How to Choose the Most Profitable Loan: Borrower's Checklist

Taking out a loan is a serious financial decision, and a mistake at this stage can cost you thousands or even hundreds of thousands of drams in overpayments. How can you choose a loan with minimal costs and avoid falling into a debt trap? We’ve prepared a borrower’s checklist to help you compare bank offers and find the best loan under the most favorable conditions.

Part 1: Borrower Preparation Checklist

1. Determine What Type of Loan You Need

Before searching for offers, answer a few questions:

1. Do you need a consumer loan, mortgage, or auto loan?
2. Do you plan to repay the loan early or strictly follow the payment schedule?
3. Do you need a loan without income verification?
4. Are you willing to provide collateral or a guarantor?

Important: If you take out a loan without income verification, the interest rate will likely be higher.

2. Compare Offers from Multiple Banks

Do not accept the first offer you come across. Analyze bank terms by comparing:

1. Interest rate – The lower, the better. Pay attention to the maximum effective rate.
2. Effective interest rate – Includes all fees and charges.
3. Loan term – A longer term increases total overpayment if you don’t plan to repay early.
4. Borrower requirements – Some banks offer better terms to clients with high salaries and good credit histories.

Tip: On AFM, you can calculate loan overpayments under different conditions using our online assistant.

3. Check Additional Fees and Charges

Even if a bank offers a low-interest loan, carefully read the contract and tariffs. Key points to consider:

1. Insurance – Is it mandatory or optional? Can you refuse it?
2. Loan issuance fee – Are there extra charges?
3. Early repayment penalties – Some banks charge fees for this.
4. Required accounts or services – Do you need to open a card or account with a service fee?

4. Assess Your Debt Burden

Before taking out a loan, evaluate your financial situation to avoid repayment difficulties:

1. Your monthly loan payment should not exceed 30-40% of your income.
2. Check your credit history – Banks may reject applicants with past delinquencies.

How to check your credit history? Request a free report from the ACRA credit bureau.

5. Read the Contract Before Signing

Before signing, carefully review:

1. The total cost of the loan (including fees).
2. Terms for interest rate changes.
3. Debt restructuring options in case of financial hardship.

Debt restructuring allows borrowers struggling to meet payments to modify loan terms, which may include payment holidays or an extended repayment period.

Besides key loan conditions, some factors can significantly affect the final repayment amount. Let’s analyze them further.

Part 2: What to Check Before Signing a Loan Agreement

1. Your Salary and Employment Affect Loan Terms

Banks prefer borrowers with stable jobs. Clients working for the government or large companies often receive better loan conditions.

1. If you work for a large company, check if your bank offers special deals for employees.
2. If you have unofficial income, the bank may increase your interest rate or reduce the loan amount.

Tip: Bank credit policies differ, so compare loan requirements and choose the most favorable option. You can do this on AFM.

2. Approved Loan Limit Doesn’t Mean You Should Borrow the Full Amount

Sometimes, banks offer a higher loan amount than what you actually need. Keep in mind that borrowing more leads to:

1. Higher interest overpayments.
2. Increased financial burden.
3. Possible rejection of future loans (due to a high debt-to-income ratio).

Before accepting a loan, determine exactly how much money you need. Avoid taking more than necessary to reduce financial risks and ensure comfortable repayment conditions.

3. Some Banking Services May Be Added Automatically

Banks sometimes automatically include additional services. Carefully check the loan agreement to avoid unnecessary expenses. These services may include:

1. Paid SMS notifications about loan status.
2. Additional insurance policies that can be declined.
3. Cards or accounts with maintenance fees that you don’t need.

How to avoid this? Always request a printed contract listing all services and decline any unnecessary ones.

4. Automated Payments Are Not Always Beneficial

Banks encourage setting up automatic payments, but in some cases, this may not be ideal. For example:

1. If your account lacks sufficient funds, the system may withdraw from other accounts, causing extra fees or overdraft penalties.
2. If your loan payment changes, auto-pay may not adjust, leading to underpayment or overpayment.

Things to check:

1. Some banks charge fees for automatic payments.
2. If your account has insufficient funds, penalties may apply.
3. Auto-pay may still withdraw money even in case of billing errors.

To avoid unnecessary expenses, regularly check your loan payments and adjust auto-pay settings.

Example: Choosing the Most Profitable Loan Based on Effective Interest Rates

Suppose you plan to take a 5,000,000 AMD consumer loan for five years to renovate your apartment. Here are offers from different banks:

1. IDBank: Mortgage-backed loan with a nominal interest rate of 14.5% to 17.5%.
2. Unibank: U-Gold loan secured by gold, with a 15% interest rate (prepaid) or 17% (monthly interest payments).
3. VTB (Armenia): Unsecured consumer loan with a 19.5% to 20.2% nominal rate.

Comparison of Effective Interest Rates:

1. IDBank: For a 5,000,000 AMD loan over 60 months, the effective interest rate ranges from 16.91% to 22.42%.
2. Unibank: The effective rate is 16.37% to 17.59%, depending on the payment method.
3. VTB (Armenia): The effective rate is 22.5% to 24%, as it is an unsecured loan.

Conclusion:

At first glance, IDBank offers the best deal due to its low nominal interest rate. However, additional fees increase the effective rate. Unibank provides competitive terms with lower effective rates, especially if interest is prepaid. VTB (Armenia) allows unsecured loans but at a higher effective rate.

Recommendations:

1. Consider collateral options, as secured loans usually offer lower rates.
2. Compare effective interest rates, including all fees.
3. Check early repayment conditions and potential penalties.
4. Review borrower requirements: age limits, income proof, and credit history.

Final Thoughts

Choosing the right loan is not easy, but by following this checklist, you can find the best loan with minimal overpayment. The key to success is understanding loan conditions before signing.

Key Takeaways:

1. Unofficial income may lead to higher interest rates or lower loan amounts.
2. Approved loan limits don’t mean you should take the full amount—borrowing more increases overpayment risks.
3. Auto payments may incur unexpected fees if funds are insufficient.
4. Additional services may be included automatically – always check the contract!

Financial literacy saves money and stress! Before signing a loan agreement, ensure you understand all terms. Choose a risk-free and profitable loan with AFM and secure the best loan conditions!