If you grew up outside the Western world, you’ve likely been warned never to take a loan. Learn to live within your means. Yet, there are times when a loan is the only way to ensure you materially increase your earning power. Never take a loan unless it is helping you dramatically change your ability to make significantly more money. For instance:
- Education
- Mortgage
- Business
- Family Crisis
Loans can seem complex at first until you realize there are just a few questions to ask and you’ll know what’s happening.
- How much will you get? This is typically called the PRINCIPAL. This is the total sum given to you — either at once or over time — as with some education loans.
2. What is the loan period? This is the length of time over which you have to pay back the loan. In Nigeria, most loans over the internet are 30-day loans. Mortgages in Nigeria are up to 10 years. Some education loans can have up to 25-year terms.
3. Is it simple or compounding interest? This is very important. You need to understand how your interest will be calculated. Most loans will have compounding interest. This means your interest amount won’t be fixed. You’ll be paying interest on whatever you still owe each time the fees are calculated. So, if you miss a payment, you’ll incur a fee. That fee is then added to your original debt — PRINCIPAL — effectively increasing your indebtedness.
4. What is the lifetime total that I need to pay when all is said and done? Ask the banker, the loan shark, the cooperative, to tell you verbatim how much you’ll have paid over the lifetime of the loan. This is always a good first question to get your bearings.
5. Are you allowed to pay down the principal? The longer it takes you to pay off a loan, it usually means you’re paying more when all is said and done. With longer-term loans, it’s easy to get into the rhythm of paying your fixed amounts. However, if you steel your nerves and make heavier payments, you’ll be cutting down the value of the PRINCIPAL, thus really reducing your indebtedness.
Knowledge is power but what you do with that power is what matters most. And remember, sometimes, loans can be used to increase your earning power so it should not be overlooked.