Recent moves by the Central Bank of Nigeria to help the economy grow faster than it currently means that banks have to give a large part of their deposits as loan.
With up to N6.3 trillion private demand deposit (not including time and savings deposits) in the custody of Commercial Banks as at July, lenders are coming up many products in a bid to align with the apex bank’s policy.
Businesses now get offer for different kind of loans that can provide the much-needed capital for growth, while individuals also get email and text notifications for products like payday loan, education loan and the likes.
In short, it has become very easy to take a loan which is not a bad thing in itself unless you do so irresponsibly and end up in a debt trap.
Before you opt for the next offer that comes your way, these considerations can help you maximize the opportunities made available by the central bank’s loan policy.
Understand what you should borrow for
It can be very tempting to unlock your phone, dial the short code for a payday loan so you can buy a new phone, give yourself a nice treatment at some fancy restaurant or go on a shopping spree- after all the bank officers are not really going to ask how you spent the money.
As a rule, you should not borrow for anything that would not help you generate more money or help you save cost.
Taking a loan for Education, a new business you are certain would generate cash for repaying the loan at maturity (unless you have another source from which you can repay) and existing ventures can be a good step.
While there could be exceptional cases, it definitely is not one involving a loan to fund your birthday party, wedding ceremony or any of such.
Have a repayment strategy
One of the first things before you borrow is outlining a plan to repay.
It is very vital to painstakingly model your finances over the course of the loan to see what sources of income you would have, liabilities and expenses that would be incurred or paid in the period, as well as to create room for unforeseen circumstances.
Do not be unnecessary optimistic in your forecast, in fact it is better to err on the side of caution; this means transitionary income and expected inflows to your wallet should be treated carefully in your plans.
Credit Bureaus got eyes on you
Data on the credit history of up to 30 million Nigerians are at the disposal of Credit Bureaus, agencies that help lenders run a background check on potential borrowers.
This means plans to liquidate your accounts so that banks cannot collect back the borrowed amount or any delay on your part in repaying interest or principal would taint your credit history and make it costlier-if not impossible- for you to borrow in the future.
It might interest you to know that Credit Bureaus in Nigeria do not just rely on financial institutions to get information on you, they also get data from Telcos and other utility companies so that they can tell what kind of risk you pose to lenders through your bill payment history.
Read also: Nigeria needs to grow domestic credit to escape low growth cycle- Akintemi
Double Check offers
A loan offered to you at 10 percent per month might sound attract but when you annualize the interest it becomes a scary 120 percent per month.
It is vital to also compare rates across lenders and seek for loan packages that fit your budget as well as presents you other benefits.
For instance, a big bank in Nigeria offers loans that are insured so that in the events of a job loss, the loan is paid by the insurance firm allowing the borrower a breathing space after which the insurer is repaid.
Set a debt limit
Investopedia, an American finance and investing website, advices that households should spend no more than 28 percent of their gross income on home-related expenses (including mortgage payments, homeowners insurance, property taxes) and a maximum of 36 percent on total debt service (i.e. housing expenses + other debt such as car loans and credit cards).
This means regardless of how bad you need a loan-especially for personal use- the amount required for repaying principal and interest must be less than 36 percent of annual income.
While there are different limits advised by several experts, reaching out to a financial experts or engaging a Credit Bureau can give you an insight into an appropriate debt load.
Alternative finance
You should also consider financing alternatives so you get the cheapest option for your business or personal project.
There are several alternatives if you do not want a bank loan, like equity (sharing ownership with someone who has capital you need) or asking that friend who wouldn’t request for as much interest as banks.
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