This post will explain the key loan terms and conditions for Zambian market. What do you need to know before applying for a loan in Zambia? Borrowers and lenders needs to understand their rights on loans to avoid being treated unfairly.
Here are the common terms and conditions of loans, the key rules, rights, and responsibilities that define how a loan works for both the lender and the borrower:
1. Loan Amount (Principal)
- The original sum of money borrowed.
- Fixed at the beginning of the loan agreement.
Interest Rate
- The cost of borrowing money, expressed as a percentage.
- Can be:
-Variable: changes based on market rates (like LIBOR, SOFR, etc.).
Loan Term
- The length of time the borrower has to repay the loan (e.g., 5 years, 30 years).
- Can be short-term or long-term depending on the agreement.
Repayment Schedule
- How and when payments are made (monthly, quarterly, etc.).
- May include interest-only periods or equal principal plus interest.
Repayment Method
Common methods:
- Equal monthly installments (EMI)
- Balloon payments (smaller payments with a large one at the end)
- Bullet repayment (entire principal repaid at maturity)
Fees and Charges
Common fees include:
- Processing fee
- Late payment penalty
- Prepayment or early repayment fees
- Annual maintenance charges
Security / Collateral (for Secured Loans)
- Property or asset pledged by the borrower.
- If the borrower defaults, the lender can seize the collateral.
Guarantor (if required)
- A third party who agrees to repay if the borrower defaults.
Default Terms
-Conditions under which a borrower is considered to be in default.
-May trigger:
- Legal action
- Foreclosure or repossession
- Accelerated repayment (entire loan due immediately)
Prepayment Terms
- Rules about paying the loan off early.
- Some loans charge a prepayment penalty.
Covenants
Conditions the borrower must follow.Types:
- Positive covenants: actions the borrower must do (e.g., maintain insurance).
- Negative covenants: actions the borrower cannot do (e.g., take on new debt without approval).
Loan Agreement
- The formal, signed document that outlines all terms and conditions.
- Legally binding.
Why is Insurance involved in my loan
When you take out a loan, insurance can play a critical role in protecting both you and the lender. Here’s how:
1. Loan Protection for Lenders
Lenders often require insurance as a condition of the loan to reduce their financial risk. This includes:
- Property Insurance: If you're getting a mortgage, the lender will require homeowners insurance to protect the property—their collateral—against damage or loss.
- Auto Insurance: For car loans, full coverage auto insurance (collision and comprehensive) is usually mandatory.
- Private Mortgage Insurance (PMI): If you put down less than 20% on a home loan, you may be required to carry PMI to protect the lender in case you default.
2. Loan Protection for Borrowers
Some types of insurance protect you, the borrower, by covering loan payments in specific situations:
- Credit Life Insurance: Pays off your loan if you die before it's repaid.
- Credit Disability Insurance: Covers your loan payments if you become disabled and can’t work.
- Unemployment Insurance for Loans: Some policies cover loan payments if you lose your job.
3. Business Loans and Key Person Insurance
If you're taking out a business loan, lenders may require:
- Key Person Insurance: Covers the life of a crucial employee or founder, ensuring the loan can be repaid if that person dies.
4. Collateral Insurance
If the loan is secured (e.g., by equipment, inventory, or property), the lender may require specific insurance to cover that collateral.
What happens when a borrower dies?
When a borrower dies, what happens to the loan depends on the type of loan, whether there was a co-signer or co-borrower, the presence of collateral, and the borrower’s estate. Here’s a breakdown:
1. Loan Responsibility After Death
a. Co-signed or Joint Loans
- The co-signer or co-borrower becomes fully responsible.
- The lender can pursue them for full repayment.
b. Sole Borrower
- The loan doesn’t disappear.
- It becomes part of the borrower's estate.
- The estate’s executor must pay off the debt using the deceased’s assets (bank accounts, investments, property, etc.).
2. Secured Loans (e.g., Mortgage, Auto Loan)
If the estate or heirs can’t or won’t pay:
- The lender can foreclose on a home or repossess a vehicle.
Heirs may keep the asset by:
- Taking over the loan (if allowed by the lender)
- Refinancing
- Paying it off through the estate
3. Unsecured Loans (e.g., Personal Loans, Credit Cards)
These are repaid from the estate.
If the estate doesn’t have enough assets:
- The lender typically takes a loss.
- Heirs are not responsible unless they co-signed.
4. Student Loans
- Federal Student Loans: Forgiven upon death of the borrower (or parent for Parent PLUS Loans).
- Private Student Loans: Varies by lender. Some forgive, others pursue the estate or co-signer.
5. Insurance and Loan Payoff
- If the borrower had credit life insurance, the policy pays off the loan.
- Without it, debts go to the estate.
