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Do you understand that loan agreement?

Discussion in 'Biashara, Uchumi na Ujasiriamali' started by Prime Dynamics, Mar 7, 2011.

  1. P

    Prime Dynamics JF-Expert Member

    Mar 7, 2011
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    Taking a personal loan to finance an investment or an emergency is an issue that most of us face. However, your financial health and money management skills will determine whether this loan will take you to another level or set you several steps back.
    The most ideal situation if happen to get a loan, is to buy assets that can improve cash flow and boost your wealth accumulation goals.
    Nonetheless, the prevailing challenging economic environment is increasingly forcing people to borrow for consumption. Then damage your financial health by putting it on a drip. Worse still, some are living beyond their means. To keep up with their lavish spending, loans are the available option to plug the finance deficit.

    In this case, it is important to note that a couple of banks have revised their tariffs upwards. This is in addition to the fact that the personal loan category usually fetches a high interest rate compared to other forms of financing because it is unsecured.
    It is, therefore, prudent to ask your banker if there are some tariff changes, and also find out the implications on the cost of their products and services.

    Banks usually push their loan products aggressively with colorful marketing language. They will tell you to take advantage of their low-interest rates to finance education, land or even furniture.
    However, you should not borrow simply because the money is available. The decision to borrow should be hinged on your financial health and your ability to re-finance that loan. This money comes at a cost, if you do not plan carefully, it may set you back financially.
    As a rule, you have to pay attention to the cost of borrowing that usually entails interest rate and additional charges. If possible, negotiate for a low-cost loan to avoid repayment pressure. Besides, this will make the loan more affordable.
    Your banker will probably tell you that interest payment is a function of the rate charged depending on the method of interest calculation. Normally, banks calculate interest on a reducing balance basis.
    Remember that all the other fees are usually charged upfront, meaning that the amount received would be less by those costs.
    When you ask for say, a sh5m loan, do not be surprised that the money deposited on your account is less than the amount applied for. But ensure that it is less by the fees deducted.

    Given this scenario, you can then assess how suitable this repayment period is to your cash flow. Another crucial aspect to consider is what you can forgo to meet the repayments over the period of the loan.
    In cases where loans are acquired as emergency funding, you may not be in the right frame of mind to go over the fine print in the loan agreement to know what you are signing up for. People in such situations normally just want to sign the forms, asking when the money would be deposited on their accounts.
    It is only when they face challenges in meeting the loan repayments that the loan cost becomes an issue.

    Another important aspect to look out for is the repayment period. Depending on the type of income earned, repayment staggered over a long period of time ensures that your household can manage the payments with limited strain on the finances. Some of the important things to remember when it comes to the loan agreement are the installment amount, flexibility in repayment schedule, the loan amount, interest rate and method of calculation and the different terms and conditions stipulated. If you do not understand the loan agreement, you have a right to request for more explanation.

    In the end, your decision to take a loan should be made after careful evaluation of the reason for borrowing and your level of financial health.
  2. Smarter

    Smarter JF-Expert Member

    Mar 7, 2011
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    Thank you Prime for valuable lesson.
  3. dkims

    dkims Senior Member

    Mar 7, 2011
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    thank u sir
  4. kaygeezo

    kaygeezo Senior Member

    Mar 19, 2011
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    Una swahili version?...umeongea pointi nyingi nzuri..ila kama ukiweza pia kuipost in swahili ,utanisaidia sana.

  5. C

    Chumvi1 Senior Member

    Mar 19, 2011
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    Ndio maana tupo jf shule imesimama
  6. Mo-TOWN

    Mo-TOWN JF-Expert Member

    Mar 19, 2011
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    Noted. Thank you.

    BLUE BALAA JF-Expert Member

    Mar 19, 2011
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    I agree with you 100%, I have experienced all these as I have taken business loans three four times (above $300,000)

    Dynamics most of Tanzanians are blind including myself, we are not informed at all except few of them. Loan is an agreement between two parties so the loan agreement MUST be for the mutual benefits.

    What do bank normally do once they have accepted your loan application, they send you OFFER LETTER which stipulates terms/conditions for you to go through. Here its where you are supposed to make the right decision by going through the offer, discuss, interrogate and raise your querries. As a client you have a big room to negotiate terms like interest rate, grace period, repayment schedule and duration.
  8. P

    Prime Dynamics JF-Expert Member

    Mar 19, 2011
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    A while ago, I had an opportunity to listen to a telephone conversation between a bank sales person and a bank customer. The conversation was as follows;

    Bank sales person: Hello X, we are glad to inform you that you can now apply for a loan with the bank and get it approved.
    X: But sir, I have never applied for any loan with the bank, neither have I expressed interest to borrow from the bank?

    Bank sales person: After a thorough analysis of our existing customers, we are offering those with active accounts an opportunity to apply for a loan for their own use. You can now apply for a loan of up to Tsh 5 million and get it approved within a day.

    X: Thank you sir, you have made my day! I will make the application straight away.

    (hapo tayari amesha taamaki)

    Such conversations have become common on the banking scene as the competition heightens.
    Sometimes when the competition is quite stiff and new sales leads are not easy to come by, banks, like other businesses, resort to cross selling to their existing customers to grow their loan books. Usually, bank sales officers analyse accounts within and come up with customers whose accounts have exhibited a regular cash inflow and call them for loan consideration. Interestingly, many of the customers who receive the loan calls usually get amused and are quick to submit their loan applications, terming it an irresistible offer.
    Consequently, many bank customers have found themselves trapped in the debt pit resulting from taking such offers. Although the offers are quite tempting, there are reasons one should reject the loan call when it rings. Some of the reasons may be lack of prior plans for borrowing. In most cases those who secure loans without proper financial plans usually get into debt problems as they tend to lose control of their budget and use the money for unplanned expenditures. Remember that a debt problem starts from lack of planning for borrowing, which translates to losing control of expenditure and ends in inability to repay.
    It is advisable that if you get such a loan call when you have no prior plan on the table on how to spend the cash, reject the offer until such a time when you are ready with proper plans. Give a distance to such loans which may end up putting your financial health on a drip.

  9. L

    LAT JF-Expert Member

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    mkuu ... this is a treasure island
  10. U

    Ulimakafu JF-Expert Member

    Apr 1, 2011
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    Thank u very much..
  11. Baba_Enock

    Baba_Enock JF-Expert Member

    Apr 1, 2011
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    Finance For Non-Finance Managers