Consolidation debt loan mortgage
It is difficult to manage a decent lifestyle without borrowing in modern times. Primary reason for this is shift from agrarian economies to industrial economies. In industrial economies, workers earn well, and it is in the interests of manufacturer to retain the experienced hands employed for a longer period. This assures the lender that the borrower will have a steady income, unlike in agrarian economies, where a single climatic debacle means loss of employment.
With bankers coming up with lucrative offers, its hard not to end up buying something that one could well do without. While investments in real estate based properties need to be done in real time basis, investing in automobiles, electrical objects, and electronic objects, which only depreciate in value over a time, seems ridiculous. Still, people go on buying spree, against all logics.
What may seem manageable in the initial stages may not always be so. Invariably, there are some forgotten expenses, and some unforeseen expenses in every budget. Without providing for such contingencies, the cash position does look robust enough. In the initial stages, the tightness in budget is absorbed for a few of months by the depleting savings. Thereafter, the borrower starts defaulting on debt. A couple of defaults do not trigger a panic button, as they should, because it is human to console one self saying that well in this month this happened because of this unforeseen expenditure. Moreover, people believe that such things happen to everybody. By the time the truth sinks, the debts become insurmountable.
A thumb rule fixed by most financial advisors is that when the total outflow towards loan repayment touches 20 percent or more of the monthly cash inflows, then there is a need to re-examine the finances for bringing down the borrowings. One way to do this is to increase income. This is not always possible. Therefore, the ratio needs to be improved by alternate means such as liquidating some assets for clearing the debts, or opting for long tenure loans so that repayment is done over a longer period, in smaller installments.
Borrowings on short term are generally expensive. The lender reasons that if a person is borrowing for short term, then after this period, a new customer has to be located, documents vetted, and credit records examine. This translates into administration expenses for the banker. At times, the cash remains idle for want of right customers at the right time. Therefore, lenders prefer long-term borrowers, with impeccable record of repayment. To draw such borrowers, the lenders are willing to lower interest rates.
What a borrower struggling with unmanageable debts needs to do is list out the dispensable assets that can fetch some value as of now, but that are likely to lose value over a time0. Estimate how much will be received on sale of these assets, and how much of borrowing can be cleared by doing so.
This method works very well for small amounts.
If, however, the indebtedness has crossed to a level of regular defaults in payments, then some serious thinking has to be done on the matter.
Debts that carry higher interest rates should be cleared as first priority. For this, means of finance that is cheaper than the debt should be identified. Some credit cards offer credit at lower rates of interest in the initial couple of years. Borrowing on such credit cards is advisable, if and only if, the borrower is anticipating some receipt before this period of concession ends. Otherwise, the borrower may get into a greater mess than he or she is already in, as credit card debt does not come cheap.
Seeking an enhancement of an existing housing loan is another way of managing such debts. Home loans are one of the cheapest debts, because they are either subsidized by the governments, or granted under some policy imposed by the governments. Therefore, interest on home loans is lesser than interest on most other forms of loans. Another positive factor about home loans is that they have to be repaid over a longer period of time. This means that installment to be paid per month comes down drastically from what may be payable under other short term loans. Home loans are also advantageous because, as of now, most countries offer income tax rebates on amounts paid towards loan interest repaid, and the principal amount repaid. Moreover, since the repayment is over a long tenure, in equated monthly installments, the inflation of every year reduces the value of the amounts being repaid. Effectively, the borrower may end up paying less than what the borrower actually bargained for.
Another option is the mortgage loan. This is a shorter tenure loan when compared to home loans. However, it is generally cheaper than credit card loan, because the underlying security of mortgage loans is generally a real estate property. And real estate properties increase in value over a period of time, thereby more than securing any principal and interest payable by the borrower throughout the loan tenure.
The above two methods are very good for consolidating debts. Lenders too are happier with such lending, the alternative is to remain in dark about of a whole lot of debts that the borrower contracts, eventually forcing the lender to surrender part of the dues.
If pledging, hypothecation, mortgaging, pawning, etc., of the borrowers assets can fetch additional funds at lower interest rates than the loans that borrower is struggling to repay, then such methods must certainly be utilized.
While obtaining loans in any of the above methods, the borrower will incur some charges towards legal clearances, valuation, etc. At times, the lender who is accepting prepayment may also levy a penalty called prepayment charges. All these amounts must be carefully taken into account before determining whether it is worth taking the new loan.
There are plenty of debt management agencies that offer such services. These debt management agencies do not study, in depth, every customers financial position. Therefore, they have uniform solutions for variable situations. At times, these agencies may be hands in glove with some bank or banks. In such situations, the solution offered by these agencies will invariably be detrimental to the borrower. Borrower must take pains to understand the terms and implications, and even do a bit of window-shopping to ensure that he or she is not being taken for a ride.
If the borrower is unable to bring down the borrowings, despite the above measures, then bargaining with lenders is called for. The borrower must indicate by how much he or she may run short off, if all his or her assets were liquidated. At this juncture the borrower may also indicate how he or she may be able to clear the debts with some additional concessions from lenders. If the lenders do not agree to the borrower's proposal, the borrower may be forced to file for bankruptcy proceeding. But that is the last measure coming after all attempts to consolidate debts through mortgages fail.
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