PERSONAL FINANCE: WHAT’S YOUR LOAN TYPE?
For you beginners in finance who have literally no idea what loans are, navigating through the process can be frustrating, to say the least. So, in order to make your life easier, we have started this personal finance series on taking loans. In our last article, we went over the basics of taking out a loan. You should read that article here before reading this one. In this article, we will discuss all the different types of personal loans you can take.
So let’s get right into it. To begin with, there are broadly 4 types of personal loans: housing loan, vehicle loan, education loan and miscellaneous products loan.
If you can’t wait a couple years ( or maybe decades, who knows) to get your dream house, you might be looking to get housing loans. Housing loans are money borrowed for the purpose of building/ upgrading your house or shelter. They are usually very high principal loans, with high interest rates (if you don’t know what these means, read our article here). To get a housing loan, you usually need to insure your shelter against fire, earthquakes and other natural disasters. Financing proportion depends on the bank you take loans from. Here are the proportions for Nabil Bank, Kathmandu to give you a basic idea.
- 50% FMV or 80% of distress value for purchases
- Upto 100% of cost for construction
For a document checklist, you should visit your bank’s website. Usually, besides general certifications, you will need land ownership documents for constructions and so on. Banks also require a minimum motor road width (usually 8-10 feet) in front of the property to give you a loan.
You might be wondering what FMV or distress values are. FMV (Fair market value) is the current market value value of the property you are gonna buy. Distress value is the value of the same property if it requires to be sold immediately. Distress value is hence lower than the FMV for a property (since it needs to be sold as soon as possible).
On this list, housing loans are probably the most reasonable type of loan to get considering that constructing a house is hardly ever affordable. And besides, it’s a lifelong asset so taking a loan just might be worth it.
AUTO/ VEHICLE LOAN.
Similar to housing loans, these loans are handy when you want a car but don’t have the bank balance to buy one. Banks usually cover 50% (Nepal Investment Bank) to 80% (Nabil bank) of the total cost of your automobile.
There are two types of vehicle loan: Hire and Purchase and traditional loans. Traditional loans are similar to every other type of personal loans in that they require a mortgage value and a steady income.
If you don’t have a mortgage value/ steady income then you can apply for a Hire and Purchase loan. In Nepal, companies like Jagadamba Motors offer this service. Under hire and purchase, you will have to pay a down payment for the vehicle (around 30%), and then the cost of your vehicle + interest will be divided into EMIs. The key difference is that until your payment is done in full, the vehicle will be in the company’s name, not yours. Interest rates are also higher in this option as compared to traditional loans. Hire and Purchase is funny business though (read this article on how loans can trap you for more) so we don’t recommend this option unless you absolutely need it.
If you are thinking of studying abroad (see our article on Study in the US here), you are probably thinking of taking an education loan for funding. Colleges, especially in the US can be very expensive and normal Nepali income hardly ever covers the fees. So in recent days, banks like Nabil Bank, Standard Chartered Bank provide education loans to fund your education abroad. I recommend you use Nabil Bank.
Education loans in Nepal are usually provided against your property. Nabil Bank also provides these against fixed deposit accounts if you have one there. Payment plans are usually long term (up to 20 years in Nabil Bank). Nabil Bank also allows a 4 years period where you won’t have to start paying your loans. This way your parents won’t have to take on the burden of your education.
To get education loans you will need a NOC (No Objection Letter) from Nepal government and course details from your university. This is in addition to other general document requirements for loans, check the Bank’s website for more info.
Like all loans, education loans should also be the last resort. Look for scholarships or sponsors from family before taking a loan.
MISCELLANEOUS PRODUCTS LOAN
These are loans on relatively cheaper products like phone, accessories or home appliances. Instead of paying upfront for an iPhone, banks pay for you instead and charge you EMIs + interest on the amount. These are the lowest principal and lowest risk loans in the list. Loan amount is usually capped at around 1 lakhs and tenure is around a year or two at most.
Nepal Investment Bank and Sunrise Bank offer a wide variety of miscellaneous product loans, I recommend you check their website first.
These kinds of loans are usually very low risk and do not require a mortgage. Instead, a bank account is usually kept as security for the debt. You can get these loans if you really really want that new Note 10 and just can’t wait for another year to save up.
I hope by now you are well informed about your options for getting loans. This isn’t everything that goes into loans and you should head onto the third article or the series: How to choose the right loan plan. Stay tuned for more on this series!