PERSONAL FINANCE: BASICS OF TAKING OUT A LOAN

PERSONAL FINANCE: BASICS OF TAKING OUT A LOAN


We have all heard about loans. Be in the news or on Bank’s banner ads, loans are often shown as a way to finance stuff you would otherwise be unable to. And it’s true; loans let you buy stuff, or do stuff that your bank account doesn’t allow you to. But to most of us, taking a loan is the simple task of borrowing money you later pay back. We don’t know the technicality of what we are getting into. If you are thinking of getting a loan but don’t know where to start, this is the article for you.

SO MANY WEIRD TERMS !

If you have gone to a Bank’s website to research loans, you probably found that you don’t know any terms they have used. Worry not, we have done the work for you. Find below a compilation of all common loan-related words.

PERSONAL FINANCE: BASICS OF TAKING OUT A LOAN
A Loan circular concept with great terms around the center including interest, rates and credit with a yellow star in the middle

PRINCIPAL AND INTEREST RATE

Principa land interest rates are the primary terms you need to understand in order to understand loans

  • Principal: This is the total amount of money you need to borrow from the bank
  • Interest rate: This is the rate of interest you will have to pay. Interest rates are usually per annum (adding up each year), half yearly (adding up every six months or quarterly (adding up every 3 months).
    • Simple Interest: Simple interest is added only on the original principal. For example if you borrow Rs 1,000 over 2 years on 10% per annum simple interest, total payback will be Rs 1200.
    • Compound interest: Compound interest is added on the principal & interest every year. For example if you borrow Rs 1000 over 2 years on 10 % compound interest, your total pay back will be Rs 1210. Compound interest can be difficult to grasp, watch this simple video to understand it better.
PERSONAL FINANCE: BASICS OF TAKING OUT A LOAN

OTHER LOAN TERMS

  • EMI: Short for Equated Monthly Installments. This means the amount of payback you have to pay each month to your bank in order to complete the total payment of Principal + Interest.
  • Down Payment: This is the payment made to borrow beforehand. Banks may ask for about 5-10% down payment. Understand that this does not mean you have to pay extra. If you borrow Rs 1000 with 10% down payment, you will only get Rs 900 from the bank. Down payment is deducted from the principal you borrow.
  • Base rate: If you have seen interest information from banks, you should recognize “Base Rate”+ <some value>. Base rate is determined by a complex procedure so let’s not get into that. For you starters, here is a list of base rates of all commercial banks in Nepal.
  • Mortgage: Mortgage is assets kept as security by the bank in case you can’t pay back your loan. Usually people in Nepal keep houses, cars or fixed deposits as mortgages
  • Term/ Tenure: Tenure is the number of years by which you are expected to complete your debt payment (usually through EMIs).

SO HOW EXACTLY DO YOU TAKE LOANS?

Taking personal loans is a fairly simple process provided that you have a stable income and enough assets for mortgage value. 

PERSONAL FINANCE: BASICS OF TAKING OUT A LOAN
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RESEARCH

Firstly, you need to look up the type of loans (find our article on types of loans here)  you want to take and the banks you want to take them in. Banks prioritise people who have accounts in their bank so this can be a guide to choose a bank. When researching, find out the kind of documents banks need and compare interest rates between banks. We have compiled ways to research and find the best loan for you here.

DECIDE ON A VALUE

Don’t forget that taking loans should always be a last measure. Read this article here to see how loans may trap you forever. Take as little loan as possible, explore alternative funding sources and then decide on a value. Remember that you need to have enough mortgage as security for your loan and enough income to pay back the loan in time.

PERSONAL FINANCE: BASICS OF TAKING OUT A LOAN

GATHER YOU DOCUMENTS

Document requirements differ by bank but here is a general list of documents you will always need while taking a loan.

  • Photograph (2 copies each)
  • Citizenship and/or Passport
  • Relationship Certificate (if applicable)
  • Marriage Certificate (if applicable)
  • Bank (deposit & loan) account statement of at least 6 months
  • Salary certificate
  • Rental agreement (If any) along with tenant’s identification
  • Audited financials of last 2 fiscal years (If business income)
  • Pension Certificate ( Patta)
  • Latest tax paid receipt or tax clearance certificate for all income (wherever applicable)

CREATE A PAYMENT PLAN

Paying debts are one of the most grueling aspects of life. Before taking loans you should make a list of your expenses for the debt period. Compile everything you would need money for and separate debt payment as an expenditure. This will help you to decide on an amount to take loans as well as to pay your debts with much more ease.

PREPARE A BID

Banks advertise loans, but don’t expect them to just jump at anyone who wants one. You will have to show the bank that you have the ability to pay back the loan. While discussing your loan details you need to sound confident and deserving. Preparing a bid beforehand consisting of objectives, payment methods and mortgage is always a good idea.  

PERSONAL FINANCE: BASICS OF TAKING OUT A LOAN

I personally don’t think taking loans is a good idea (Here’s why). But I do understand why some people need to do it. This article was for you beginners who have decided that they need loans. To find out your loan type see this article here. For more helpful tips and information, read this article here. Best of luck and I hope you will be happy with whatever it is you want with all that money!