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Published on April 11, 2008

They make you think that you are getting a good deal from finance companies, credit card firms and banks. But there are a few areas consumers need to be aware of.

The most obvious one is interest rates. Lenders need to explain what they are really charging.

A low interest rate of 1 per cent flat per month is not as simple as it sounds. The flat interest rate means consumers have to pay 1-per-cent interest on the total loan regardless of the balance throughout the whole term of the loan.

Let's say you borrow Bt100,000 with 1-per-cent flat interest for 12 months. It means you have to pay 12 months of interest at 1 per cent times Bt100,000, which equals Bt12,000 per year.

The lender will add this amount to the principal loan amount (Bt100,000 plus Bt12,000) and divide it by 12 months (Bt112,000/12 months).

This amounts to Bt9,333.33 in monthly payments and translates to an effective interest rate of about 21.6 per cent per year.

A simple conversion of a flat rate to an effective rate is to multiply the flat rate by a factor of 1.8. This will give you a fairly close estimate of the real interest rate you are paying.

Another potential blind spot is the various fees attached to a loan.

Let's say the Bt100,000-loan above carries a 5-per-cent up-front fee. This means that you will only get Bt95,000 cash, but you still have to pay back the full Bt100,000 plus interest.

There are other fees that are generally applied to a loan.

Some lenders will charge you a late fee when payment is overdue. This can be as little as Bt100 but is often higher.

If your account goes into delinquency, you will most likely be charged a collection fee, which can be as high as Bt300.

If you want to pay the loan off early, you may not have any option to do so or may have to pay an early-payment fee.

A responsible lender will disclose and explain these charges to you clearly. In many instances, everyone is focused on getting the loan and forgets everything else.

A critical factor that some lenders may ignore is indebtedness, which involves the total outstanding obligations and debts that an individual has.

Let's assume you have a loan with a monthly payment of Bt9,333.33. You also buy an insurance policy that carries monthly payments of Bt5,000. And you have a three-year auto loan with a monthly payment of Bt24,000.

Your total indebtedness is Bt38,333.33.

A common term used in financial services to define indebtedness is the "debt and obligation" to income ratio.

Assuming your income is Bt100,000 per month, your DTI ratio would be 38.33 per cent.

A responsible lender would set a reasonable limit as to how much they would lend to you. A safe guideline would be to stay about 50-60 per cent.

As a consumer, we have to be cautious about digging a deeper hole that we may not be able to get out of.

The three areas cited above are probably the more critical ones to understand. However, there are other conditions that lenders will impose on consumers. The important thing is to be aware of them when taking out a loan.

Dan Harsono is chief marketing officer at Bank of Ayudhya.