Top Things to Know Before You Borrow from a Moneylender
Approaching a moneylender for a loan can be a sensible choice, but it’s important not to make that decision impulsively.
You should make an informed decision to borrow from a moneylender.
Therefore, the following information will guide you through the essentials so you can borrow safely and smartly.
What You Need to Know Before Borrowing from a Moneylender
Difference between Licensed and Unlicensed Moneylenders
First, understand the difference between licensed and unlicensed money lenders. The licensed money lenders are regulated by government authorities under strict rules regarding interest rates, fees, and non-discriminatory and fair treatment of borrowers
On the other hand, unlicensed money lenders, mainly called “loan sharks,” are unregulated and can charge incredibly high interest rates and employ other objectionable or even illegal practices to collect debts.
Therefore, knowing the difference between the two will enable you to identify and only deal with a licensed money lender.
Interest Rates and Fees
Regarding licensed moneylenders, one of the most critical aspects to consider is interest rates. The rates are usually higher than what banks would give since licensed moneylenders operate at higher risks by giving out loans to people who cannot get loans from regular financial institutions.
But, the regulatory body has placed legal limits on how much interest a licensed moneylender can charge. For instance, the maximum allowable interest rate is 4% per month.
Apart from the interest rate, you need to know other charges, including fees money lenders charge, processing fees, administrative fees, and penalties for late payment.
Terms of Loan Repayment
Before taking any loan, you must be aware of the repayment terms. This generally includes the period for the loan, frequency, and amount of installments to be paid.
Usually, loan durations can range from several months to a year or more. Notably, the payment schedule might be weekly, bi-weekly, or monthly. Importantly, make sure the repayment plan fits your income and everyday expenses.
Since missed payments can cause fines, increase interest rates, and even affect your credit score, you should ask the lender what happens if you miss a payment. Also, find out whether there is any grace period for late repayments and if any prepayment penalties exist.
Borrow only the amount you can afford to pay
It is pretty easy to slip into borrowing money you do not really need and then find yourself burdened financially by it later.
Therefore, before borrowing, make a budget to estimate how much you can afford per month. Borrowing an amount you can handle ensures you will not be plunged into a debt crisis.
Transparency in the loan agreement
A valid money lender will have an explicit loan agreement stating all the terms and conditions of the loan, including how much was lent out, the interest rate, payment date, fees to be incurred, and penalties, if any, and the contact address or number.
Therefore, never sign a contract in which some critical details are missing or unclear. Ask for an explanation if you don’t understand something in the agreement. If the lender won’t explain the terms or is pushing you to sign now, walk away and look elsewhere.
Scams and Predatory Lending Practices
Scams and predatory lending practices are just about common in finance. Any lender who can pre-approve without any prior credit and financial history is not a good one to deal with.
Similarly, a lender should avoid asking for fees before disbursement or using threatening or aggressive language. These are some common scam signals to watch out for.
Conclusion
Learning about what to expect enables you not only to borrow safely but also to borrow responsibly. You can identify a licensed lender, evaluate their credibility, and assess the implications of the loan, significantly if your financial circumstances change and you cannot pay the loan as agreed.
At SKM Credit, we encourage borrowers to approach moneylenders from a place of knowledge. You can contact us if you have questions about what to expect when borrowing.