A user’s guide to consumer financing

Loans are part of life and can be utilised efficiently.

KARACHI: Income disparity in recent times has made it necessary for a consumer to be aware of the benefits and demerits of taking loan financing and managing the risk. Financial institutions are readily offering loans to customers in order to refurbish their asset base and build income.

Consumer finance today is a challenging subject, both for the consumer and the service provider, as financial crisis looms over global markets. Sooner or later, banks and DFIs always resort to consumer financing to build their empires.

More importantly, the customer needs to be well-informed and well-equipped to review choices before making any decision. He must evaluate potential risks of taking loan financing.

Before an agreement on financing, we need to be clear, both as lender and borrower, about the fundamental elements involved in the process. Each lending decision almost always carries a risk. Customers either take a loan or an overdraft facility.

A main thing to note is that interest is charged on the full amount in case of a loan, while interest in the case of an overdraft is charged on the outstanding amount only.

Overdraft is also called cash credit. Banks reserve the right to liquidate the security in case the customer defaults on payments.



Another kind of loan is a bridge loan – a temporary loan usually taken in case of some uncertainty. Such loans are usually given to ‘credible’ individuals, based on their financial worth and market reputation.

Banks today need collateral – additional security to protect themselves during loan financing. Tangible security like land, property and car needs to be documented in case of loans exceeding over a certain ceiling, usually for commercial or business purpose, either to build, construct or renovate.

Lots of customers do not know that clarity of documentation is the main factor in getting a loan. The longer the association between the banker and borrower the greater the chances for a loan to be approved. Always maintain a bank account with one bank consistently to build potential credit history.

Short-term advances are always better for banks than long-term as they are less risky for the bank and easier for the customer to pay back.

A major concern that bankers face is to analyse the purpose of the loan, why the customer needs the money, what should be the payback period and what risks he may face in repayment. Hence, it is definitely the bankers’ concern to know the reason for the loan.

For example, running finance is a very useful facility. It is a short-term financing facility, where the mark-up is charged on the actual amount utilised by the customer, usually for business purposes. Here, the main factor that creates the possibility of the loan is the “character” of the customer. Once that is established and the purpose of the advance is disclosed by the customer, approval is easily done by the bank.

We wonder how we are unable to get a loan, whereby we should be wondering what we give as security against the loan. Loans are part of life and can be efficiently utilised, if only we have the discipline to use the money for legitimate value-added purposes that enrich our lives rather than make it more redundant and miserable under the financial mismanagement that we ourselves are prone to demonstrate.

The writer covers international relations and public policy and is a banker and broadcaster for FM 91

Published in The Express Tribune, December 17^th, 2012.