To better understand whether it is worth it for people to borrow in certain situations, they need to weigh the potential benefits and risks of the loan and critically assess their capacity to repay. Generally speaking, the decision to take out a loan is reasonable if the person has a good capacity to repay and if the purpose for which the loan is taken will bring a higher income in the future. The National Bank of Moldova tells about the characteristics of a rational behavior of individuals in terms of lending in a series of articles produced in partnership with the Independent Think Tank “Expert-Grup”, IPN reports.
According to the central bank, the rational reasons for taking a loan refer to the long-term improvement of the quality of life (for example, buying a home), gaining of profits from a business project that will exceed the cost of the loan, development of the own human capital, such as university studies or professional certifications, or refinancing of the previous loan on more advantageous terms.
It is unreasonable to take a loan for impulse purchases or excessive spending, risky investments in dubious projects, paying off previous debts by taking on new and bigger commitments.
If, however, the person decided to raise a loan, they should choose a bank to contact before going to a nonbank lending organization. Banks tend to offer more advantageous conditions because their business model involves less risk. The bank will perform more checks, the procedures will take longer than at a nonbank lending organization, but if a loan is provided, the interest rate can be lower.
The effective annual interest rate is one of the main criteria on the basis of which different offers can be compared. This rate reflects the real total cost of the loan. The possibility of early repayment of the loan is another important aspect.
In addition, the composition of the periodic payments to the bank is carefully checked: as a rule, the bank proposes a schedule in which it prioritizes its own interests regarding the payment of interest. Respectively, in the first year of repayment of the loan, over 80% of the payments can be only interest and less than 20% - the loan itself. It is good to negotiate with the bank so that the principal payment has a higher share in the first years of loan repayment.
The loan agreement is signed after all the conditions are examined. It may happen that, already after the conclusion of the contract, the person finds in it a previously unnoticed mention, which makes the loan less advantageous. In such a situation, the person has the right to revoke the loan agreement without explaining the reasons to the bank, within 14 days from the conclusion.
After the contract is concluded and the money is received, the person must ensure that loan payments are made on time, according to the schedule indicated in the contract, in order to avoid payment delays and penalties. If the person has difficulties in paying the installments, it is reasonable to request the restructuring of the loan.
The rights of the person as a beneficiary of loans are set out in the Consumer Loan Agreements Act. The law prohibits the application of an annual loan interest rate exceeding 50%, and all other related payments (commissions, penalties, etc.), except interest, per loan day must not exceed 0.04% of the total loan amount. The person who takes out a loan has the right to be informed, before the conclusion of the contract, about the effective annual interest rate and other essential conditions of the loan and has the right to revoke the loan agreement within 14 days of its conclusion, as well as to the early repayment of the loan.
