Note when securing a loan, all charges be it internal or external charges incurred while processing the loan will be borne by you, so let’s take a look at common terminologies as well as costs associated with loan collection
INTEREST RATE: A rate which is charged or paid for the use of money or money borrowed (Loan). Interest rate is often expressed as an annual percentage of the principal. It is calculated by dividing the amount of interest by the amount of principal. Interest rates often changes as a result of inflation or as agreed by the Lender and the Borrower. This is normally expressed in percentages (%).
This is a key factor in loans and it’s one of the elements with which the profitability of the financial institution is built. And it is not a fixed rate because it is a percentage and most interest rates are flexible, it could either increases or decreases, and the financial institution would have made you sign a document saying they reserve the right to change the rate, so it is key for the Borrower to read the loan contract (Terms and condition) well before appending signature, most times we are so excited about getting the loan that we forget the years or months paying it back, this post is not to scare you away from taking loans but to get you educated about the nitty-gritty associated with it. I take loans myself, funding any mega project requires a loan for success, the pillar that sustains any conglomerate is a loan and so on.
In this part of the world, Interest rates could either be annually or monthly. For instance, if you have 28% annual rate from one institution and 3% monthly from another institution, the 3% monthly comes to 36% annually which is higher than the 28% annually, but if you are not thoughtful enough you think it is cheaper, and that is what Microfinance Banks use most of the time, and people think their rates are cheaper than commercial banks whereas the reverse is the case.
Other charges to consider are:
Annual management Fees which is also in percentage is paid on the loan anniversary, so if your loan tenor (Period in which you are to pay back the loan) is 2 years you will pay it twice. More often than not annual management fees are fixed rates and do not move as the main interest rate.
Commitment Fees also in percentage is to assure the financial institution that you are committed to paying back the loan you are taking, this is like an assurance fee and it is paid on the repayment or deducted before the financial institution disburse the loan to you. Commitment fees are always fixed too.
Insurance Fees also a percentage is to insure the financial institution against any form of eventuality as they are taking a risk in lending out the money to you in the first place. This is also deducted before disbursement and it is a fixed percentage.
Kindly note that the above is the major reason why you get a lower value than the amount requested at the point of disbursement as they would have taken out all the cost of capital as explained above.
Also, most financial institutions will not advise a shorter tenor for a loan as they tend to make more money the longer the loan period, so if I want a loan of say a million and my tenor is 2 years I will pay less interest than having my tenor to be 3 years.
Let me advise that before you sign any document ask for the repayment schedule, request to see the calculations, it will look something like this:
Always remember that you have the right to ask for details, so ask!
I remain your friend and Personal Finance Coach Babatunde Ayorinde, follow me on twitter @pistis03,
And if you like to engage us to speak in your program or for adverts send us mail at babat09@gmail.com.
Thanks for reading, invite you Family, Friends and Foes to read the blog, as we move ahead to our financial freedom.
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