Most businesses and individuals are rushing to pick credit to invest or finance their expenses, but the most critical challenge is that few really understand what these loans mean in terms of interest rates, and conditions, insurance charges, penalties.
In most instances, people do not take serious the hidden costs these loans may carry and end up even losing the little investment they have made.
Now let’s take a quick look at things you must know before you pick that loan.
Terms and conditions
This is the most important part of a loan, terms are embedded in that document you sign (contract) spelling out different conditions and has the option of signature. The terms and conditions are the conditions that you have accepted. The terms and conditions specify the agreed interest, repayment conditions, penalties in case of default and many others.
Therefore it is important to read through and keenly understand what is written in the agreement. Never sign on that agreement until you are convinced that the terms in the agreement favour your loan. And try to compare different terms and conditions of financial institutions as they vary from institution to the other.
Know your rate
Interest rate means the money you have to pay as profits to financial Institution for the loan you have borrowed. Most importantly interest rates vary from one Institution to the other and also depending on the
amount to be borrowed. For small businesses and start ups, you need to approach Microfinance Institutions or Savings and credit Cooperatives-SACCOs rather than a bank. However, first understand what is to be charged on your loan, different institutions have different rates and operate with different types of loans.
The two common types of loans are flat rate interest loan and declining interest loan. With flat interest, you have to pay a uniform interest through your repayment process, if your interest rate is 10 percent on for example the principle loan of Rwf200,000 to be repaid after two years, the interest will be Rwf20,000 every month as interest for two years.
Meanwhile declining rate means that your interest paid on the agreed time of repayment keep on reducing until you finish your loan, for example if your loan is 200,000 and the interest of Rwf20,000 at a
rate of 10 percent every month, it means that your interest repayment will decline from one month to the other. This implies that payment maybe longer that the flat rate assuming that both loans have
the same amount of principle, rate. So you need to choose the type that fits your repayment period and is very flexible to your income in terms of using the loan
Understand the charges
The borrower must also understand the hidden charges that go along with the loan they are to acquire; these costs include Insurance charges, penalties among others. The borrower must well understand
fully what and why insurance charges are charged on every loan and also to understand that failure to fulfill the repayment time stated in the agreement between them and the financial institution will put
penalties that would be extra charges on their loan.
However, these charges should not be understood as extra charges which financial institutions use to cheat you, they are indeed part of the loan.