Learn how to compare loan terms
It’s a challenging time, so it’s important you are a bargain hunter to make some savings
Every Naira counts at this time, and you can’t afford to lose any opportunity to make savings on your loan. Besides, it’s not just about the interest rate or overall cost, you also need to be sure you are getting the most favourable terms possible. Comparing the terms from different lenders helps you decide which one offers the best deal on the type of loan you are seeking. Did I hear you say this may take some time? Yes, it may take a few hours but trust me, it is worth it. One major challenge most people face is that the offers from most if not all lenders are different, so it may be like comparing apples with oranges.
It is absolutely true that the gimmick of lenders is to market product differentiations aimed at ensuring you cannot easily compare their offerings with their peers. Nonetheless, we will try to demystify that constraint, with simple logic. Whilst there are several factors to consider in comparing loan terms, here are a few of them, and you can always contact nairaCompare, your caring companion, for any enquiry on further details or assistance.
Let’s start with what you are familiar with, the cost of the loan. The cost of the loan is not just the lending rate, in fact, the lending rate needs to be converted to an effective annual interest rate to ensure you are comparing apples to apples. Some lenders charge a lending rate upfront; they deduct the interest from the loan or ask you to pay the interest before disbursing the loan to you. So, when a lender tells you the lending rate is 5% per month but you must pay it at the beginning of the month, with the first interest deductible from the loan amount, what that means is that you are paying 5.3% per month. Besides, converting your interest rate to an annual rate is more important because a monthly payment of interest is more expensive than a quarterly payment of interest or semi-annual payment of interest – time value of money!
Similarly, some lenders are fond of charging a flat interest rate on the initial principal amount of the loan, even when the loan is amortising. Just in case you don’t know what amortisation of loan means: it is the term used to describe the gradual repayment of the principal amount of a loan on a periodic basis (monthly, quarterly, semi-annual etc.) over the life of the loan, as against waiting to the maturity date before paying off the principal amount as a lump sum (which is called bullet repayment of principal). So, when a lender tells you that the interest rate is a flat rate on the principal amount, but the loan is amortising, then you need to check what the effective annual interest rate on the loan is because the interest paid on an amortising loan should be on the outstanding balance of the loan i.e. interest should be calculated on a reducing balance basis. The real game here is that the lender wants to gain more value, taking advantage of what finance experts call the time value of money and indeed, time is what really differentiates the value of money.
So, when you are considering a loan with a year tenor or more, negotiate to pay interest annually or semi-annually, rather than paying interest monthly.
If your cash flow plan supports the amortisation of the loan, insist that your interest rate be calculated on the reducing balance and not the initial principal amount. Another common practice of lenders is to load up the cost with different fees, ranging from loan processing fees to management fees, and insurance premiums amongst others. You need to compare these costs with alternatives and estimate the total cost of the loan to you. In fact, you need to check if the lender has a prepayment penalty, i.e. the penalty that you will pay if you can repay the loan before the agreed maturity. Many lenders also have penalties for default and indeed most lenders would increase the lending rate on the loan in the event of a default. Yes, you are not planning to default but it is important you compare this term to avoid being sorry if you find yourself in a fix that leads to a default on the loan.
In addition to charging a higher interest and default penalty, some lenders charge restructuring fees for extending the tenor of your loan after default. It’s like compounding your problem, right? So, you can’t afford to be in a hurry to read the terms of the loan and compare with alternative providers, as some of these salient facts may be hidden somewhere in the loan agreement and it may be too late when you realise it, so caveat emptor…take caution and invest the time required to read the terms before you accept the offer.
However, in case you don’t see these terms in the loan offer or agreement, please ask questions about them and make clarifications before you get into the contract. Ignorance is not an excuse in law – you will be liable, and the lender cannot be held responsible for non-disclosure, the onus lies with you to find out the details.
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