Financial security is when you know you do not have to worry about the basic needs of life. It also involves having the courage to comfortably withstand any emergency life throws your way.
The outbreak of COVID-19 was unexpected. Apart from the health implications it caused, the global economy has suffered greatly.
The outbreak of the virus resulted in job losses and business closure. The situation is so worse that even stable sources of income are no longer guaranteed.
As a result, many people have had to reduce their expenses, and the need to seek loans to enable sustainability or survival is on the rise.
While many may consider taking loans to meet their current needs, here are five (5) tips on what to consider before taking that step.
1. The lender
With different financial institutions willing to offer loans, it is crucial to find the right lender. At a critical time, such as this, securing a loan can come at significant risk and cost. It is, therefore, essential to get it from a source that will provide acceptable terms. It could be from a friend, family, community fund or a microfinance bank. Ensure you secure the loan from a lender willing to give you the best possible conditions and a well laid out repayment plan.
2. Do Your Homework
Research is key. Do your homework and be well informed about it. Ensure you have a realistic means of repayment. Look at the viability of the loan and ensure that you have a realistic chance of paying back on its due date.
3. Work Out Your Payment Plan
Many focus on planning on how to spend a loan and determining how much they need to secure. While this is essential, it is equally important to plan on how you will repay a loan. It would be best if you decide whether you will be paying on a weekly or monthly basis. These factors will guide you in choosing a loan with favourable payment terms to avoid unplanned costs.
4. Credit History
Having a good sense of your credit history is also very important. Know your cash flow and be sure of your income and expenses. Know the precision in terms of what you can get and when you can get it, so as to draw up an excellent and reasonable payback strategy.
5. Terms and Conditions
Ensure you read the fine print and understand the various terms and conditions of a loan before signing any legally binding documents, including a personal loan agreement. In some instances, you may find it difficult to understand certain things regarding the loan you are about to secure. Try as much as possible to clarify all doubts before taking the final decision.
Financial strain may not be the sole purpose of taking a loan. However, whatever the reason may be, it is crucial to consider these five tips before securing one.
How interest rates impact your wallet
It is imperative to understand how interest rates impact our wallets.
In the financial world, the interest rate plays a huge role in any financial transaction. Interest rate is the proportion of money a borrower pays for an asset or any form of debt. It is the return or interest paid to the financial service provider.
In Nigeria, interest rates are by financial institutions and the Monetary Policy Committee (MPC) assigned by the federal government to keep interest rates at a moderate and stable price level for proper economic growth.
When it comes to interest rates, either increasing rates or declining rates, the economy gets influenced in many ways. Rates of interest ascertain economic performance. Lower interest rates are a sign of a slow or poor economy as interest rates are changed to enable cash flow.
Higher interest rates are, in turn, viewed as an indicator of a healthy economy with favorable cash flow. Interest rates can slow down or improve an economy. It is necessary to examine the various aspects of our financial life influenced in different rate scenarios to understand how interest rates impact our wallets;
Some ways interest rate can impact your finance are:
Many factors influence how an individual saves, but a decline in interest rates tends to discourage saving because the reward is affected. A higher interest rate makes it attractive to save money as it enhances increased return. Thus, a change in interest rates influences an individual saving, which is an essential part of financial planning.
How you will be affected by a change in interest rate depends on if you are inclined to borrowing or investing. Because the interest placed on loans will be less, lower interest rates offer more opportunities to borrow or acquire cheaper loans, which means it favours the borrowers. People are discouraged from getting loans to invest in their businesses because a higher interest rate translates to a higher borrowing cost.
Lower interest rates allow companies to acquire less costly loans that impact the price of the goods they sell. As far as expenses are concerned, people will have more funds to spend on goods and services.
Interest rates can have an impact on the income people earn by affecting economic growth. Slow economic growth will influence the level of income earned. With substantially less income, people will have less cash to survive on.
When setting financial goals and making meaningful decisions regarding one’s finances, understanding the impact interest rates have on one’s life can help.
How MSMEs can get easy access to finance
MSMEs must take the following steps for loan readiness.
MSMEs are considered the backbone of the Nigerian economy. In 2019, they made up 90% of all registered businesses, contributed more than 50% of the country’s nominal GDP, and employ 84% of its labour force. Despite this, MSMEs were the recipients of less than 5% of all credit granted by the banking industry.
One reason for this is self-selection by MSME owners. Many MSMEs refuse to apply for loans from banks due to a fear of rejection and a belief that banks charge exorbitant fees and request hefty collateral before giving loans to MSMEs. Now more than ever, in this era of cashflow-based lending and low-interest rates, this harmful myth is costing businesses access to finance that they need to scale.
Another reason is the MSMEs’ lack of loan readiness. Unlike large companies, small business owners do not prepare themselves before applying for loans. This causes them to make many mistakes that discourage banks from lending to them due to a fear of non-repayment.
In order to overcome this hurdle and join large businesses in taking advantage of the low-interest climate, MSMEs must take the following steps for loan readiness:
1. Maintain financial records – Research shows that 69% of MSMEs in Nigeria do not keep detailed financial records. As a business owner, you must ensure that funds pass through your business account. Your business’s financial records as reflected in your bank statement will help your bank determine your repayment capacity. This is important, whether you want a collateral-free or collateral-based loan.
2. Use narrations for transfer into personal accounts – Again, always use your business account for business funds. However, if funds must be paid into your personal account for any reason, then ensure that those payments have a narration that reflects the purpose of the payment. For example, Two shirts purchased. This helps isolate business funds from personal when computing your turnover in order to determine your loan amount and repayment capacity.
3. Know what you want – Always know exactly how much you want and what you want it for. If your account officer asks you how much you want and you say “any amount you can give me”, they automatically assume you have no plan for the money or a plan for repayment. Before approaching your bank, determine how much you need and how much you can repay per month, using your monthly income.
4. Have a repayment plan – Always have a plan for repayment. Know how much you can afford to part with per month. Note however that your repayment plan might not align with that of the bank. Banks prefer not to take more than 33% of your monthly income in loan repayments, so your loan repayment period will probably be dependent on how much you can pay per month. Regardless, a well-thought-out repayment plan will build confidence in your repayment ability.
5. Engage your account officer– It is important to have an engagement with your account officer before applying for the loan. Instead of just writing a loan application letter to the bank and waiting for a response. Armed with your financial statement and your knowledge of how much you need and for how long, visit your account officer and have them work with you in getting your loan.
Ese Atakpu is a writer and banker.
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