If you do have to take out a loan, it pays to consider the following pointers:
• Shop around for the lowest interest rate. Don’t get tempted by the advertised figures, as in most cases, they are merely starting interest rates and are applicable to a select few customers. “Others end up getting a much higher rate. Individuals should check the rate applicable to them before signing a loan agreement,” advises Preeti Bhambri, founder and managing director of MoneyCamel.com
• Look at the first-year clause. The attractively low interest rate you thought you will be getting might only be valid during the first year of the loan and the succeeding years could carry higher interest. “Many customers don’t realize that often banks offer low interest rate for the first year only and the interest rate significantly goes up from the second year,” says Bhambri.
• Watch out for excessive charges. Brush up on the latest guidelines by the Central Bank to know you are not being charged higher processing fee, early repayment fee and other associated costs. “The central bank has regulated the fees and charges. Again, check the product details,” says Bhambri.
• The amount of money you will borrow will depend on your capacity to pay. John Bailey of Acuma suggests that personal loans for car finance, consolidation of debts or purchases should be no more than 5 to 10 per cent of your monthly household expenditure.
• The longer the loan term, the more you pay. Some people prefer a longer-term facility in order to avoid paying high monthly instalments, but this option could mean that you will end up paying more on interest. It is therefore a good idea to choose the shortest option available as long as it’s within budget.
“If you took a loan of Dh25,000 at 6.99 per cent over four years repayments would be only Dh598 per month but you would end up paying Dh3,730 on interest. If you took the same option over 12 months, your repayments would be higher at Dh2,163 per month, but the total interest payable would only be Dh956 in total or 26 per cent of the total interest payable in the first example,” Bailey explains.
