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  1. What is a loan?
    A loan is money that is borrowed and must be paid back, usually with interest and other associated costs such as loan processing costs, insurance fees, stamp duty etc.
  2. Most loans must be secured
    The lender needs to make sure that he doesn't lose his/her money if you don't pay back your loan. You may therefore be required to present proof of security or collateral. This is something you own (e.g. a piece of land) and which the lender can take over if you fail to pay back the loan. Some lenders accept another person to be a guarantor.

    In case you fail to pay back your loan, the guarantor must stand in for you and pay back that loan. You may also be required to provide the lender with indications/proof of your cash-flow and business activity. This will give the lender an understanding of your capacity and ability to pay back the loan and will therefore inform his/her decision of whether or not to give you a loan and how much to lend you. Some loans may not require security.

    Banks or other lenders that do not require security may charge very high interest rates or other fees because it is very risky for them to give out a loan that has no security. Therefore, in case you are offered a loan without security, make sure you understand all the terms and conditions including the cost of the loan.
  3. Every loan comes with a cost
    When you take a loan, you must understand that you have to pay back the amount which you have received from the lender, plus an additional cost called interest, together with possible additional charges. Before you take a loan, ask the lender about the total amount you have to pay back over the entire period of the loan. This is called the Total Cost of Credit and includes the amount you borrowed + interest + any other fees/charges. It is the responsibility of the lender to tell you the Total Cost of Credit. If he does not, ask for it.
  4. Interest is the "price" you pay for borrowing money.
    Interest is the additional money you have to pay to the person or financial institution that lends you money. Interest is normally expressed as a percentage of the amount you have borrowed. It is mostly calculated on an annual or on a monthly basis. Depending on the loan, you may be asked to pay interest yearly, monthly, or weekly. There is a big difference between a yearly, monthly, and weekly interest rate. Yearly interest rate: If you took a loan of 100,000/= with 12% interest per year, you would pay an interest of 12,000/= per year in addition to the 100,000/= that you received as a loan. After one year, you would therefore have to pay the lender 112,000/= plus any other fees/charges. Monthly interest rate: If you took a loan of 100,000/= with 12% interest per month, you would pay an interest amount of 12,000/= every month. Over the year, this would amount to 144,000 in interest only. You would therefore have to pay back [100,000/= + 144,000/=], which would add up to 244,000/=.
  5. If your loan comes with variable interest, you might end up paying more
    Interest can be "fixed" or "variable". If it is variable, this means that it can change over time. Therefore, you might end up paying more. Fixed interest is one where the interest rate doesn't change during the period of the loan repayment. This allows you to accurately predict your future payments. If the interest is variable, the rates can change during the period of the loan (for example, if the Bank of Uganda's Central Bank Rate changes). A variable interest rate may go up or down.
  6. If your loan comes with a flat interest rate it is more expensive
    Interest may be "flat" or "declining". A loan with 10% declining interest will cost you less than a loan with 10% flat interest. This is because with a "declining" interest rate you only pay interest on what you actually owe the lender while with a "flat" interest rate you keep paying interest on the original amount of the loan until this amount is entirely paid back. For example, if you take a loan of 100,000/= at 10% interest per month and you pay back 50,000/= (plus the interest) after one month, with flat interest you still have to pay 10% of 100,000/= which is 10,000/= in the second month; with declining interest you only pay 10% of 50,000/= which is 5,000/= in the second month.
  7. Be aware of any additional charges
    In addition to interest, financial service providers may charge further fees/charges. These include loan processing fees, insurance, stamp duty, etc.. Make sure you understand the total amount you will have to pay back. Once you have understood this, think again and ask yourself if you will be able to pay back the loan. If not, you may want to opt for a different financial service provider or a smaller loan size.
  8. Do you know what penalties you would face if you don't pay back on time?
    Understand what penalties or fines you would face if you make a late payment or miss a payment.
  9. Shop around for the best offer
    When you want to take a loan, compare the offers from different financial institutions by considering: interest (rate, period, currency, declining/flat, fixed/variable), charges and penalties – understand the "Total Cost of Credit". If you shop around for the best lender, you will most likely end up paying a little less with better repayment terms. Borrowing from the wrong lender could cost you a lot, so research your options and choose wisely. Be confident when asking financial institutions for costs and terms of products – it is their responsibility to provide you with all the information that you need to decide which product is the best for you.
  10. Plan in advance before taking a loan
    Before taking a loan, plan in advance how you will pay back the loan and the interest payments. You have an obligation to pay back the amount you borrowed plus the interest and any further charges/fees. If you know that you will not have the means to do so within the agreed time, you should not take the loan.
  11. It's easy to get into debt but hard to get out
    If you borrow money, plan carefully how you will use your loan and how you will pay it back – and stick to your plans. Always use borrowed money for the purpose you borrowed it. Avoid borrowing to pay off another debt.
  12. Make that money productive
    To pay back your loan, you have to make the money work. Borrow for productive investments such as buying a piece of land where you can grow something or increasing your business. Pay back the loan and maybe borrow more later if it is necessary. Use loans wisely and never rush into borrowing. Think twice before borrowing for luxuries, or things that lose value (e.g. car, furniture, clothes, etc.) except if they are meant to boost your business.
  13. Don't borrow because others are borrowing
    It is not wise to take a loan just because other people around you are doing so. Ask yourself if you really need the loan. Mostly, it is better to save than to take a loan. Take a loan only as a last resort.
  14. If you don't pay back, you might lose your security
    Remember that when you apply for a loan you may be required to give the lender some form of security. This can be your house, land, vehicle, animals or salary. If you don't pay the loan back in a timely manner, you can/will lose your security. The lender has the right to keep the security if you fail to pay back.
  15. Beware of aggressive lenders
    Avoid "easy" loans and lenders who discourage you from reading and understanding the loan documents. They might try to take advantage of you. Always insist on reading all the loan documents and ask for explanations so that you understand the "Total Cost of Credit" as well as all the conditions attached to the loan before you sign. It is your right to ask and the responsibility of the lender to provide you with all the information you need before agreeing to take a loan. Both you and the lender should be honest in disclosing information to avoid nasty surprises in the future.
  16. Think before becoming a guarantor
    You can guarantee a loan for a trusted person. However, be careful about being a guarantor for other people's loans. If the people you are guaranteeing for fail to pay back the loan, you must pay the loan.
  17. Don't "dig a hole" to fill up "another hole".
    If you are already struggling with debts, avoid taking another loan since this will only add to your debts and hence increase your burden. Remember you will be paying additional charges, fees and interest since this is a new loan.
  18. Protect your financial image
    Do not despair or lose hope if you have difficulties paying back your loan. Consult with family and friends on how to handle the situation. If you are going to fail to pay on time as laid out in the contract, inform your lender in advance. Don't try to buy time by paying with a cheque that "bounces" (issuing a cheque when you do not have nough money on your account). Don’t give any false or misleading information.
  19. Keep your financial history clean
    If you take a loan from a financial institution regulated by Bank of Uganda, you will receive a financial card. With this card, your repayment history will be recorded. The next time you apply for a loan, this information will be used to help the lender decide whether or not to give you a loan and on which conditions. The better your history, the better the loan conditions will be.