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Ae basics of banking

Borrowing – Understanding the options, pros and cons

Borrowing – Understanding the options, pros and cons

Have you felt perplexed about what it might cost to miss something important in the fine print while borrowing or taking a finance?

At Standard Chartered, we’re committed to providing you with the right financial tips and tools. Through this edition of our educational series, “Basics of Banking”, we will help you take informed decisions on loans.

Today, let’s take a closer look at various borrowing options and understand its risks and benefits.

Types of Loans or Borrowing Options

Not all loans are the same. Here are some of the categories of loans to help you understand what kind of borrowing suits you the most.

Secured Lending

These loans require you to pledge a collateral for the money you are borrowing. The bank reserves the right to utilise the pledged collateral to recover the loaned amount in case of non-payment. The interest rate for such loans are much lower as compared to unsecured loans.

For example, a home finance / mortgage loan, is considered a secured loan as your property is used as collateral. In this case, the property will be held by the bank and the ownership will be transferred to you upon completion of the repayments. If you fail to meet the repayment requirements, the bank will have legal rights to claim and sell your property. This process is called foreclosure.

Unsecured Lending

Unsecured loans are those that do not require any collateral for loan disbursement. In the UAE, the bank will analyse your credit history through the Al Etihad Credit Bureau as it helps determine whether the loan should be approved. The interest rate for such loans can be higher as they are no collaterals pledged against the loan. However, if the borrower defaults there will be a negative impact on the credit history maintained with the Al Etihad Credit Bureau, This may limit the borrower’s options to take further credit from other licensed financial institutions.

For example, a Personal Loan enables you to borrow money in the form of cash at a predefined interest rate. For most consumers, the purpose of taking a personal loan can be anything from consolidating debts, funding a higher education, home renovation, medical emergencies or to purchase big-ticket items. While A credit card is also a type of unsecured lending issued by the bank with a pre-approved limit to help you purchase or make cashless transactions.

Questions to ask the bank and yourself before applying for a loan

Fixed Rates vs. Reducing Rates
For a loan with fixed rates, interest/profit is to be applied to the initial principal whereas for reducing rates, it is applied to the principal outstanding balance. Reducing rates are often the less expensive option.

Paying minimum due vs. full payment
For credit cards, if you are running short of funds you could choose to pay the minimum due to avoid defaulting. This however means that interest will be charged on the amount that is carried forward. Paying in full is always the better option.

Late payment and its consequences
There would be late payment fees to be paid if your loan repayment is past the due date. It could also affect your credit history and credit score.

Benefits of a good credit score
A good credit score is a measure of how responsible you are with your loans and credit. If you have a good credit score, you have higher opportunities of further borrowing from other licensed financial institutions. Please note some countries may have legal implications if your loans have not been paid as per schedule.

Terms and conditions
Study your credit agreements and make sure you fully understand the terms and conditions. It’s your responsibility to ask questions and understand your obligations.

Each bank has its own unique offering. Don’t hesitate to research the options thoroughly. Compare fees and products to identify what best suits you and your needs.

Ensuring timely repayment of your loan

Repaying your loan on time is crucial to avoid short-term and long-term losses. Goes without saying that you must set aside the required amount and pay before the due date. Here are some tips:

Automatic payment / auto-debit
You could opt to set up an automatic payment from your deposit account to avoid missing a payment or being late.

Set due date reminders
Set reminders and then, let your smart phone or your email take the responsibility of reminding you before time, every time your payment is due.

If you are going through a rough patch and can’t keep the repayment schedule, request your bank to restructure your loan.

To know more or read related topics, visit https://www.sc.com/ae/stories/basics-of-banking/