AZE.US
Borrowers in Azerbaijan should look beyond the advertised interest rate when taking out a loan and focus instead on the total cost of borrowing, including commissions, insurance and other fees, an economist has warned.
Economist Asif Ibrahimov said one of the most common mistakes consumers make is judging a loan solely by its annual interest rate.
“The key question should be simple: if a person borrows 10,000 manats, how much will they ultimately repay to the bank?” Ibrahimov said.
“In addition to interest, commissions, insurance, service fees and other charges can significantly increase the real cost of a loan.”
He said borrowers should ask banks to provide the effective annual interest rate as well as the total amount that will be repaid over the full term of the agreement. These figures, rather than the headline rate used in advertising, provide a more accurate basis for comparing offers from different banks.
Additional fees can include charges for issuing the loan, opening or servicing an account, withdrawing cash or repaying the debt ahead of schedule.
Insurance costs also require particular attention, especially in mortgage and auto lending. Borrowers should determine whether insurance is mandatory, how much it costs, who pays for it, what risks it covers and what the total insurance expense will be over the life of the loan.
Ibrahimov also urged borrowers to carefully review penalties for late payments.
Loan agreements should clearly state what happens if a payment is delayed by several days, how penalties are calculated and how a late payment may affect the borrower’s credit history.
Another important issue is early repayment. Consumers should find out whether banks charge additional fees for paying off part or all of a loan ahead of schedule and whether interest is recalculated after an early payment.
The economist said monthly payments should also be measured against a household’s real disposable income rather than the maximum amount a bank is willing to lend.
“If all of a family’s available income goes toward loan repayments, an unexpected expense or loss of income can quickly create serious financial problems,” he said.
Borrowers should therefore maintain at least some financial reserve and avoid signing an agreement before reviewing all provisions related to interest-rate changes, fees, penalties, insurance, collateral and early repayment.
Ibrahimov summarized the rule in three numbers that every borrower should know before signing a loan agreement: how much money they are receiving, how much they will pay each month and how much they will repay in total by the end of the loan term.
If a borrower cannot get a clear answer to all three questions, he said, the loan decision should be reconsidered.
AZE.US