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Loans
How to choose a loan

It is worthy of note that a decision to turn for a loan should be serious and informed. Be sure to think it over and approach the need to turn for a loan from a critical standpoint. It is desirable that any loan be taken for really immediate and justified needs. In all other cases money-making should be selected. But there are times when it is impossible to correct one or another problem without additional cash receipts, and the need for a loan is urgent.

A loan means borrowed or own funds allocated by the bank to the borrower in the amount and on terms provided for in the loan agreement. According to the Banking Code, in Belarus the banks and nonbanking financial institutions are entitled to allocate loans. Placement of borrowed funds of natural persons and/or legal entities in its name and at its own expense on conditions of security, serviceability, and maturity is a banking operation done by the Belarusian banks on the grounds of a special permit – a license to banking business. One should be clear-headed and careful about loans. One should be fully aware that any loan must be repaid in strict compliance with the terms of the credit agreement, and also loan interest must be paid to the bank.

In the first place, you should measure the stability of the situation and your ability to pay off monthly installment of the principal amount and interest on loan in due time. Ideally, the total amount payable to the bank should not exceed 20 – 30% of your salary.

At present the Belarusian banks offer a wide choice of loan products on various terms. Try to choose an appropriate alternative in several banks. Information available will enable you to compare loan offers of different banks. Visit web-sites of the banks, often a loan calculator can be found there. Address the bank employees for clarification of unclear provisions. As a general rule, centers of banking services have specialists whose duty is to consult, in an intelligible form, the customers who are financially incompetent. Your right to obtain timely (prior to signing the loan agreement or any supplement agreement thereto), relevant and reliable information is captured in legislation of the Republic of Belarus (Article 145 in the Banking Code of the Republic of Belarus; paragraphs 4 and 6 in the Instruction on the Procedure for Distributing Information on Lending Terms and All Inclusive Interest Rate for Loan Utilization, as approved by Order of the Board of the National Bank, Republic of Belarus, No. 173 dated November 13, 2008).

Make a thorough examination of the loan agreement before you sign it. Never sign any papers without reading them! Read all provisions of the loan agreement carefully and thoughtfully. If possible, bring the loan agreement home, have a closer look at its provisions which establish your obligations (duties, responsibilities); make sure than the loan agreement is free of any provisions which are unknown to you or which meaning is obscure. Focus on whether the loan provisions provide for loan repayment before the maturity date. Such prior repayment disadvantages the bank as in this case the bank receives less profit than was projected. That is why the banks use to include provisions in the loan agreements providing for penalties or bank charges for loan repayment before the maturity date. The National Bank’s requirement to furnish the customers with full information on loan interest is general for all financial institutions; any hidden payments or bank charges are prohibited. The requirement, that alteration of agreement entailing change in interest for loan utilization may only be possible after signing a supplement agreement with the borrower, has the aim to defend the borrowers’ rights. Should the borrower disagree with such alteration of agreement, he is granted the right to repay loan before the maturity date. Should this be the case, the repayment period may not be less than three months from the date of call.

The banks allocate loan proceeds either in cash or cashless way through the bank card use, or transfer money directly to the account of the seller of goods and services. You should keep in mind that certain banks collect charges for credit card cash advance.

Account must be taken of the fact that the better a loan is secured (availability of a loan guarantor, or pledge, etc.), the more profitable the lending terms are, i.e. interest rate is lower. Consequently, unsecured loans are more expensive. At present fast loans rise to popularity. Quick provision of funds combined with minimum set of documents (without any certificate of income or loan guarantors or pledge) is the advantage. Often, the prospective borrower needs only his or her passport. But stay alert, as fast loans are the most expensive ones. By allocating fast loans, the bank assumes high repayment risk – the risk of loan default or delayed repayment due to the fact that the borrower conveys scant information about himself. That is why the banks offset default risks by high interest rate. So be sure to think once again whether to take out a fast loan or get a certificate of income and involve a loan guarantor. But if you need to get money quickly and do make a decision to take out a fast loan, you should recognize that you will have to pay for it.

Given similar interest rates, interest payments may differ depending on the method of repayment. There are two main methods of loan repayment: in equal installments (annuity payment) and with reduction of the monthly amount payable (graduated payment). Given equal interest rate and period, excess payment is higher for annuity payment. Such excess payment is justified by the opportunity to spend a lesser amount every month for loan repayment (given equal interest rate and period, monthly annuity payments at first will be significantly lower than graduated payments). Annuity payments are convenient for the borrower from the angle of even burden on family finances.

Choice of the loan type should be analyzed individually, as all depends on the result you wish to arrive at. Whether it will be a single loan or a situation can occur when you will have to turn for a loan again; what amount is required – small or large; for what period you will use loan proceeds; etc. The credit card is convenient if you need small loan amount and if it often happens that a certain amount for a short period is needed. When you have your credit card at hand you can take out a loan more than once. But if you wish to borrow a large amount or you intend to buy, say, a car, apartment, country house on time, goal-oriented loan application is preferable. It means a mortgage loan, cash loan, car loan. Both the car loan and consumer loan can be used for purchasing a second-hand car. Sometimes the banks have certain arrangements with auto dealers or other organizations and can stipulate more favourable lending terms in this case. Often the banks hold out special offers, arrange campaigns, offer special-purpose loans, e.g. for wedding reception. Such loan will possibly be cheaper.

Credit history

A question about a certain black list allegedly compiled in the country’s main bank and kept in a secret red file superscribed “The Debtors” is among the most frequently asked questions processed by the specialists of the National Bank’s Contact Center. The citizens of Belarus, who have taking out a loan on mind, are agitated: the rumor mill says that the National Bank plays the part of a borrower supervisor and makes decisions to whom a loan may be allocated and whose request should be rejected. This is a myth of course, fed by the fact that the Belarusians are incompetent in the system of credit histories and reports, and diabolize the National Bank. So let’s take a close look at what information and why is kept by the Credit Register Department of the National Bank of the Republic of Belarus.

Let’s make sense of the definitions.

A loan transaction means a loan agreement, overdraft lending agreement, borrow or pledge agreements, and also a deed of guarantee or suretyship agreement, signed by and between the customers and the banks. After making such transactions you act as a borrower, loan debtor, pledger, guarantor or surety. Acting in any named capacity, you sign an agreement with the bank and in doing so you enter into legal relations with it and become a source of credit history development. Such information is sent to the National Bank where the respective credit history is formed to become an efficient tool for assessment of the customer’s repayment discipline by the bank.

A credit history means information which characterizes the subject of such credit history and fulfillment by the same of his obligations assumed under loan agreements. Such data is kept in the Credit Register of the National Bank. A credit report means a document which contains information formed by the National Bank on the grounds of data included in the credit history.

Information on any signed agreements and fulfillment of obligations under such agreements, to be included in the respective credit history, should be submitted to the National Bank within 10 days from making an operation. Such information is updated in the online mode; so as soon as the bank sends information to the National Bank such information appears in the credit history in next to no time.

The credit history of a customer who is a natural person contains the following:

  • general information (name, given name, patronymic; identification number; date of birth; citizenship; place of residence);
  • information on the signed agreements (the bank with which such agreement was signed; number and date of the agreement; amount and currency of the agreement; repayment period);
  • data on fulfillment by the customers of their respective obligations to the bank under given agreements (history of loan repayments; late payment on a loan or overdraft or borrowing; default curing; data on fulfillment of pledge agreements, deeds of guarantee or suretyship agreements).

The National Bank processes such incoming data on loan agreements, compiles and maintains credit histories in its Credit Register. The central bank submits data from the Credit Register in the form of credit reports to the parties entitled to be disclosed such information.

The law says that banking secrecy is the main principle of formation of credit histories and submission of credit reports. Only courts, law-enforcement agencies, and other persons in certain cases stipulated by the legislation may request any credit report without consent of the subject of a certain credit history.

The National Bank of the Republic of Belarus does not maintain any so-called black lists inclusion into which means impossibility of taking out a loan. Prohibition on lending is not mentioned anywhere directly or indirectly. Every bank makes a decision on lending independently, based on information contained in the credit history. The banks which allocate loans to their customers develop their own criteria of credit history assessment. As a general rule, an application for credit is turned down if a person has a long-term loan delinquency to a large amount.

Information on late payments is deleted from the credit history at the lapse of 5 years after repayment of debt, whereas outstanding amounts will be kept in the credit history for 45 years.

May one learn his credit history?

Information contained in the credit history is very simple to obtain. To do so, one should only enquire with the National Bank. The credit report is submitted free of charge once within a calendar year. The quantity of requests is unlimited, however all subsequent requests are paid.

In Minsk, requests for credit history should be filed with the Credit Register of the National Bank. In the regions, such credit reports are submitted by the central administrations of the National Bank operating in all regional centers.

Is it allowed to obtain the credit history of a close relative?

The credit history may be submitted either to the subject of such credit history or his/her proxy on the grounds of a notarized power of attorney. Information contained in the credit history may not be disclosed by phone; only personal attendance is required.

How to change one’s credit history?

Changes may be entered in the credit history only if it contains erroneous data. Should this be the case, apply to the bank with which an agreement has been signed, or file the request for entering changes in the credit history directly with the National Bank. Time for consideration of such request is one month.

For example, if the date of agreement termination or loan repayment under the agreement actually performed by the customer is not recorded in the credit history, the bank must both issue to a customer a certificate confirming the absence of loan debt and also submit such information to the customer’s credit history.

The credit report requested by the customer after changing inaccurate information is submitted free of charge.

People often ask the National Bank whether it is possible to make a note in the credit history, stating that their certain relative may not be given a loan if such relative abuses alcohol or is mentally deficient or has never repaid loans taken out before, or for other reasons. We want to reiterate that the National Bank places no marks in the credit history meaning a ban on lending to a certain natural person, in particular enters no notes concerning legal incapacity or mental deficiency or similar. According to Articles 29, 30 in the Civil Code of the Republic of Belarus a person shall be deemed legally incompetent or partially incapacitated in cases provided by the legislation from the date when court decision has come into legal force.

So the National Bank is not entitled to restrict one’s rights provided by the legislation of the Republic of Belarus.

 

Refinancing

It happens sometimes that a bank loan is the only solution to the critical situation when there is an immediate need for money. A person executes and signs an agreement, receives money and… understands in a day or a couple of months that the loan terms are unacceptable for him and his purse. In means that poor financial awareness can turn one of the most remarkable financial instruments into self-deception.

Ad here you come across an exciting and alluring proposal of the bank: We will repay your loan on new better terms. You start hunting down the question and meet the notion of REFINANCING of loans. Simply stated, it can be called on-lending or a loan for the loan.

So, what is refinancing and how to get money’s worth, not to blunder and avoid sliding deeper into the debt pit where one has appeared with the loan previously taken out. Let’s sort things out.

REFINANCING means allocation of a bank loan for repayment of a previous (current) loan with a view to reducing the interest rate and, hence, monthly payments.

Refinancing can also be a tool for increasing the loan period or avoiding improper terms and unsatisfactory bank servicing in respect of the loan allocated previously.

What is the debt refinancing loan facility?

The customer submits to the bank information on the loan balance and receives a new loan to the outstanding amount on better terms. The customer neither sees no receives ready money. Such amount is transferred by the bank on the account of the bank where the loan, to be repaid, has been previously taken out. Then the previous loan is withdrawn and disbursement of a loan starts.

It is a positive point that refinancing can reduce monthly principal and interest payments. Generally the banks offer more easy terms than existed initially, otherwise such procedure would be senseless.

At the same time, it helps to remember that documenting of this kind of loan is more difficult than drawing of an ordinary loan agreement. Apart from the main set of documents (documents evidencing of your income and employment) you will have to submit to the bank statement of outstanding amount and terms of the existing loan, and also details of your bank account.

When making a decision on refinancing of the loan taken out earlier, it is useful to remember about “purity” of your credit history, as delays in loan payment will entail negative assessment of borrower’s creditworthiness and, hence, credibility. If you have a chequered credit history, the bank may turn down an application for loan considering you a defaulting lender.

It should be remembered that in case of sufficient paying capacity you may wait for a general consumer loan on more suitable and easy terms, after receiving of which you will be able to repay and withdraw the loan taken out earlier. When the bank makes assessment of customer’s creditworthiness, it deducts all existing loan payments from the customer’s income and, should the level of income permit, allocates a new loan. But if the best part of income is spent for existing loans payments, no approval of the bank will be received as the assessment criteria applied by the banks are very stringent at present.

If this occurs, loan refinancing proposal comes to succor, and a chance of approval of such loan is much better.

But if you have made a decision to take out “a loan to the loan” you must understand clearly what you are going to substitute for what, otherwise you can accidentally slide deeper into the debt pit and bargain one trouble for another. So be sure to weigh all pros and contras and compare the following:

  • terms of payment;
  • interest rates;
  • repayment profile (annuity payments or graduated payments);
  • loan period should also be taken into account.

If you follow these simple but helpful advices and certain preliminary calculations, you will be able to sufficiently reduce your expenses for loan repayment on convenient terms.

Loan types

At present loans obtain a wide circulation. Practically everybody falls back on a loan during his lifetime. But what we really know about them?

The banks and nonbanking financial institutions allocate loans on the grounds of Order of the Board of the National Bank, Republic of Belarus, No. 226 dated 30.12.2003 “On Procedure of Allocation (Placement) by the Banks of Monetary Resources in the Form of Loans and Repayment Thereof”. Such procedure specifies the main principles and approaches applied for lending to legal entities, natural persons, individual entrepreneurs, and are binding upon the banks, nonbanking financial institutions, and borrowers. A loan means borrowed or own funds allocated by the bank to any other person (borrower) in the amount and on terms stipulated by the loan agreement.

Let’s make sense of a variety of lending products proposed by the banks to the population. This is important, as the procedure of lending and repayment, list of required documents to be submitted to the bank by a prospective borrower, procedure of consideration thereof by the bank, maximum loan amount, interest rate and many other terms of loan agreements depend on the loan type. When you choose a loan, be sure to analyze all advantages and disadvantages of the loan of interest. You should do it in order to choose the most convenient and beneficial loan without any misgivings and overpayments.

Lending to natural persons can be of two types by their goal:

  1. real property loan means allocation by the bank of a loan for purchase and construction of residential spaces, garages, arrangement of country houses, etc. Generally these are long-term loans;
  2. consumer loans are the loans for consumption, such as:
  • allocation of funds for purchase of any goods or services, e.g. furniture, equipment, package tour, payment for education or medical treatment;
  • auto lending means loans allocated by the bank for purchase of cars – both new and used;
  • cash loans or loans charged to card account;
  • overdraft lending means allocation of funds to the amount exceeding the balance of money on the borrower’s account – by cashless settlement, or by funds transfer for payment of settlement documents submitted by the borrower, or by use of funds in accordance with the borrower’s instruction through the use of payment instruments (a cheque, debit card, other instruments), or by giving out cash to the borrower.

All variety of consumer loans can be classified by the following attributes:

  1. By method of identification of goals:
  • target-specific loan means that it is expressly stated in the loan agreement for what purpose the loan is allocated, and such allocated funds may not be spent for anything else. The bank often requires submission of documents evidencing of purchase of the respective goods or services (loan for education; loan for a car). If a target-specific loan is allocated, the borrower often does not receive money in his pocket, as the bank transfers it directly to the shop, car dealer or university;
  • general-purpose loan means resources allocated by the bank to be used by the borrower at his own discretion; no disclosure of the lending goal to the loan provider is required. For example, consumer cash loan. Such loans are allocated to a smaller amount and for a shorter period than target-specific loans.
  1.  By method of securing loan recovery:
  • secured loans imply availability of any guarantee of loan repayment by the borrower. Mortgage or third-party security may be deemed such guarantee;
  • unsecured loans are not guaranteed. Secured loans generally provide easier terms as compared to unsecured ones, as their default risk is much less.

Loans are classified by period as short-term and long-term.

Short term loans are loans which maturity initially fixed by the loan agreement is up to one year (inclusive), and also loans allocated under revolving lines of credit, and overdraft loans.

All other loans are long-term loans.

  1. By method of money receipts, loans may be allocated in the form of:
  • money loan;
  • loan charged to card account;
  • funds transfer directly to an account of the seller of goods or services.
  1. By mode of allocation, loans can be in the form of:
  • nonrecurring amount, when the bank allocates the full amount provided by the loan agreement;
  • lines of credit – means documented liabilities of the bank to the borrower to allow loans in the agreed amount and for definite purposes within the fixed period of the loan agreement.
  1. Credit on current bank account subject to an agreement (overdraft lending) – means allocation of a loan by the bank to the borrower through payment on demand placed on a current bank account, in spite of unavailability of funds on such account, within the limit fixed in the loan agreement and with subsequent repayment of debt of account holder to the bank at the expense of receipt to such account.
  1. There are also several main types of loans differing in the repayment structure. Monthly amortization by graduated (decreasing) payments or annuity (equal-sized) payments. There are non-installment loans when the principal amount and interest are discharged at the end of the period. Certain banks allocate loans with individual repayment structures indicated in the loan agreement.

Other criteria can also be used to classify loans by groups or types.

According to Article 22 of the Banking Code, interrelations between the banks and the customers shall be built on the basis of the banking legislation and signed agreements.

According to Article 137 of the Banking Code, under the loan agreement the bank or nonbanking financial institution (loan provider) undertakes to allocate funds (loan) to another person (borrower) in the amount and on terms specified in such loan agreement; and the borrower undertakes to repay such loan and pay interest on it.

The loan agreement shall include the terms of a loan, in particular:

  • amount of a loan;
  • lending purpose;
  • loan period;
  • interest rate on a loan;
  • loan maturity and due date of interest payment;
  • form of securing of borrower’s obligations to repay a loan and interest on it.

Bank lending of business entities is based on compliance with the main crediting principles: on conditions of repayment, interest payment, and maturity.

The principle of payment means that the total amount of loan must be repaid in full.

The principle of interest payment means that the borrower must make a certain payment to the loan provider for temporary lending of funds for the borrower’s own needs. The mechanism for the implementation of such principle in the course of business activity of banks is actualized through specification and fixing of interest rates under loans agreements. Interest rate on a loan is a payment received by the lending bank from the borrower for use of borrowed funds, including payment of lending services. The principle of interest payment stipulates economizing of lending resource and promotes increase in own financial resources. This principle enables the banks to cover expenses for active banking transactions and receive profits.

The principle of maturity means that a loan is provided for a certain period stipulated by the loan agreement.

The principle of maturity is one of the main principles on which banking transactions are based. Regular provision of national economy with monetary resources and, hence, amount and growth rate of public production depend on observance of this principle. The mentioned principle also determines liquidity of the lending institution itself. The period of loan by its economic nature is a critical time during which the borrower commands lending resources; outlasting such time twists economic nature of lending.

No money to pay

When a person signs a loan agreement, he assumes obligation to pay a certain sum to the loan provider on regular basis and at the scheduled time.

According to Article 137 of the Banking Code, the bank undertakes to allocate funds (loan) to another person under the loan agreement, to the amount and on terms specified by such agreement, and the borrower undertakes to repay such loan and pay interest on such loan.

Nevertheless, life is unpredictable, and anyone can find himself in a state when it is impossible to redeem a loan. All looks well today, you have steady income, regular job, and loan repayment does not seem a burden. But then disease or loss of work or salary reduction or other life obstacles can take you aback and you have no money to pay.

What should be done if you are unable to make loan payments? What measures are applied to those who are unable to meet their obligations under the bank loan?

If you have insured against the default risk, the insurance company will satisfy the debt. Taking out an insurance policy is a measure which will safeguard the borrower and his relatives against any expenses related to loan servicing in case of force majeure circumstances stipulated by the insurance agreement. Should this be the case, the insurance company assumes fulfillment of debt service obligation.

If you have taken out a loan for purchase of a TV set or computer, the borrowed sum is not large. But if you have bought, say, a car or an apartment or a country house, this is a different story. In any case, you should not be in a flap. Do not lose heart and remember that there is always a way out. The main rule is not to wait until the bank workers call you because you have ceased to make loan payments. You should act.

First of all, notify the bank of your inability to make loan payments and indicate the reasons. Such actions will be treated by the bank workers as a display of your bona fides, evidence of the fact that you are not a malicious defaulter or a swindler.

Address to the bank in writing and notify it of your problems. It would be better to enclose documentary proof of your life circumstances (a xerox copy of the service record page with the entry stating your dismissal; a certificate of loss of work issued by the unemployment office; a certificate of health, etc.).

There is no use to escape, dodge phone calls, and do nothing for dealing with a problem. It will not shield you from penalties, they will accrue so increasing the amount due, and you will have to discharge the debt in any case, especially as the bank can qualify such conduct as avoidance of obligations under the loan agreement.

Keep in mind that all delayed loan payments will be recorded in your credit history and subsequently you can find difficulty in new loan arrangements. 

Therefore, your main task is to negotiate with the bank and ask for possible loan restructuring, signing a supplementary agreement which would provide a loan deferment, extension of a loan period, interest rate reduction – i.e. make a search for remedies together with the bank. All this will enable to lower the loan burden at a time.

Installment payment and rescheduling of debt repayments, extension of a loan period with a view to reducing monthly payments are most frequently used remedies. Interest rate reduction is used rarely. There is every likelihood that the bank will meet your needs if you have been a prompt payer and deterioration in your financial position is caused by a good excuse. Furthermore, solution of cases through the courts is cost-intensive for the bank, though of course the banks make independent decisions whether to make concession or not.

And what’s the main, you should seek sources of income for loan repayment, a new job where you would have an adequate salary enabling you to repay the loan which you have taken out in the bank and are unable to repay.

When the loan amount is small, you can try to borrow money on your relatives, friends and acquaintances and repay such loan to the extent possible. This is a good solution to cover loan with borrowed money, if of course you have somebody to borrow it on.

And what if the bank disagrees to alter the terms of the loan agreement?

First of all the bank workers will remind the defaulter of his debt by phone or written notifications. Workers of the bank’s security service and legal service will take interest in such defaulter and his sureties. The bank’s security service examines if the defaulter or his surety possess any property. Then the bank files a petition in court to terminate the loan agreement and collect a debt and penalties. Collection of debt under the loan agreement can also be effected on the ground of the writ of execution.

We note finally, that to avoid difficulties and problems related to loan repayment, it is important first to weigh up your possibilities and life circumstances, and correctly manage your earnings and expenses, think twice on advance buying of any goods. This will help to avoid an unmanageable debt load. And be always mindful of your rainy day fund which will help you not only to overcome a period of trial and repay loan in due time, but to avoid signing the loan agreement with the bank at all.

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