Do You Really Understand Loans, or Are You Setting Yourself Up for Trouble?

In Nigeria, just like everywhere else, loans are an important way to get money for both people and businesses. Whether you want to grow your business, buy a home, or handle an emergency, it’s important to know how loans work to make smart financial choices. This article will explain what loans are, how they work, the types of loans you can get, and tips for getting one.

What Is a Loan?

A loan is a sum of money borrowed from a lender (such as a bank, credit union, or online lender) that you agree to repay over time, typically with interest. The terms of the loan, such as the interest rate, repayment period, and fees, are usually agreed upon before the loan is disbursed. It’s a serious financial commitment, yet some act like it’s a gift. When you borrow, you’re not just taking money—you’re signing up to pay it back with interest, often under terms you barely read.

How Do Loans Work?

The process is simple but not always straightforward. You borrow an amount, agree to pay it back within a set period, and pay extra in the form of interest. Easy, right? But here’s where people go wrong—they overlook hidden charges, penalties, and unrealistic repayment schedules. Have you been guilty of this?Here’s how the process generally works:

1. Application: You apply for a loan by submitting the necessary documents to the lender. These documents typically include proof of income, identification, and credit history.
2. Approval: The lender assesses your creditworthiness based on factors like your credit score, income level, and debt-to-income ratio. If you meet the lender’s criteria, your loan application is approved.
3. Disbursement: Once approved, the loan amount is disbursed to you. This could be in a lump sum or, in some cases, in installments.
4. Repayment: You repay the loan over a specified period, usually in monthly installments. The repayment amount includes both the principal (the original loan amount) and interest.
5. Completion: Once you’ve repaid the loan in full, your obligation to the lender ends. However, failure to repay the loan as agreed can lead to penalties, increased interest rates, and a negative impact on your credit score.

Common Mistakes to Avoid When Taking Out Loans

Making mistakes when taking loans is more common than you might think, and these errors can have long-lasting financial consequences.

1. Failing to Compare Options

Many borrowers don’t research or compare options, leaving them stuck with unnecessarily high-interest rates or unfavorable terms. For example, interest rates for personal loans in Nigeria can range from 4% to 30% per annum depending on the lender. Shopping around for better rates and flexible repayment terms can save you significant money in the long run.

2. Ignoring the Fine Print

Hidden fees and penalties often lie in the fine print. Yet, about 42% of borrowers admit they don’t fully understand their loan agreements before signing. This can lead to unexpected charges or complications. For instance, early repayment penalties or missed payment fees can quickly inflate your total loan cost. Take the time to read and ask questions before committing.

3. Over-Borrowing

It’s tempting to take more than you need when a lender approves a large sum. However, statistics show that nearly 25% of Nigerians struggle with loan repayments due to over-borrowing. This often happens when people use loans for non-urgent expenses, leading to debt they can’t handle. Stick to borrowing only what’s necessary to meet your financial goals.

4. Not Considering Repayment Capacity

Shockingly, reports indicate that about 40% of Nigerians are in debt, with 26% specifically owing to loan apps. Misalignment between your income and repayment obligations can leave you in a financial bind. Always calculate your monthly repayment amount and ensure it’s no more than 30% of your monthly income to avoid unnecessary stress.

5. Using Loans for Non-Essentials

Are you using loans for the latest gadgets or luxury items? 1 in 5 Nigerians take loans for non-urgent needs, creating financial strain without adding value. Loans should be a tool to solve problems or create opportunities, not a way to fund a lifestyle you can’t afford.

6. Not Understanding Interest Rates

Interest rates can be tricky to grasp, but ignorance can cost you dearly. For example, if you take a loan with a 20% annual interest rate, you’re paying significantly more over time compared to a 10% rate—and yet, many borrowers overlook these details. Research how interest rates work and how they’ll affect your total repayment. Consider the Annual Percentage Rate (APR), which includes additional fees and gives a clearer picture of the loan’s cost.

Also Read: Pros and Cons you should consider before getting a Loan

Tips on Getting a Loan in Nigeria

Securing a loan in Nigeria can be straightforward if you follow these tips:

1. Know Your Credit Score: Your credit score is a key factor in determining whether you qualify for a loan and what interest rate you’ll be offered. Regularly check your credit score and work on improving it by paying off debts and avoiding late payments. In Nigeria, you can check your credit score on CRC Credit Bureau. Dial 5658# on your mobile phone to get a free credit report from Nigeria’s first independent licensed credit bureau. 
2. Understand the Terms: Do you know how much you’ll end up paying, or are you too focused on getting the money now? Before taking out a loan, make sure you fully understand the terms, including the interest rate, repayment period, and any associated fees. Ask the lender to clarify anything that’s unclear.
3. Compare Lenders: Different lenders offer different terms and interest rates. Shop around and compare options to find the best deal that suits your needs.
4. Provide Accurate Information: Ensure that all the information you provide during the loan application process is accurate and complete. Inaccurate information can delay the approval process or even result in rejection.
5. Consider Your Repayment Ability: Only take out a loan if you’re confident you can meet the repayment terms. Consider your monthly income, expenses, and any existing debts before committing to a loan.
6. Avoid High-Interest Loans: Be cautious of payday loans and other high-interest loans. While they may offer quick access to cash, the high costs can lead to a debt spiral if not managed carefully.
7. Have a Clear Purpose: Lenders are more likely to approve a loan if you have a clear and legitimate purpose for borrowing. Whether it’s for business expansion or home improvement, having a well-thought-out plan can work in your favor.

Conclusion

Loans can be a helpful tool, but only if you’re smart about them. Stop making excuses and take responsibility for understanding what you’re getting into. It’s your financial future at stake, after all.

So, are you going to continue borrowing blindly, or will you finally take control and make informed decisions?