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LOANS WHAT YOU NEED TO KNOW BEFORE SIGNING ON THE DOTTED LINE
In today’s day and age, apart from a fortunate few, little can be achieved with the money we have in hand. And taking out a loan from a bank is not deemed out of the ordinary. In fact, a lot of people resort to borrowing money for a multitude of reasons. Banks have creatively crafted and customised the types of loans keeping the demands of the modern borrower in mind. In hindsight, a person can get a loan catering to virtually every need that arises. While some are on the lookout to increase their net worth, others are simply looking for ways to reach their financial goals. Home loans, auto loans, educational loans, personal loans, consumer durable loans are some of the common loans that banks provide. You have a need? The bank has a loan.
However, taking out a loan from a bank is easier said than done. Through various marketing mediums, banks seem eager to lend, but in reality getting a loan sanctioned can be a tedious task. Also, though there are no hard and fast rules, here are few important things you should remember before applying.
Research Before Applying
In Nepal alone, there are numerous banks which offer loans. However, we normally approach a bank which we have an account with or which is closest to home. This is wrong practice. While the preceding sentence may have its advantages, a rational applicant must conduct analytical research on the types of loans that banks provide and filter findings accordingly. While this may seem tedious at first, the rule of thumb states selecting a bank which offers the lowest interest rates among other details. Along with the offered interest rate, word of mouth information from you friends and acquaintances also provides valuable information in terms of services received.
A simple way to calculate your loan eligibility is to calculate the Equated Monthly Installment (EMI). Banks identify whether you have existing loans for which the eligibility goes down. Banks also cross-check on the number of dependencies. Higher number of dependencies lowers the repayment capacity of the applicant. The profile of the applicant also plays a major role. For instance, an applicant with a stable source of income will find it relatively easier than an applicant who is self-employed with inconsistent earnings. Age is another factor. An applicant who has reached 50 years of age will find it comparatively harder than an applicant who has reached the age of 30. The repayment capacity is directly linked with the age of the applicant since the loan tenures do not surpass the retirement age of the applicant.
Cash Flow Impact
Before you apply for a loan, understand the impact on the monthly cash flow. An applicant must calculate the monthly effect of the loan on the salary. One must also calculate the schedule of the payments whether the tenure is near or far. Both have its pros and cons. When the tenure is near, the cash flow will be comparatively higher but repayment time will be shortened. On the other hand, when the tenure is far, cash flow will be comparatively smaller but repayment time will increase. Therefore selecting a loan for 2 or 5 years will depend on whether the applicant can withstand the effect of the cash outflow on the salary.
Longer Tenure means Costlier Loans
In recent days, the country’s apex monetary institution, Nepal Rastra Bank, has been hawkish in its monetary policy. An increase in the base rate means the banks have also increased their floating loan rates. A hike in the interest rates means incline in the EMI. Many cannot afford such rise and often request the bank to re-adjust the EMI by increasing the tenure. While this can be a temporary relief in a desperate situation, research shows that the applicant actually ends up paying more.
Read the Document Carefully
A loan agreement is a legal document and is binding on both the parties. While the details to be filled are highlighted for the benefit of the applicant, the font size of the terms and conditions appearing at the latter half of the document is relatively smaller and seems inconsequential. However, this very part of the document has quite a few devils hiding. The late fee charges and penalties, the administrative and services charges and the penalties on pre-payment of the loan are all mentioned in this part. An applicant must read and comprehend the matters. Any queries must be settled with the corresponding loan officer before proceeding with the loan application.
When the loan is approved and passed by a bank, it does not mean you are stuck with the bank forever. Under unavoidable situations or when you are receiving a better deal from another bank, you can always switch. However, one should consider switching costs of such practice before shooting the gun as both banks will have pre-defined clauses against it.
At the end of the day, your loan will be processed, approved and closed by bank employees, software and institutions that are following a pre-determined system but are assisting you in makingthe single biggest financial decision of your life. Chances are, you have chosen well, but it is always wise and rational to follow the above steps before signing on the dotted line.