Loans are an effective financial tool that helps you achieve your goals.
Nevertheless, loans must be used wisely. If you are thinking about borrowing money, consider your options carefully.
There are two type of loans.
The first type is a Secured Loan. A secured loan is when you offer a security in return for the money you borrow – such as property, your deposits or other assets. This is what is known as a collateral. Most banks when you take up a secured loan often offer a lower interest rate.
It is important for you to know that with a secured loan if you fail to meet your loan repayment the banks or lender who provided you with the loan can take the asset you put up as a guarantee for that loan.
For example, you take a secured loan to open up a business. As a guarantee for such loan you place your home as a guarantee. What is a guarantee? A guarantee will constitute a formal document that says that the lender, for example a bank, has the right to demand the guarantee you have made, in this case your home, to make up for the missing payments or to repay the loan as the case may be. With the case of placing your loan as your guarantee for your loan the lender will ask you to place in his or her name the hypothec of your home.
Once you have paid off your loan, the house becomes yours again. It is important that once you pay off the loan you immediately ask the lender to release the hypothec and that this reverts back to you.
The second type is an Unsecured Loan. With an unsecured loan, you borrow money without putting up collateral. Interest rates for unsecured loans are higher than secured loans because you are not offering any security to the lender. When you apply for an unsecured loan, say for example, a credit cards, personal loans, overdraft, etc., the bank will study your financial history on the basis of which it will decide what, in the first instance, it will provide you with an unsecured loan, and if it does how much that unsecured loan will be.
Keep in mind that a loan does not come for free. The lender for making a loan available to you will charge you an interest on that loan. It is important that you make sure you understand the method of interest calculation that the lender will use before you decide to borrow.
There are different types of interest rates. One is known as floating rate interest. This type of interest rises and falls – or floats as it is knows – according to how the market interest rates behave. If you take a loan with this type of interest it is very important that you make sure that the lender honours its contractual commitment with you that when the market interest rate falls, the interest rate you are paying on the loan also falls. The converse of this, is that should the market interest rate rise, the cost of your loan will increase as the interest rate will also be increased.
The cost of a loan does not only include interest. There will likely also be other fees and charges, for example handling fees, annual fees, associated with the loans. Also make sure whether the lender will charge you unfair fees: for example, he/she charges you an administrative fee which you need to pay so as to release to you the guarantee you would have pledged against your loan – such as the hypothec on your house.
Before you take up a loan make sure that you understand important jargon related to such a loan. When looking at a personal loan and credit cards, one important jargon that you will come across is the APR. It is important that your decision is not based on the interest rate but on the APR. Make sure that the bank you are talking to provides you with the APR.
What is this APR?
An APR is the ‘Annualised Percentage Rate’ which includes the basic interest rate and other fees and charges of a loan product expressed as an annualised rate. Authorised institutions are required to adopt the same set of rules and assumptions to provide a consistent basis of calculation, which allow you to compare loan products and credit card services offered by different banks.
Lenders are required by law to publish their fees. Nevertheless make sure that you go through the fine print.
When you take out a loan from a lender make sure you understand the fee and charges that you will be asked to pay. These can be various and may include:
o Handling fee charged by the lender for processing the loan you have asked for.
o Early repayment charge: The bank may charge you an extra fee if you pay off a loan earlier than the agreed term set in the contract between you and the bank.
o Late repayment charge: If you are overdue on your monthly repayment the penalty fee, or interest, you will be charged.
o Cancellation fee: If you change your mind and cancel the loan after you signed the contract, the bank may charge a cancellation fee
With certain type of loans you may have to pay additional fees. For example if you take out a loan or mortgage for your home you will likely incur the following additional costs:
o An architect fee who you may engage to make sure that the dream house you have selected has no structural and other material damage.
o The fee you will pay to the architect sent by the bank to determine the value of the dream home you are buying and which, most likely, will be the guarantee for your loan.
o Taking out a life insurance covering the value of the dream home your buying so that in the event of an unexpected death the bank recoups the part of the loan that you still have to pay.
o Engaging a notary to carry out the appropriate research on your chosen dream house so that the home that you are buying actually belongs to the person who is selling it to you, has the necessary planning permits, etc.
o Legal fees paid to lawyers for processing a mortgage
o Stamp duty to the government to register a mortgage
o Taking out of an insurance on your dream home so that you have, say, coverage for fire or other damage.
The government, from time to time, provides schemes, particularly with regard to first home buyers, to ease the costs relating to the purchase of your dream home. The government provides such type of schemes because its policy is to encourage you to become a home owner. Make sure that you ask your bank what support schemes are in place when you are discussing a loan for your home.
Pay close attention to the repayment terms of your loan. Most loans, have a set period of time to repay the money – depending on what you are buying: the repayment term to pay a loan on a house will be much longer than that for a car.
Whatever type of loan, particularly if you are young, you may ask, and you will receive from the bank a longer repayment period. A longer period will reduce the size of the monthly payment and thus, perhaps, make it easier for you to manage your monthly and annual budget. There is, however, an adverse side to this. A longer repayment period means that you increase the total amount of interest you have to pay.
Has a family member or friend asked you to be a ‘co-borrower’ or guarantee a loan for them? Before you say yes, think carefully – you could lose not only your money, but valuable assets such as your house or car.
When do you become a co-borrower? This is when, for example, you decide to enter for a business loan with your spouse, partner or a friend. In such a case both you and the other co-borrower are jointly and individually liable for the debt. If the person you borrow the money with is unable to pay their share of the loan, you will be responsible for repaying the full amount outstanding.
When are you a guarantor? You become a guarantor when you sign a guarantee for a spouse or partner, friend or family member, for them to take out a loan whereby basically you are stating that you will make good if the person who took out the loan defaults. When you sign your name as a guarantor, you are legally responsible for paying back the entire loan if the other person cannot or will not make the repayments. You will also have to pay any fees, charges and interest. Additionally, as a guarantor you don’t have the right to own the property or items bought with the loan.
Additionally, if you provide security, such as a mortgage on your home, to guarantee someone else’s loan, you will not be able to use your home as security for your own loan. You may even end up losing your home if the person defaults on paying out the guaranteed loan and you cannot cover it by other assets you own.
Think very, very, very carefully before guaranteeing a loan. Ask yourself whether there is another way you could help your spouse or partner, family member or friend without becoming a guarantor?
Ask yourself: is this truly a risk you should take. Think the worst: consider how you will pay back the loan if your friend or family member cannot. Will you be able to afford the repayments – which you would need to meet over and above other commitments you may have? Do you have savings you can use or assets you can sell to pay the debt? If you do have to use your own money or assets to pay off someone else’s loan, are you risking your own financial future?
Regrettably, relationship breakdowns occur. A breakdown in your personal relationships affects every part of your life, including your finances. If you were a guarantor or co-borrower for your ex-partner, you may be liable for their debts if they cannot or will not repay their loan. In most cases, you may not be able to get out of loan contracts you made in the past, but, should you, regrettably find yourself in a relationship breakdown, make sure that you speak to a lawyer.
Before becoming a co-borrower or guarantor make sure you ask yourself how you may end up exposed.
