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JUST BEFORE YOU TAKE THAT LOAN
Jeremiah O. Aimionsevbuse Esq.
Associate at Nobilis Solicitors
With the recent upsurge of lending homes and microfinance institutions, Nigerians now find it relatively easy to borrow money with little or no collateral. Gone are the days when (potential) borrowers would subject themselves to rigorous scrutiny all in the name of KYC’s and due diligence before loans are granted to them by microcredit financial institutions. Technological advancement has further made it possible to obtain a loan without a physical visit to a lending home or microfinance institution as same can be done online.
This remarkable ease of obtaining loans has however led to a corresponding increase in the spate of NPLs (non-performing loans) most of which later end up being subject of debt recovery court cases. Apart from the sense of urgency that often accompanies applications for loans, borrowers hardly see the need to consider the details of the loan agreements. It is only after utilizing the loan sum that some borrowers realize that the loan had strings attached. Some end up complaining about the terms and conditions of the loan after they had defaulted, while some businesses borrow more than they actually need and end up as huge debtors.
This paper highlights some of the issues borrowers need to consider before taking a loan.
CRITICAL ISSUES TO CONSIDER BEFORE TAKING A LOAN
- The purpose of the loan
Knowledge of the purpose of the loan is an indispensable criteria to the grant of a loan, as it helps the Lender to ascertain the chances of being repaid from the proceeds of the business. Knowledge of the purpose of the loan would also assist an applicant to determine the amount of money he wants to borrow, the type of loan to obtain and the relevant financial institution to approach. Some of the popular types of loans include overdraft, personal loans, business loans, mortgages, auto loans.
- Requirements for the loan
It is also necessary to consider what a lending home or microfinance institution requires from an applicant before availing him/her with a loan. Almost all microcredit institutions require that an applicant submits the financial reports of the business before such an applicant is availed the loan. Some lending homes also require an applicant to have a regular source of income and present his/her statement of account for a specified time frame (usually six months). Salary advance loans applies to only employees and usually, the borrower’s employers is asked to give a guaranty in favour of the borrower.
- Interest rate
This is by far the most important thing an applicant should consider before taking a loan. Disputes on interest rate and computation have been the bedrock of many debt recovery actions. It is worthy of mention that the law gives a wide latitude to lending homes, microfinance institutions, banks and other finance institutions to charge interests on loans. It is therefore advisable that an applicant takes note of the interest rate before taking a loan as a court of law will enforce loan interest agreements between the parties irrespective of how much may have accumulated on the loan.
- Duration of the loan
A loan could be for a short term, long term, and medium term. It is important that an applicant for a loan considers the duration of the loan he intends to acquire as a consideration of same together with the interest rate would enable a prudent investor/borrower determine whether, giving his resources and the projected outcome from a proper utilization of the loan, he would be able to pay back the loan on its due date.
- Repayment option
It is also important to consider the repayment option for the loan. Is repayment at the expiration of the loan term, or is it by weekly or monthly deductions? Giving your level of income/profit can you (or your business) reasonably make such repayments? What are the options open to the borrower where he intends to pay before the expiration of the loan term? Does he get a waiver on some interest? What happens where the borrower fails to pay before the due date? Does he get a moratorium (extension of time)?
- Associated fees/penalties
It is also important to consider whether there are other fees or penalties associated with the loan. For instance some lending homes and microfinance banks charge late fees on their facilities. Some charge insurance fee, premium and legal fees or management fees etc.
- Grievance option
It is not uncommon to find instances where disputes arise as to the calculation of interests on the loan and at times, as to the exact amount already paid by the borrower. It is therefore advisable that an applicant considers the options provided for him to explore. Some loans recognize the borrower’s right to have an independent auditor audit the account and come up with his/findings as per the correct computation of the interests in the event of a dispute.
It is important to state that lending homes and microfinance institutions have relatively made it easier for borrowers to obtain facilities for their business (or personal use). It is however advisable to pay great attention to the details and where necessary, seek legal advice before taking a loan.