Yula.la News

Part 1: Yula.la Money Matters: What First-Time Borrowers in Laos Should Know

Borrowing money for the first time can be a scary and complicated process if you’re unaware of the ins and outs. Especially so in Laos, as there are many loosely regulated lenders on the market who have the ability to rush borrowers into harsh agreements with high-interest rates and short payback times that the borrower may or may not be able to satisfy.

If you’re unable to pay back your loans in time, you could find yourself in serious trouble and losing unexpected assets such as your house, car, or business assets.

The more you learn about proper borrowing techniques, the higher chance you have of successfully preparing to obtain a loan from a trusted source to meet you and your family’s financial needs

So how can we become responsible borrowers?

Every time someone borrows money from a lender in Laos, the agreement will contain three key elements that you must understand and ensure you are capable of fulfilling during the life of your loan. These three elements will make or break the benefit of any loan. They are 1) Interest rates 2) Repayment Term and 3) Collateral.

It’s our responsibility to understand what each element means and how it affects our loan borrowing experience.

1. Interest rates

Interest Rate - is the amount charged on top of the principal (starting amount of loan or original sum of the borrowed money) by a lender to a borrower and is expressed as a percentage of the principal. 

Interest rates really depend on the type of loan and the repayment period. 

We might opt for a high-interest loan if we need money quickly. An example of a high-interest loan is a “payday loans”, which is a small loan given to a borrower when they need immediate cash for personal or business reasons.   

Low-interest loans are loans with lower interest rates per month, but longer payback periods. It can also be for individuals who have good credit scores and are considered “low-risk” borrowers because they demonstrated responsibly, trustworthy behavior for paying back past debt to lenders.  

For example, a $5,000 (45.208.520.00 KIP ) loan with a 10% interest rate over five years would cost over $1,300 (11.754.215.20 KIP) in interest alone, making the total repayment $6,300+ (56.962.735.20 KIP).

Always ask the lender the monthly interest rate, so you can determine the total repayment amount. Interest rates are usually correlated with the total repayment period of the loan.

2. Repayment Period

Repayment - is the act of paying back money previously borrowed money from a lender with interest.  

Repayment lengths usually depend on the type of loan and are paid back on an agreed amount between the lender and borrower based on the amount the borrower is capable of paying.

We repay loans consistently, usually every month. However, every month there is added interest rate to the principal amount. If payments are not made on time, it can badly affect our credit history. 

What does this mean to the borrower? 

Longer repayment periods or “long-term loans” usually means lower interest rates per month for 5 years or more. An example would be a student loan which can have a repayment period of monthly payments for 20 years+. 

Lower repayment periods or “short/medium-term loans” will mean higher interest rates per month. Repayment terms can be anywhere from monthly payments of half a year to 5 years. 

Repayment periods and interest rates can also be affected by the type of collateral agreement we have with our lenders.

3. Collateral

If I am a business or individual looking to borrow a considerable amount responsibly, I might run into collateral loan types. 

Collateral is an asset or property, such as my car or house, that an individual or entity offers to a lender as security for a loan. If the loan isn’t paid off, the lender has the right to seize that collateral.

Some common collateral types for individuals and businesses are:

Tangible Collateral:

1. Real property, like homes, land, or commercial properties

2. Inventory

Intangible Collateral

3. Cash Secured Loan – collateral linked to a different cash resource such as a bank, that can be liquated.

4. Unpaid invoices

5. Blanket liens – legal claim for all assets within a business equal to the amount of debt (bonds and shares, etc.)

6. Proof of Income / Deposit Bank Account

7. "Power of Attorney" Letter

Usually the more collateral value we can bring to a lender, the lower the interest rate the loan might be. For example, if a borrower offers their house and car as collateral they can receive a low-interest loan. If they are unable to pay the loan back, their house and car are taken by the lender. 

Collateral requirements are different for every lender, so double-checking what assets we are willing to risk for a loan is key. We will discuss more on collateral throughout our Money Matters series.

Now that we know the 3 main pillars of a consumer loan, we can start to think about different loan options and repayment plans that are right for our personal or business needs. 

This is a just starting point, but ensuring you choose the right IR, repayment terms, and collateral agreements from the very beginning of your lending journey means you’re halfway towards a successful and responsible borrowing experience. 

A great place to start is by checking out the Krungsri finance calculator and booking a free finance consultation with Krungsri here.

We hope you enjoyed part one of the Yula.la “Money Matter" series. The Money Matters series covers a range of financial advice for Lao borrowers and investors. The first part of Yula.la's Money Matters is sponsored by Krungsri Leasing Laos, a Global Standard Financial Institution, under the supervision of the Bank of the Lao PDR.