Why you must understand your loan repayment terms

Customers observe social distancing in a banking hall. PHOTO/KELVIN ATUHAIRE

Loans are a necessity at one point of life to sort out an issue, be it business, education or finishing a house. The cold side of the loan is when one has breached the terms of the contract or did not understand the amortisation schedule.

Tales of some borrowers puzzled about the unending loan repayment is a common conversation amongst many. To some, the need for money is prioritised after the loan contract. However, most complaints about unending loans, all start from disregarding detail on the drawing board. The technocrats explain what you need to know about loan repayment terms.
Terms of concern
Before one is issued a loan, they are taken through the dos and don’ts as required by the financial consumer protection guidelines. Like any borrower, they are certain to payback as per the due date because it is undesirable to be tormented by a loan.

Charles Ocici, the executive director Enterprise Uganda, simplifies what loan repayment terms entail. Loan repayment terms consist of the principal loan amount per payment, scheduling the amount per period either quarterly or monthly, interest rate and grace period (time before one starts paying back the principal amount). It is vital to keep in mind that the bank has a right to change the interest rate at any time especially when one is unable to pay on time as stated in the loan contracts. It also has a right to call the loan earlier than scheduled because when the maturity date arrives, one pays the last instalment and the loan is closed.

The amortisation schedule depicts a loan amount taken, term of the loan (which will be paid back in a given maturity period) and instalment amount per period.

“For instance, for a two-year loan, one will be asked to pay every quarter hence eight quarters. The amortisation due amount per quarter is the entire loan divided by eight quarters. Hence getting the eight scheduled installments of principal of the loan across two years,” Ocici illustrates.

In each quarter, the amount is the same and interest amount is paid too. Amortisation is dependent only on the principal without interest. Interest keeps coming in according to the amount outstanding.
Loan repayment schedules
You could repay you loan monthly, quarterly, half yearly or annually depending on your capability to meet your financial obligation to the lender.

One can borrow in January and promise to pay back in December without any disturbances but in between, one pays the interest only because it is not amortised.

It is advisable to accept a schedule depending on the nature of your source of repayment, advises Ocici. A school gets school fees on a termly basis so you don’t go for quarterly repayment because the latter covers only three months while a term comprises of four months. Hence a school can manage a termly repayment as opposed to the quarterly basis. Try to make sure that your repayment is in line with your source of repayment.

“When taking a salary loan paid on a monthly basis, why should one accept to payback weekly? Amortising a loan on such a basis is a lie. Hence the accepted amortisation schedule should be a reflection of your repayment capability or seasonality of your business. It must correspond with the net amount available after running over heads. Never accept the lender to make a decision on your behalf.”

Unending loan stories
People don’t look at the amortisation table; they borrow because they are in a hurry to fulfil their needs and don’t realise they started paying double principal in the third year.

“When one takes a loan, they usually pay back three times what they actually borrowed, Grace Makoko, Global market consultant says. It is biblically justified that the borrower is the servant to the lender.”

For amortisation schedule, Makoko argues that every lender makes sure in the first half of the loan, the borrower is paying mostly interest and very little principal. The principal stays high so that the lender ‘milks’ it as much as possible then allows you to start paying down the principal having made their money. That is why people whine about unending loans.

One of the reasons why some loans seem to be recurring is that the amortisation was mistaken since one chose a wrong period, for instance, if one earns money termly and they chose quarterly term of payment. Such a repayment drags on to the next term.

Ocici advises, “If one did not get the terms right, they will not pay that loan on time. Depending on the bank’s assessment on the truth, they either sell your collateral or choose to understand your plea of being unaware of the amortisation terms. The bank gives an extension of the loan, adding you a few months ahead alongside with increasing its interest rate as a punishment because of breach of the formally accepted loan arrangement.”

Any delay in completing a scheduled loan, attracts a double interest on your loan. “In fact, people forget that loans accrue interest on a daily basis. One might say I took only five days repaying back past the scheduled date. The core banking systems of most commercial banks usually allows only an extra day. After that day without repayment, this amount automatically amortises and the consumer will pay interest on top of interest.”

After defaulting on your loan, the bank simply extends your loan period beyond what you had earlier agreed.
George Wilson Ssonko, the head of Financial Consumers Protection Unit at the Bank of Uganda, says, the institution does not want to over stretch you since they have given you a consistent amount per month to pay so they simply push the extension of the loan period. People think a default only happens when one pays in the next month, which is unlikely true. If one surpasses their scheduled date, they have already breached their contract.
Current credit relief
On July 30, 2020, Bank of Uganda issued guidelines to all banks in regard to reporting to Credit Reference Bureaus under the credit relief and loan restructuring guidelines.

A loan would be restructured even if it is in arrears as long as it was not classified as ‘loss’ as at March 31, 2020 and proof of customer’s ability to continue meeting his / her loan obligations post the restructure.

“What you don’t want to do as a bank is to postpone a risk that will certainly materialise, as it is very crucial during these times to have adequate provision coverage on your loan portfolio,” Guy Kimbowa Lutaaya, the head of credit at Absa Bank Uganda, advises.

The guidelines mention that restructured credit facilities will be reported to the Credit Reference Bureau (CRB).
However, the reporting should not portray or lead to any adverse change in the credit risk profile of the borrower.
Bank of Uganda’s intention is to correctly capture the new terms and conditions of the credit facility in CRB.
“If a client had earlier agreed to pay Shs2 million but had restructured to Shs1 million per month, that information, earlier on, would be reported as adverse information on the CR score but this has since changed,” Ssonko expounds on the relief.

Lutaaya explains that this is done to avoid the danger of the borrower falling into a non performing loan.

“Such negative information would be put onto your CRB detail. Later, one will be given a very high interest rate when they try to borrow,” Lutaaya says adding that they would be pushed out of the market depending on how bad that negative information is.

Lutaaya emphasizes, “If a bank is extending the tenor of a loan due to the impaired ability for the customer to meet their obligations, it wouldn’t be ideal to reduce the interest rate on that existing loan; as it erodes economic value of the loan.”

Pay bigger principal earlier
Makoko suggests paying a bigger principal earlier because with time, one would have paid less interest. This is where the trick is for borrowers on how the loan is paid out. “You have every right as a borrower to say you want to pay more. It means the loan instalment will be bigger because you want to reduce the principal.”

Check how many times you have paid. Go add up what you are going to pay after looking at the amortisation table.

Check when you should see a significant reduction on the principal amount because that is how one ends up paying three or four times the actual laon. Enedeavour to shorten that period to start paying the principal in the first 12 or six months thus making a substantial reduction.

“Increase your standing order to accelerate the payment of the loan,” Makoko adds.
Also sign off early repayment penalties. Banks use depositor’s money, who in return expect interest. One can ask for a waiver on early repayment penalties so that people are encouraged to pay earlier.

FILING COMPLAINTS
When does one turn to Central Bank?
Before one turns to the central bank with complaints about any supervised financial institution, first contact the commercial bank.
“State in writing the facts about when the loan should have ended on such a date, the unjust treatment without a clearance letter and the need of an explanation on the matter,” Ssonko says.
Legally, the financial institutions are given a period of 14 working days according to the financial consumer protection guidelines, to respond to such matters.
Also, if one receives unsatisfactory responses and needs the regulator to do a background check on the complaints’ behalf on what exactly happened.

What is amotisation?
Amortisation is the term used for how money is applied to your loan principal and interest balance. You pay a fixed amount every period, but the amount is split differently between principal and interest for each payment, depending on the loan terms. With each payment, your interest costs per payment go down over time.

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