Money Moves

BEFORE YOU TAKE A LOAN…

loan

In my last article before we were interrupted by the love season, I made it clear that if you ever have the opportunity of choosing between borrowing money from family or friends and getting money from any financial institution in the form of a loan, you should choose the former. I gave that option because primarily, it comes at no cost. Inasmuch as I would have loved for you to avoid loans, I can’t also lie to you. Loans are integral parts of our daily dealings, especially for entrepreneurs. All you need to do is to be witty about your decisions as far as loans are concerned. So this article will address some Frequently Asked Questions (FAQs) about loans. This is to help you make an informed choice whenever your appetite for a loan is whetted.

WHO QUALIFIES FOR A LOAN?

The whole idea of loans is not charity. Loans are given with the hope of the borrower paying back with an interest. So anyone with any form of income, revenue or cash flow can go in for a loan. It can be a salaried worker, a student who receives allowances from parents or an entrepreneur (self employed, business person).

DO YOU NEED AN ASSET TO SECURE A LOAN?

Some loans do not require assets in the form of collaterals in order to be accessed. In most cases, accepting collaterals for loans is an institutional decision. For example, banks consider the activity in a customer’s account before deciding on the collateral option when the customer requests for a loan. Loans which are secured with collaterals tend have lower interest rates than loans which are not.

WHAT FACTORS SHOULD AN INDIVIDUAL CONSIDER BEFORE GOING FOR A LOAN?

First of all, one has to consider how much s/he earns in say a day, week or month. One also has to consider the quantum s/he can take and the interest on that loan. The period within which an individual can pay back both the interest and principal is also important. An individual should consider all these because majority of his/her income within the repayment period will go to defray the debt.

HOW DO FINANCIAL INSTITUTIONS COMPUTE INTEREST ON LOANS?

In the computation of interest rate on loans, financial institutions take into consideration risk, inflation rate, policy rate, etc. So if these factors are high, then you are sure to get a high interest rate. The computation is done for weekly or monthly payments. For example, if the interest on a GH¢10,000 loan is say 10%, the borrower will pay GH¢1,000 every week or month depending on the terms of the loan.

WHAT ARE THE PAYMENT PLANS?

The payment plan of loans varies from one institution to another. It also depends on the arrangement between the lender and the borrower. The repayment periods mostly do not go beyond a year. For some of the loans, the borrower pays the interest at the end of each month i.e if the payment is done on a monthly basis. Then s/he pays the principal plus the last set of interest at the last month of the repayment period.  For others too, part of the principal plus the interest is paid each month till the period of repayment elapses.

CAN THE PERIOD OF A LOAN REPAYMENT BE EXTENDED?

As aforementioned some loans are secured with collaterals. So when the period of repayment elapse and the borrower has not been able to repay the loan, the financial institution will contact the borrower with the option of selling the collateral to defray the debt. However, if the borrower realizes that s/he is unable to repay the loan within the agreed term, s/he can contact the financial institution to extend the term. This apparently comes at an additional cost. Nonetheless, the term can’t be extended beyond a year. For example, if a borrower is supposed to repay a loan in three months, it can only be extended three times.  

SHOULD THE BORROWER CONCERN HIMSELF WITH QUATUM OF INTEREST?

Of course, no one should just go walk into any financial institution and take a loan simply because s/he is hard up. You should have options. The interest rate varies from one institution to another. So one has to be mindful and do the needful. Do a thorough research, ask questions and choose one that best suits your interest.

WHY DO PEOPLE DEFAULT IN LOAN REPAYMENT?

Everyone who goes in for a loan goes with the intent of paying back overtime. In the words of a young entrepreneur, “whenever time comes in, uncertainties are inevitable.” So, one reason for people defaulting in the repayment of loans is uncertainties. Another can be unrealistic expectations. For example, you can’t earn GH¢1,000 every month and go in for a loan of GH¢10,000 with the expectation of paying back the loan within a year. This is implausible. People also default because of lack of priorities (unnecessary expenses). There are other factors as well.

HOW CAN THE FAVOURABILITY OF A LOAN BE DETERMINED?

Among others, the favourability of a loan depends on the following factors.

  1. Reasonability of the interest rate
  2. Ability of the borrower’s income to defray debt within the given period.
  3. Ability of the borrower to avoid any form of financial distress during the repayment period.     

Loans are not bad in themselves. They have helped a lot of business persons and corporate bodies either to expand or successfully executed projects. Some businesses are still viable because of loans. Nevertheless, if the reason for which you intend to go for a loan is not urgent, please don’t. You have time to accumulate some money from other sources. If you also know you can’t repay a loan you are contemplating about, please avoid it. It is worth it. Lastly, if you have to go for a loan, don’t ever offer an asset which means a lot to you as collateral. You will live to regret if you do.

Credit: Bernard Osei Baafi, Stephen Boama

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