Whether you’re after a personal loan, car loan, or mortgage, credit card, there are important facts you need to know about loans.
With so many different options out there, the picking a loan that works for you can seem confusing, but it doesn’t have to be.
Before you borrow, become familiar with some key terms that are associated with all types of loans and the right questions to ask your lender.
Common Terms Used Are;
This is the original amount of money that you’re borrowing from a lender exclusive of the fees and bank charges or taxes.
This is the amount of time you should pay back the loan. Different types of loans have different terms.
This is the amount the lender is charging you for lending you the money. It’s usually a percentage of the amount of the loan, and is based on the rate the Central bank recommends. Currently the interest rate is capped at 10% and it applies to all banks Kenya
Globally several rates are based upon the federal funds rate—such as the prime rate, which is a lower rate reserved for the most creditworthy borrowers, like corporations.
Costs Associated With Loans
Understanding all the costs associated with each loan will help you figure out which one to go for. Costs are not always advertised upfront when signing for a loan. These are questions you need to ask.
When you borrow, you have to pay back the amount you borrowed plus interest, which is usually spread over the term of the loan. In calculating interest cost there are 2 ways;
1. Reducing balance method
In reducing balance method, the interest to be paid is revised every month on the outstanding loan amount.
2. Fixed Rate
These are some common types of fees:
- Application fee: Pays for the process of approving a loan
- Processing fee: Similar to an application fee, this covers costs associated with administering a loan.
- Origination fee: The cost of securing a loan (most common for mortgages)
- Annual fee: A yearly flat fee you must pay to the lender (most common for credit cards).
- Late fee: What the lender charges you for late payments
- Prepayment fee: The cost of paying a loan off early (most common for home and car loans).
- Tax fees: This is tax charged on your loan.
Not all loans come with these fees, but you should look out for them and ask about them when considering a loan.
Qualifying for a Loan
There are a few factors that lenders use to determine whether you are eligible for a loan or not.
1. Credit Status
Your credit report/ rating is a key factor in helping you qualify since it shows your loan performance.
2. Source of income
You’ll likely also need to show that you have the capability to pay back the loan. Lenders will often look at your debt-to-income ratio—the amount of money you intend to borrow compared to the amount you earn.
3. Security/ Collateral
If you don’t have strong credit rating , or if you’re borrowing a huge amount of money, you may also have to secure the loan with collateral e.g title deed, log book—otherwise known as a secured loan. This allows the lender to sell it if you’re unable to repay the loan.
The “fine print” is a term that refers to contract terms and conditions, disclosures, or other important information that is not included in the main body of a document but placed in footnotes or a supplemental document. Reading and understanding the fine print is essential when entering into an agreement.
In some cases, lenders will restrict how you can use funds. Make sure you’re aware of any restrictions on how you use the borrowed money so that you won’t get into legal trouble.
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