If you have decided to take a loan, choosing the right loan plan can be very intimidating. The sheer number of banks offering loans as well as the existence of technical and complex terms you don’t really understand can be really unnerving. If you have literally no idea where to start, read our beginners guide for loan-takers here.
After knowing the type of loan your needs fall under (see our guide on types of loans here), you need to decide on a plan. The loan market provides you with a lot of options. But you have to be careful, loans can be really damaging if it goes wrong, Hence, here’s a guide so that you can navigate properly through loan plan options.
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UNDERSTANDING LOAN OPTIONS
There are two things you need to understand to begin exploring your options: Loan terms and interest rate type.
This is the time period in which you will have to repay your debt. This affects your EMI, you interest rate and how much total interest you will pay. If you don’t know what these terms mean, read our article here.
Shorter term loan plan usually have lower interest rates, but you will have to pay back more money in each installment. On the contrary, longer term loans have high interest but have low EMIs. Don’t take it as an absolute though, you will have to carefully examine which will yield more benefit. If you have low EMIs, even though you will pay more in total, the financial burden will be much less.
Interest rate type
Interest rates can be classified as simple and compound, or as fixed and adjustable. Simple interest rates are added on the initial principal. Compound rates on the other hand are added every year on principal + interest. This means that compound interest rates generally result in higher total payments.
Fixed interest rates are fixed at the time of taking the loan. This option hence offers less risk. Adjustable rates on the other hand can go up on down depending on the base market rates set by banks. Most Nepali bank offer adjustable interest rates in their loan plan. Rates can go up or down according to the market so it does have higher risk. But if things go your way, the total amount you pay back might be less.
DECIDE ON A LOAN OPTION FIRST
Before asking for loan estimates, you need to decide if you want a long term or a short term loan. Similarly, you should also decide if you want a fixed or an adjustable interest rate. This will help you short-list your options to a few lenders. You will find that comparing loan plan will be much easier this way.
DO YOU WANT A DEBT FOREVER?
Debts can haunt you for life if you are not careful. Read our article here to see how loans can trap you forever. So, it is necessary to assess beforehand how long you want to keep your loan for. After doing that, you should ask your loan officer to provide an estimate of how long it will take you pay back the loan. Loan plan estimates will also include EMIs and estimates of interest rates (if adjustable) in the coming years. This can be a helpful guide in choosing the right loan plan.
REQUEST A LOAN ESTIMATE
Some banks may not give you a loan estimate fearing that you will back out after seeing it. Don’t forget that it is your right to ask for one. Always ask for an estimate of how much money you will have to pay back and over how many years. This will give you a clearer idea of ways to manage your other finances and choose the right loan plan.
THINK BEYOND JUST EMIs
EMIs can be misleading sometimes. You have to factor in potential future costs you may have. This is especially important in long-term loans. Some loans may have lower EMIs, but higher overall costs. Hence, to effectively choose the right loan plan, you need to look beyond just the value of EMI