Looking for ways to reduce your loan arrangement fees?

• November 14, 2018
• LUTAKOME
• no comments

The Bank of Uganda Consumer Protection Guidelines paragraph 6 (4) (b) stipulates that when a financial services provider provides ancillary services attached to their product, they should provide the consumer with a pool of at least four providers of this other service to select from. This includes insurance companies.

 

To comply with this directive, many commercial banks/lending institutions have been tinkering with various models to ensure that the regulator’s requirements are fulfilled. Many of these test models have not served the intended purpose especially when it comes to life insurance, with many customers not showing any interest in choosing an insurance provider since they have no clue what insurance is in the first place, and those who bother only tick the cheapest on the list since at the time the only thing that matters is getting the loan approved. Because it is mandatory, the client doesn’t take the time to understand it and does not therefore know what is covered or not covered under their credit life insurance, until a loss has unfortunately occurred.

 

This probably means that the lending institution has also not taken the time to understand the purpose of this cover, is uncertain of their customer’s creditworthiness and is therefore unable to advise their clients on the best protection cover, and instead attempts to pass on all risk (even uninsurable risk like default) to their insurer.

 

Many clients have life insurance policies, the terms of which may allow one to use it as loan security. With an individual term life insurance cover you should be able to adduce security when taking a personal loan from a financial institution provided that insurance company is on the accredited panel of providers by the lending institutions. The amount of the cover you have under your policy should also be the same or more than the value of the loan and going interest on the loan you have applied for.

 

Understanding the purpose of credit life insurance cover would eliminate situations where the clients who already have eligible life insurance covers in force are forced to take an additional insurance cover out of ignorance.

 

This seems straight forward enough and it should be workable so that financial institutions appeal more to their financially literate customers who include among others, their own staff members.

 

A few points to look out for

In implementing this solution however, financial institutions have to look out for a number of factors: –

 

Cover Terms;

The lending institution must have the capacity to fully understand the benefits under the already existing cover to ensure that their needs are adequately taken care of; many life covers provide protection against death, disability and critical illness and also have maturity benefits. Terms like the lapse policy, plus any grace periods offered in connection therewith should also be critically looked at.

 

Cover Term;

The term of cover should be equivalent or greater than the loan tenor to ensure that cover doesn’t cease before the loan is fully cleared.

 

Assignment;

The lending institution has to ensure that during the tenor of the loan an endorsement is issued on the policy against which the loan is taken assigning it to them as a security till the loan is fully repaid.

 

Sum Assured;

Whether it is an endowment policy term life or whole life, the lending institution must ensure that the loan advanced plus anticipated interest does not exceed the cover benefit. In case of endowment covers this amount can be assessed against the surrender value of the life policy, in which case if the borrower surrenders the cover all proceeds get paid to the lending institution as first priority.

 

By implementing this model, a customer who uses both services will save a lot of money, in insurance costs which they pay on every loan they take out, or every time they take a loan top up while at the same time retaining the cover even after the loan has been cleared.

 

Source: http://uia.co.ug/looking-for-ways-to-reduce-your-loan-arrangement-fees/