by Rania Oteify
Gulf: If you’re taking out a personal loan, auto loan or a home mortgage, you must be prepared with a list of questions to ask your lenders. These questions are not only about what you’re being offered, but they also must check for alternative that might save you money.
Rates are not the same for all loans; they change based on the terms and other factors, such as your risk factor, employment, etc. So it pays off to ask your lender about what factors determine your rate and see if you can make changes that help your reduce the amount of interest that you’re paying on your loan.
If you want to be more specific in your questions, consider the following question.
Term and rate
Look into how changing your loan repayment term can change your monthly payment and the amount of interest you pay over the life of the loan. For example, if you’re buying a car, stretching a loan over 60 months may only save you slightly every month, while the overall cost of interest is significantly higher than if you pay it off over, say, 48 months.
Find the point where your monthly payment is affordable, without dragging a loan for longer than needed. In addition, think of early-repayment penalty. In particular, if you’re financing a car over seven years, while you’re not planning to keep it for that long, you run the risk of paying extra fees and penalties when you come to sell it and settle the loan.
Fees and restrictions
Loan documents are infamously overwhelming, with more fine print than anyone wants to read and comprehend. So ask your lender to clearly explain the fees, other than the interest, that are charged on the loans as well as any other restrictions. Once you sign on the loan documents you typically have no recourse. So don’t hesitate to ask about a full explanation of anything you’re not sure of.
Restrictions could be related to prepayment, early repayment or refinancing. It also could be related to selling your asset — the car or the house. If you would expect your life situation to change in the next few years, committing to a large loan with no easy exit can be shackling.
Banks are not doing you a favour when you are being offered a personal loan or any type of financing. And although you don’t want to trigger any red flags as a borrower, you will need to know exactly what will happen if you default on your loan — meaning that you become unable to repay because of job loss, illness or anything else.
If you’re signing a blank check as a security for your loan, would you be responsible for the remaining amount of the principal? The principal amount plus interest? The principal amount and interest plus other charges? These are all different scenarios, and the amount that you will need to come up with can grow significantly.
And although you may have no intention to default, you still must be aware of the legal consequences of this situation. If you default on a home mortgage or an auto loan, the lender probably will seek to repossess the collateral — that is your home or car. But what if you default on an unsecured personal loan, where there is no collateral to possess?
Leaving the country
Expatriates run the risk of having to end their employment in the UAE voluntarily or involuntarily. If this was to happen, would you be able to keep the loan running and pay it off from aboard? Is that allowed by the bank that might see your payroll comes to an end? And if yes, what are the logistics of doing so? Will you have to transfer money regularly, which will cost you wire-transfer charges. How much these will be?
Knowing how you will be able to handle your loans if your situation changes can help you make the initial decision of whether to take one out or not. It also could help you shop for better loan terms. One lender’s set of terms doesn’t mean that is the only option available. So look around until you find a loan that match your requirements and expectations.
The writer, a former Gulf News Business Features Editor, is a Seattle-based editor.
Before you take a loan
Know your rate and term options
Add up all the costs involved
Know the consequences of default
Ask if you can get out of it or pay it remotely