In the world of finance, especially in credit or loan transactions, we often hear the term “provision”. For some, the term may still be unfamiliar.

However, a good understanding of provisions is essential, especially for those of you who are planning to apply for a loan or credit. This article will discuss about provisions, from their meaning, functions, to how to calculate them.

With a better understanding of provisioning, you can make more informed decisions in managing finances.

Definition of Provision

Provisions are fees charged by financial institutions, such as banks or financing companies, to customers in return for services rendered in the process of granting credit. These fees are generally calculated based on a percentage of the approved loan amount.

Provisions serve as compensation for various services provided by financial institutions in the loan application process, including credit evaluation, eligibility checks, and document preparation.

The Role of Provision in Credit Transactions

Provisions have an important role in credit transactions. In addition to being a source of income for financial institutions, provisions also serve as indicators for customers.

By knowing the amount of the provision, the customer can estimate the costs that will be incurred in the process of applying for a loan. This understanding can help customers to be better prepared financially and avoid unexpected cost surprises.

Provision Functions

Provisioning has several important functions, among others:

1. Administrative Expenses

Provisions are used to cover administrative costs incurred in the process of granting credit, such as data verification fees, document creation costs, and notary fees. In the presence of provisions, financial institutions can manage various expenses related to the filing of credit.

2. Income of Financial Institutions

Provision is also one of the sources of income for financial institutions. By charging a provision fee, financial institutions can ensure operational continuity and provide better services to customers. Revenue from the provision can be used for investments in technology, employee training, and infrastructure upgrades.

3. Selection Mechanism

The amount of the provisions imposed can be one of the selection mechanisms for financial institutions to assess the creditworthiness of customers. Financial institutions may use the amount of provisions as an indicator of risk. The higher the risk considered by the financial institution, the higher the provisions imposed.

How to Calculate Provision

The way to calculate the commission is generally quite simple. Typically, the provision is calculated on the basis of a certain percentage of the approved loan amount. Here are the steps to calculate the provisions:

Example of Provision Calculation

if you apply for a loan of IDR 100,000,000 with a conditional interest rate of 1%, then the amount of the commission you must pay is:

Provision = 1% X Rp100,000,000 = Rp1,000,000

When is Provision Paid?

Provisions are usually paid by the customer at the beginning of the loan term. There are several ways of payment of provisions, namely:

• Deducted from loan amount: The provision is deducted directly from the amount of the liquid loan, so the amount of money received by the customer will be reduced by the value of the provision.
• Paid separately: The customer is required to pay the provisions separately before or after the disbursement of the loan.

Differences in Provision and Administrative Expenses

Although often considered the same, provisions and administrative costs have significant differences:

• Provision: It is an expense calculated as a percentage of the loan amount and is used to cover administrative expenses as well as as a source of income of a financial institution.
• Administrative expenses: It is a fee charged to cover more specific administrative expenses, such as the cost of creating a credit card or the cost of creating a passbook. Administrative expenses are usually fixed in nature and are not directly related to the amount of the loan proposed.

Factors Affecting the Provision Amount

The amount of the provisions imposed may vary depending on several factors, including:

1. Types of Loans

The type of loan (KPR, KTA, etc.) will affect the amount of the commission charged. Each type of loan has different characteristics and risks, which can affect the level of provision.

2. Loan Amount

The larger the loan amount, the greater the commission to be paid. This is because the administrative costs and risks associated with loans are greater as the amount of loans increases.

3. Loan Term

The term of the loan can also affect the amount of the provision. Loans with longer maturities may incur higher provisions because financial institutions have to bear the risk for longer.

4. Financial Institutions

Each financial institution has different policies related to the amount of provisions. Therefore, it is important for customers to compare various offers from different financial institutions.

Want to apply for a loan or credit? Make sure you know important papers such as debt agreement letters! Read more: Debt Agreement Letter of Functions, Uses, and Correct Examples.

Tips for Choosing Credit Products with Affordable Provision

To get credit products with affordable provisioning, you can do some of the following:

• Compare Various Offers

Compare various offers from several financial institutions to get the most competitive provisioned interest rates. By comparing different options, you can find the product that best suits your financial needs.

• Read Terms and Conditions

Carefully read the applicable terms and conditions before signing a credit agreement. Understanding the terms and conditions will help you avoid unexpected costs later in life.

• Ask for Provision Details

Ask the bank clerk or financing company about the details of the provisions to be charged. Make sure you get a clear explanation of the amount and method of payment of the provision.

Comparison of Provision with Other Costs in Credit

When applying for a loan, you also need to consider other related costs, such as interest and administrative costs. Here is a brief comparison:

Tips for Negotiating Provision with Financial Institutions

If you want to reduce the amount of provisions imposed, you can enter into negotiations with financial institutions. Here are some tips for negotiating:

1. Do Research: Know the industry standards and average provisions imposed by other financial institutions. With this information, you can make a realistic request.
2. Be Professional: When negotiating, stay professional and polite. State your reasons why you want to negotiate the amount of the commission.
3. Ask about Discounts or Promos: Ask if there is a discount or promotion that can be applied to the cost of the provision. Some financial institutions may have specific policies for specific customers.
4. Offer Good Credit Eligibility: If you have a good credit history, show this to the financial institution. A good credit history can be a reason to get a lower provision.

Provision is a cost that needs to be considered when applying for a loan or credit. By understanding the meaning, function, and how to calculate provisions, you can make wiser decisions in choosing credit products that suit your needs and financial capabilities.

In addition, understanding the comparison between provisions, interest, and administrative expenses, as well as conducting proper negotiations, can help you manage borrowing costs more effectively. How, are you interested in applying for a loan or credit?

Before applying for a loan or credit, make sure you prepare a sufficient budget so that you can pay off the loan or credit you apply for. Prepare a budget with the help of the FINETIKS application, available at Google Play and App Store, GRATS!