rate is an important factor when considering a loan, noting that by taking the first option available, you may have missed an opportunity to ease the financial burden the loan will place on you.
After doing your home work – deciding how much you need and the rates at which you can get that from the banks, experts say you should consider other source besides the banks. Can a friend lend you the money? That will save you thousands of naira in interest.

Expectations of banks
Your research is not complete if you don’t know what it takes for a bank to give you a loan.
Generally, banks expect you to be in a paid employment with an organisation, which is enlisted as being legible for loans. Also, your salary must be consistent and on a monthly basis as repayment for loans are expected monthly. In addition to this, your employment status must be permanent and you are entitled to terminal benefits. This is in case you lose your job as it would enable the bank to recover its money.
Your employer will also be required to issue a letter of awareness/ domiciliation of salary and terminal benefit of the customer. This is to affirm that your employer is aware that you want to take a loan from the bank and they will continue to pay your salary through that bank.
Just as you do you due diligence, the banks review investigate organisations from time to time.

Don’t forget the economy
What is the prevailing economic situation? Is there likely to be a reduction in interest rates? Well, in Nigeria, there is presently a clamour for interest rates to be reduced. And with the rate of inflation declining, it may be wise to watch how things pan out before taking a loan. Surely you are better off with lower interest rates. Experts say it is important that you take such economic factors into consideration as well.
Culled from Punch

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