Taking up a loan becomes necessary when you lack funds for a particular purchase, monthly bills or day to day expenses. When you apply for a loan, the creditor assesses your repayment capacity and creditworthiness to determine whether or not you are eligible. The lender may also check your credit history and financial strength to decide the tenure and rate of interest on the loan. Most standard loans are repaid in monthly installments, and the repayment amount usually includes a portion of the principal and a part of the interest.
In the beginning stages of repayment, the majority of the amount goes to reducing the principal, and only a small portion is used for servicing the interest. However, as the loan period progresses, this ratio keeps getting reversed, and towards the end of the loan period, the majority of the monthly repayment goes towards servicing the interest. If you fail to keep up with the repayments, you become a defaulter.
The Debt Trap
To avoid defaulting on payments, borrowers often resort to taking up new loans to pay off other loans. It is a vicious cycle of debt that keeps piling with time. Debt consolidation is the best way to get out of a sticky financial situation involving multiple debts. Here are some of the different types of loans that you can consolidate.
It is provided for buying a house, although some banks also offer loans for home repair and purchase of land as well. The newly purchased house then becomes the collateral for the loan. The buyer needs to come up with a specific portion (usually 10% to 20%) of the total value of the home, and the creditor provides the rest of the amount as a loan.
It is also a secured loan in which the car being purchased becomes the collateral, and the loan is given for the value of the vehicle. It is for much shorter tenures than a home loan and goes up to a maximum of five years. A buyer can even purchase a used car with a car loan. In such cases, the lender would do an independent assessment of the condition of the vehicle and accordingly fix the loan amount and the rate of interest.
Education loans are offered to students for higher education and particular degree or diploma courses. Usually, banks or lenders ask for a guarantor (usually the parents) before approving the application. The student loan has a moratorium on repayment, and monthly repayments typically begin only after the completion of the course or when the student has got a job.
Personal loans are usually unsecured which is why they do not require collateral. The lender considers the monthly income of the applicant and his/her credit history to determine eligibility, tenure, and rate of interest. The interest is usually higher for a personal loan. Experts pointed out that a credit card is also a type of personal loan.
If you have taken several of the above loans and now finding it difficult to manage the different repayment dates and amounts, you can consolidate all the existing loans with a debt consolidation loan, which usually has a more extended tenure and a lower rate of interest.
Isabella Rossellini is a marketing and communication expert. She also serves as a content developer with more than seven years of experience. She has previously covered an extensive range of topics in her posts, including business debt consolidation and start-ups.