Ministry: Avail personal loans with caution

 29 Sep 2016 - 8:19

Ministry: Avail  personal loans with caution
It is important that the borrower understands the terms of the contract and know how interest rate is calculated before signing the loan agreement.

The Peninsula

DOHA: The Ministry of Economy and Commerce has advised the public to be prudent in taking personal loans and not to rely on loans for purchasing unnecessary consumables such as a new car, renovating the house or securing an additional source of income to cover monthly expenses. 

Personal loans could be taken only in necessary cases and as direct loans towards financing a new project or starting up a new business, the ministry said yesterday in an advisory issued to the public. 

The ministry has also urged people “to stay unaffected by others and avoid comparing their financial status with someone who is better off.”

“Personal loans are one of the financial solutions individuals employ to meet specific needs, such as establishing a project, buying a house or achieving future goals. The loans, on the other hand, can pose a long-term burden that may affect the income of the individual and the balance of the family,” said the ministry.

The ministry said the tips were intended to “support consumer earnings, alleviate their financial burdens and enable them to effectively apply solutions for personal finance.”

The most important things a consumer should know before borrowing are the loan terms, interest rates, duration of the loan and value of the instalments. It is crucial for the borrower to understand the terms of the contract and know how interest rate is calculated.

The conditions imposed by the bank on the borrower should be clarified to the borrower in advance. The bank has the right to unite all the borrower’s accounts and consider them as one account in order to repay the loan, said the ministry.

The bank calculates the interest rate for the loan based on the rate set by Qatar Central Bank, in addition to the interest rate of the bank and the insurance company.

Maximum insurance coverage is QR1.5m

The bank also has the right to cancel the loan in case of death, where the maximum amount that will be covered by insurance is QR1.5m and which varies depending on the bank. 

The bank can take any precautionary or executive actions against the borrower in case the borrower ceases to pay his debts or declares bankruptcy (legal terms and conditions will be applied). Furthermore, the borrower can repay back the loan before maturity.

The ministry has warned of the negative effects of borrowing, such as focusing on the financial value of the loan without considering its interest rate or duration, which will negatively affect future planning. 

The ministry has illustrated through a series of examples the effect of increasing the duration of the loan on both the interest rate and the method of calculating the value of the installment. For instance, if a loan worth QR100,000 is taken for a period of four years, at 5.5 percent annual interest, it may be paid back in monthly installments of QR 2083 adding a total interest of QR22,000, taking the total amount to 122,000. 

If the same amount of loan is taken for five years, the instalment will decrease to QR1,667 but the interest will increase to become 27,500, taking the total amount to QR127,500. The ministry has also warned against not taking into account any future commitments that will require additional financing when borrowing, or applying for more than one loan in a short period of time or at the same time, leading to the accumulation of loans and excess borrowing that the consumer will be unable to repay.

The ministry has encouraged borrowers to think of developing their skills and career to be promoted in their workplace and earn higher income.