With Oyetunji Abioye
Personal loans are getting popular by the day in Nigeria. This is why credit cards shouldn’t be a default when you’re looking to borrow some money. Personal loans are not only simpler, but they offer better rates. Even better, you can shop for a personal loan without hurting your credit score.
When you’re approved for a personal loan and accept the terms, the money can be sent directly to your bank account, or you can get the money by cheque.
Features of personal loans
According to www.magnifymoney.com, here are some features of personal loans
-Loan terms are usually pretty simple: There is a fixed term. You know when the debt is paid off, and it is almost always less than five years.
-There is a fixed interest rate: Your monthly payment and interest rate stay the same for the life of your loan. Credit cards will increase the interest rate on your existing balance if you become 60 days past due. And they can increase your interest rate on future purchases at any time.
As good as personal loans are, they are not without their faults. According to experts, even personal loans can have their own tricks. While we like them better than borrowing with credit cards, you need to watch out for the following traps when getting personal loan, according to www.magnifymoney.com.
This one is a bit confusing. So, we will make it simple. Pre-compute interest is a bad deal. Avoid it. And don’t be afraid to ask if it is being done to you. It is a complex way of calculating interest, and the entire reason it exists is to make sure that you pay more interest in the early months/years of your loan. So, if you pay off your loan early, you will end up paying a higher interest rate than the rate quoted.
If you take out a loan with a three-year term, and you take the full three years to pay back the loan, then there is no difference between a normal loan and a pre-compute loan. But, if you pay off the loan early, then you will pay more interest. Advertising is particularly misleading if there is a promise of “no prepayment penalty” because interest is charged according to the “precompute” method.
How does precomputed interest work?
In a normal loan, interest will accrue every day at the agreed rate. If you want to pay off your balance, then you just need to pay back the balance of the loan and any interest that has accrued since your last payment. In a pre-compute loan, the total amount of interest that you will pay during the entire term of the loan is calculated and added to the balance up front. So, if you borrow N10,000, and you will pay back N5,000 of interest during the loan; then, your balance becomes N15,000. If you pay off your balance early, then an interest refund is calculated.
Bottom line: don’t be afraid to ask if they calculate interest using the “pre-compute” method. If they do, don’t be afraid to walk away, especially if you think you are going to pay off the loan early.
Most personal loans charge an origination fee, so there is really no avoiding it. To see if you are getting a good deal, make sure you compare the Annual Percentage Rate of a loan, not the interest rate. An APR includes the origination fee and it assumes that you do not pay off the loan early.
There are two ways that people get stuck with the fee: You don’t realise the fee is deducted from the loan amount. If you need to borrow N100,000 and there is a three per cent fee, then make sure you borrow N103,009.28. The three per cent fee will be deducted and you will end up with N100,000 of loan proceeds.
You don’t get a refund if you pre-pay. In the example above, if you paid off your loan one day later, you will not get the fee refunded. So an origination fee is like a disguised prepayment penalty.
The APR of a personal loan (including the fee and interest rate) can be well below a credit card interest rate (and it can save you a lot of money). Just make sure you understand the fee and compare the APR.
There are indirect ways of charging a prepayment penalties (pre-compute interest and origination fees). And then, there are direct ways: a prepayment penalty. Most lenders do not charge this, so you should be able to avoid it completely. Just make sure you ask if there is a prepayment penalty. Personal loans are great, if you do the research. With a personal loan, you can have a fixed interest rate, fixed payment and fixed term.
If you compare APRs, then you will be making the right decision. Don’t just jump into picking a personal loan and end up taking out a pre-compute loan, with a big origination fee, only to refinance the loan three months later. These are sub-prime tricks that can dramatically increase the costs.
If you borrow for 36 months and pay it off in 36 months, then you are in good shape.
Insurance sold with the loan
Some banks in Nigeria now sell insurance products even though regulatory authorities frown on this. It is common abroad for banks to sell insurance with loans.
We all want to protect our families from the unexpected and insurance is a great way to do just that. Similar to how we recommend planning in advance for your debt (and looking for the best deal), you should do the same with insurance. However, some banks will try to add an insurance sales pitch at the end of a loan closing. The two most typical types of insurance are life insurance and unemployment insurance.
For life insurance, a typical sales pitch will sound like this: “For just the cost of a can of soda a day, you can make sure you children never have to worry about this debt if you die.” Beware of these high-pressure sales tactics. The value of these add-on policies is almost always outrageously bad.
To protect your family, you should think about a good term life insurance policy that covers not just your personal loan, but all of your needs. Do the search separate from the loan transaction.
Unemployment insurance can be a bit more compelling (because, unlike term life insurance, it is difficult to buy a policy separately that will make loan payments on your behalf if you lose your job). I have seen people benefit from these policies. But you need to do the math. How much does it cost per month?
So long as you don’t have a high risk of losing your job in the next six to 12 months, you are almost always better off saving the money (rather than paying the premium). There are also a tonne of limitations to the amount of the loan payment that can be made (and the length of time that it will be paid). You should ask them the following questions: How much does this cost a month? What are the requirements for me to be able to claim? How much will it pay and for how long?
When you ask those questions, you will likely see that the policy being offered is poor value, and you are better to just save the money yourself.