Explainer: Things to know before you take loans

    In finance, a loan is the lending of money by one or more individuals, organisations, or other entities to other individuals, organisations etc. Loan eligibility might not necessarily be an opportunity if you do not plan or utilize it well because you might fall into a debt trap.

    The recent increase in loan sharks and access to instant loans from banks present itself as an opportunity to many Nigerians, especially because they come with no collateral unknown to them were the consequences of borrowing without proper planning.

    “Loan eligibility is like a cycle, when you get a loan, you repay, you become eligible for more and then you pay again. It’s like borrowing airtime from a network provider like MTN, you get to find out that 80percent of the time you recharge is to pay for the airtime you borrowed and qualify for the next,” a banker with one of the tier-1 lender said.

    If you are willing to go this route, here are five things you must do before you take a loan

    First, ask yourself, why do you need this loan? Borrowing is out-rightly not bad but, there are good and bad loans –which can come from the taker or the giver. Instant loans can be attractive but debt isn’t. A loan should be used to fund needs like rent, tuition, medical bills, or starting up a business. A loan should not be used to fund expensive lifestyles like vacations, furnishing of homes, or weddings that can keep you in a debt cycle.

    Knowledge of the loan

    When getting a loan, it is necessary to know the interest rate; this is the amount the lender charges for borrowing, which is usually a percent of the amount borrowed.

    “I know a guy that borrowed N100, 000 from a loan shark and ended up paying more than was borrowed, this happened because he is uneducated. So no question was asked about the interest rate and its calculation,” another industry source said.

    Other things to look out for are the loan clauses, these can be agreements on extra charges outside of the interest, they could also be consequences to default of payment. The terms and conditions of the loan should be scrutinized before taking the loan.

    Ajibola Afolabi, a credit analyst with a Nigerian bank said “one of the things I noticed about our clients is that they have poor knowledge of the facility being granted to them.”

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    Choose a responsible lender

    A responsible lender is an institution that checks your ability to repay your loan by accessing your credit risk through your income statement and debt history.

    The Central Bank of Nigeria (CBN) consumer protection regulation states that “Before granting credit to consumers, assess their capability to repay in a sustainable manner taking into consideration their financial circumstances.”

    Afolabi said, “Personally I go through the person’s bank statement provided, his employment status and some other items to evaluate the person’s credit worthiness. Normally we are guided by the 4c’s of credit while going through the customer credit history.”

    Borrowing from lenders with none of this information will most likely come with a high interest rate with really short payment time. Responsible lenders would also save you from embarrassment in a case of loan default as their policies to mitigate it.

    CBN consumer protection also states that “Lenders should have a policy to deal with consumers who are in financial difficulty and also monitor loan performance and upon early detection of repayment difficulties engage the customer to discuss alternative repayment options”. It is also advisable to run due diligence research on the loan app or institution.

    Repayment plan

    It is important to draw out a repayment plan that fits into the payment structure of the loan and your financial capability. A loan’s principal and interest should be paid off in monthly installments. Because interest-only payments do not reduce the principal of the loan, interest continues to accrue at the same rate.

    What other alternatives are available

    In a situation where you are looking to fund a start-up, you could seek alternatives such as grants, crowd funding or angel investment.

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