With a loan, you promise to pay back all the money you borrowed plus interest. You are usually required to pay back the loan (the principal) with interest over a specified period of time or term. Interest is the amount of money the bank charges you for letting you use its money. Interest is determined by the type of loan and the term of the loan. Interest is either fixed or variable. A fixed rate stays the same throughout the term of the loan and a variable rate may change during the period of the loan.
When shopping for a loan, you should also pay close attention to the APR, which stands for Annual Percentage Rate. The APR includes other charges or fees to reflect the total cost of your loan. When shopping for a loan, make sure you look for the lowest APR to determine what is best for you.
For example, if you decide to purchase a car and you borrow $15,000 from the bank and the bank charges you 8 percent fixed interest and gives you five years to pay back that money, every month for the next five years or for the next 60 months, you will have to pay the bank $304.15. This amount does not include the loan application fee, legal and other service fees. For that $15,000 you borrowed, you will end up paying the bank a total of $18,249. That is the $15,000 you borrowed (or your principal) plus the 8 percent interest of $3,249. Charging interest is how the bank makes its money.
Secured and Unsecured Loans
There are two types of loans: secured and unsecured loans. Secured loans require collateral which means that you must provide the bank with something to get the loan. To borrow certain amounts of money, the bank may require you to provide collateral or a guarantee on the loan. If you do not pay back your loan, the bank will seize the collateral to cover the money you borrowed. Usually the item you purchase is what the bank will use as collateral. Most banks will only accept items that they can easily sell to pay off the loan. Banks will allow you to use land, your home, your car, and savings accounts as collateral.
Getting an unsecured loan means you don’t have to provide collateral. An unsecured loan poses a higher risk to the bank or creditor. Because there is no way to recover any of the money it loses if you don’t repay the loan, the bank will usually charge higher interest rates and fees for an unsecured loan, such as a personal loan or for a credit card.
The bank may also require you to have a co-signatory on your loan, usually someone whose creditworthiness may improve your application for credit. If you fail to pay back your loan, the person will be legally responsible for paying back the money you borrowed.
BVI banks charge an application fee for loans. Depending on the type of loan, you may also have to pay a down-payment. You should also bear in mind that banks often charge fees for late loan payments.
Applying for a Loan
Now that you understand what a loan is, you can start shopping around for a loan. As there are only six commercial banks in the BVI, your choices are limited but you should still shop around to make sure you get the best deal. There are a few basic questions you should ask yourself and each prospective lender: How much more will I pay for the item under the terms of the loan? What is the total cost of credit? Can I afford the monthly payments? Are there any fees? What is the Annual Percentage Rate?
The Bank will evaluate you to see if you qualify for the type of loan you are interested in. The bank will look at your Four Cs; capacity – your present and future ability to make your payments; capital – the value of your assets and your net worth; character – how you have paid your bills or debts in the past; and collateral – property or assets offered to secure the loan. You will need to complete a loan application and provide the bank with the following items:
- Two forms of identification: such as your passport & driver’s license.
- Utility bills (electricity or water) or rent receipts (to verify your physical address).
- Job letter and pay slip.
- One professional reference letter & one bank reference letter.
*Additional information may be required, depending on the purpose of the loan.
The loan application will include questions about the purpose of the loan, the length of time you have been on your job and your salary, how much money you make, how much debt you have, how many assets you have, and whether you have repaid previous debts on time. If you have recently lived in the United States, the banks may require your U.S. credit reports.