Four Big Secrets You Need To Know About Loans

Life would be a whole lot easier if we never had to be in debt and if magically, we always had access to like N1,000,0000 at our beck and call. But even though our chances of never having to take a loan are slim, we can still manage and maximize the loans we get.

So let me share 4 secrets about loans which you need to know.

Trust me – you’ll be managing your loans better as long as you know these tips by heart.

SECRET 1:

When you apply for a loan the lender wants to know you can pay back the money as agreed and so will look at your creditworthiness or how you’ve managed debt and whether you can take on more. This is done by checking what’s called the five C’s of credit: character, capacity, capital, collateral and conditions.

Character refers to your credit history, or how you’ve managed debt in the past. You start developing that credit history when you take out credit cards and loans.

Your capacity refers to your ability to repay loans. Lenders can check your capacity by looking at how much debt you have and comparing it to how much income you earn.

Capital includes your savings, investments and assets that you are willing to put toward your loan.

Collateral is something you can provide as security, typically for a secured loan or secured credit card. If you can’t make payments, the lender or credit card issuer can take your collateral. Providing collateral may help you secure a loan or credit card if you don’t qualify based on your creditworthiness.

Conditions include other information that helps determine whether you qualify for credit and the terms you receive. For instance, lenders may consider these factors before lending you money: How you plan to use the money & External factors like how the economy is, federal interest rates and industry trends—before providing you with credit.

The five C’s of credit help lenders evaluate risk and look at a borrower’s creditworthiness. They also help lenders determine how much an applicant can borrow and what their interest rate will be. The five C’s of credit are also important for you to understand whether you want to apply for credit. You can use them as a checklist to guide your own finances. It may be helpful to keep the five C’s of credit in mind as you build credit and work toward your financial goals. Showing a history of responsible credit use that reflects the five C’s of credit can put you in a better position to get the financing you need.

SECERET 2:

There are three truths to loans and debt which are; Getting into it can be fun, Getting out of it is not and it’s worth that effort. Unlike the federal government, average Nigerians can’t just keep piling up debt as if it will never come crashing back down on them. Due to interest rates, your financial hole is only going to get bigger if you ignore it. The remedy is to focus on the problem, and the solution. One way to get focused is to take a piece of paper the size of a debit card and write down five debts you want to get rid of. Tape it to your debit card. Every time you reach for that card, you’ll be reminded that you’re adding, not subtracting to the problem. As for solutions, the simplest is to make a plan, get a budget and stick to it.

Consider debt consolidation as this loan allows you to compile multiple high interest debts into a single lower interest debt. While debt consolidation can’t lower the principal of what you owe, it can reduce the total amount of interest you’ll pay over the life of the debt. Reducing interest expenses may make it easier for you to put more money toward paying down the principal of the debt. If you are saddled with different kinds of debt, you can apply for a loan to consolidate those debts into a single liability and pay them off. Payments are then made on the new debt until it is paid off in full. It’s a good place to start, especially if you have a great relationship and payment history with your institution. Creditors are willing to do this for several reasons. Debt consolidation maximizes the likelihood of collecting from a debtor.

SECRET 3:

Lending is a massive business that directly and indirectly touches almost all parts of the economy that is why both established banks and startups in the field are constantly looking for ways to innovate and artificial intelligence might allow for just that. A computer bot could approve or deny your application. Sometimes your application might be declined by a “robot” without a human ever setting eyes on it. This is often more common with online lenders, because it’s one of the ways they can offer fast approval — sometimes within the hour.

According to a Mckinsey report, Robotics Process Automation or RPA is a type of software that mimics the activity of a human being in carrying out a task within a process. It can do repetitive stuff more quickly, accurately, and tirelessly than humans, freeing them to do other tasks requiring human strengths such as emotional intelligence, reasoning, judgment, and interaction with the customer. One of the time-consuming steps in Loan processing is “Application processing”.

Banks and lenders often use their own algorithms to check loan applications, automatically sorting the low-risk applications from the high-risk applications to preapprove strong applicants. It can be a way of weeding out prospective borrowers who don’t meet the initial eligibility criteria. If you’re considering applying with a lender that offers preapproval, it’s often worth reviewing their eligibility requirements to avoid wasting time and on applications that go nowhere.

Knowing all the industry tricks inside and out will be of limited help if you’re not choosing the loan that works for you. To get the most out of your financing, start by comparing your loan options to find the best one for you.

SECRET 4:

The interest rate of a loan is only the beginning and may not actually give you a full picture of what your loan costs. The Annual Percentage Rate (APR) gives you a better idea of the total cost of your loan, but keep in mind that penalty fees for things like early payoff or late payments usually aren’t included in the APR. If you suspect that you’ll pay off your loan early, consider looking for a loan with no prepayment penalties.

Interest rates and APR are two frequently conflated terms that refer to similar concepts but have subtle differences when it comes to calculation. When evaluating the cost of a loan or line of credit, it is important to understand the difference between the advertised interest rate and the annual percentage rate (APR), which includes any additional costs or fees.

The interest rate is the cost of borrowing the principal while the APR is almost always higher than the interest rate, including other costs associated with borrowing the money.

The loan term can be just as important when it comes to the monthly and total cost of your loan. That’s because interest is a cost that accrues over time. A long term reduces your monthly payments but can make your loan significantly more expensive.

A personal loan calculator is a great tool to help you visualize how much your loan could cost. You can put in different values to compare costs and decide what loan amount and terms you can ultimately afford.

Bottom line, knowing all the industry tricks inside and out will be of help to you in the long run. To get the most out of your financing, start by comparing your loan options to find the best one for you.