If you were to lend $100 to a friend and he doesn’t pay it back, there is not much you can do. The loan is unsecured.

But if he promised you his mobile phone or his goldfish if he failed to come up with the money by an agreed time, you have some security. The loan is secured against the phone, or the fish.

Borrowing for the right cause is wise. However, you should know that borrowing money is an instant debt, and once you are in debt, you pay extra for the privilege. It’s important you understand all the various fees and charges you might have to pay when you take out a loan.

Lenders use different terms to describe their fees, so it’s important to properly check all the costs that come with the loan

Some loans deals may seem attractive but the fees can quickly add up. When comparing loan offers, add up all the charges over the length of the deal as well as your monthly repayments.

Although  unsecured loans require no collateral, banks are quite choosy on who qualifies for the offer. In most instances, the most targeted are the salaried employees because the deductions are usually made by the employer.

In case the borrower leaves employment and defaults on the repayments, the lender will still have legal recourse against the borrower despite there being no security offered upfront for the loan.

Leading commercial banks exploit their customers by exposing them to numerous charges.

Dubbed “hidden”, the charges are not explicit when a customer applies for a loan.

While the IRA says that both the borrower and lender should pay their own premiums, Bank of Uganda argues that it is a free market where commercial banks can impose levies provided they do not break any law.

The public, on the other hand, view the charges as a rip-off by commercial banks.

“We are concerned that there are many charges, but we do not control what commercial banks charge as long as they do not break any other law. But we want banks to disclose the charges to customers before they offer any loan documents for signing,” said BoU deputy director of financial stability, Yiga Masajja

For example, a borrower applying for $5,000 receives $4,568 after meeting insurance charges at 2 per cent, stamp duty at 1.5 per cent, evaluation fee at 3 per cent, loan monitoring at $2 per month for 48 months paid up front, and a loan application fee of $11.

This amount excludes mortgage evaluation, which is also charged on the loan amount, though the interest is charged on original amount. Besides that, banks also ask for insured collateral.

Credit life insurance is a policy which the lender is indemnified if the borrower dies before repaying the loan in full.

Although BoU said the arrangement suits the unsecured loans, in some cases, banks still take ownership of the property of a borrower even when they have credit life insurance.

“Depending on the terms of the insurance cover, the bank may have the right to take ownership of a borrower’s property to clear the outstanding amount,” said IRA spokesperson Faith Ekudu.

The insurance regulator hopes to address the problem in the laws on bancassurance.