Every company needs funding at some time during its lifecycle to pay off short-term debt, support new initiatives or business strategies, or buy operating assets. At some point in their lives, people can also want a bank loan to assist with the cost of buying a car, a house mortgage, or household items.
10 Things To Be Aware Of Before Applying For A Bank Loan In Nigeria
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To apply for a loan, you must formally contact a bank
Most people typically request a business plan from banks when considering applying for a loan. But not every company needs a business strategy.
However, in order to be eligible for any loan, you must properly apply to the bank; as a result, it’s critical that you clearly state your demands in your letter of application.
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Interest rates are set annually by banks and are not capped
Banks impose annual interest rates rather than monthly ones. This implies that a bank’s 20% interest rate on a loan is offered annually rather than monthly. For instance, your interest is going to be N50,000 if you request for a N1 million loan with a 3-month term and a 20% interest rate. which, for just three of the twelve months, accounts for 20% of the N1 million allotted.
It may, however, be less based on how frequently you pay back the principle. In other words, your interest will be 20% of N1 million for the first month, or N16,667, assuming you return N300,000 at the end of the first and second months and N400,000 for the third. After 20% on N700k for one month, or N11,667, in the second month, there will be 20% on N400k for one month, or N6,667. It is now N35k in total. The interest rates that you are offered are also subject to change because banks frequently include a clause in their offer letters allowing them to raise the rate at any time they deem necessary due to changes in the market.
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Different banks provide varying terms and conditions as well as interest rates
The interest rates and conditions that banks offer vary in the same way as the prices of goods and services vary in the market. While some might give you a better deal in terms of interest rates, others might give you a shorter repayment schedule.
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Always pay attention to the terms and restrictions
They always provide a set of “Other Terms and Conditions,” or “OTC,” with the offer letter. They are typically not the same as the terms and conditions (TC) that most consumers prefer to look at, which include things like security, interest rate, and tenor.
The problem, though, is that the TC is frequently irrelevant when a loan defaults and a bank sues you in court. Since the OTC usually contains those items that specify what the bank may do in the event of a default, it is probably more significant.
RECOMMENDED:Â When To Apply For An Emergency Loan
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Collateral or security of some sort is always required by banks
Regardless of the kind of loan you request, banks will require collateral of some kind. It may be your guarantee, an asset, or even landed property. They occasionally remember to file a claim in court to these collaterals, and occasionally they forget. In the event of default, they run the danger of losing their claim to the asset if they don’t.
Don’t be duped, though; even if an encumbrance isn’t registered, the court may nevertheless acknowledge it.
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If you don’t pay back your bank loans by the due date, the bank won’t take over your company
Indeed, banks share your preference to stay out of court and, to be honest, they want you to be successful since your accomplishments and theirs are strongly correlated. It’s preferable to make partial loan payments rather than none at all if you are unable to repay your entire debt. Judges frequently consider evidence that strengthens your case. Therefore, try to get in touch with the bank and look for a new arrangement whenever you miss payments on any part of your loans.
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You can try to restructure or renegotiate your debt at any time
As a result, if you feel that the terms of your loans are not favorable to you, you can always contact your bank to amend them. Additionally, you cannot contact a bank if your loan is non-performing. When your company is going well and you are making timely loan payments, you can also get in touch with them. Because of this, business owners are never able to sit back and relax; they have to continuously look for methods to make their operations better. Refinancing is going to a different bank to become a new lender and taking over your current debt. Once the new bank provides your improved T&C, you should take advantage of this choice.
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You can request a moratorium from your bank
A moratorium is only a bank’s consent to temporarily halt principal repayment for a borrower. It makes sense to allow the business a little time rather than burden it with significant financial outflows that it may better utilize in building the business, as some business concepts need time to start producing money even after borrowing from a bank. Banks understand this and frequently grant borrowers a grace period (one, three, or year, for example) during which they just have to pay interest. At the conclusion of the moratorium, borrowers start paying principal and interest.
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Your Debt Service Coverage Ratio (DSCR), not your interest rate, poses the greatest risk of default
Imagine two guys, Mr. A and Mr. B, who each borrow N1 million. Mr. A is required to repay the loan over the course of a year, while Mr. B has three years. They agree to pay back both interest and principal in equal installments and are assessed annual interest rates of 20%. While Mr. B pays N37.1k each month for the following three years, Mr. A must pay the total of N92k per month for a year until the debt is returned.
Now, assuming they both make N100,000 in cash each month from their businesses, which one do you think will default sooner in the event that there is a sharp decline in sales during the first year? Without a doubt, it is Mr. A, even though over the course of three years, he pays less interest—a total of N111.6k—than Mr. B, who pays N337.8k. This is as a result of Mr. A’s 1.09x DSCR versus Mr. B’s 2.7X. Even if Mr. B’s company pays greater interest, he is practically guaranteed to turn a profit as long as it has a return on investment of more than 20%.
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Banks may charge unstated fees
They charge you fees and C.O.T. in addition to the interest rate that the bank charges. However, we are all too familiar with these. Whenever you apply for a loan, banks typically do not disclose these additional fees to you. When they charge you C.O.T. or WHT while they are paying your interest, for instance, taxes are subtracted. Additionally, even if your loan agreement has reduced harsh interest rates for payment defaults, they still charge you harsh interest rates when you do. When your accountant prepares bank reconciliation reports, it’s crucial to always ask them to spot-check charges once a month.