There was a time when loans had to be sold, because customers didnâ€™t seek them out. That is still largely true in insurance. But the trend has changed in the loan segment. At least some classes of customers borrow quite readily. In fact, supply is outstripped by huge demand in this sector. Some people donâ€™t think twice before taking a loan to finance a vacation in Europe.
They donâ€™t pay much attention to the huge rates of interest. This new-found favor for loans borrowers are headed for a huge default crisis, or anything like that. Borrowers of financial loans have certain characteristics in the loan market and customer behavior observed over a number of years.
Most people think very deeply before buying a home. They invest a lot of time in searching for the right house. They involve their family in the decision-making process. They take everybodyâ€™s opinion into consideration before finalizing the house.
That is commendable, of course. However, they spend a fraction of the time when it comes to taking a loan. No family involvement, no counseling, no effort and they just take whatever loan is easily available, without really comparing the end results of various options.
The result on the fallout of neglecting to do adequate research before borrowing is not able to pay back in time. Currently banks are increasingly getting requests from customers who had defaulted on credit cards payments or loans few years ago, and who are now finding it difficult to get a home loan, or some other loan, because of their poor credit history. Since the credit information bureau is operational now, such cases are likely to become more and more common.
Earlier, people never worried too much about the consequences of defaulting on loans. But if it is done now, one will regret the decision later. He would find it difficult to get another loan.
Many customers who have warmed up to the idea of borrowing are going to find it hard to cope with the debt later. Take, for example, a shopkeeper, who would fall into the small and medium enterprise (SME) category. Banks are chasing the SME segment these days, and suddenly the shopkeeper has easy access to a loan. But it could actually upset his operational scale.
There is a need to make unbiased, independent opinions available to people who are looking for a loan. If the assessment is independent, customers need not fear that they are being misguided or that some product is being pushed in the guise of advice. Such a service would also ensure that the relevant credit providers would chase customers. Then customers could make an informed choice. One of the best ways to come out of the debt trap is to live moderately and prudently, cut down on unnecessary expenses, build up savings and canalize existing funds into repaying high cost loans if any. Even if it entails living a frugal lifestyle for a while, do it.
Not in debt but contemplating taking a large loan one needs to consider the following factors before taking a loan
while borrowing comes with its own set of benefits.
Before you take on debt, one needs to understand it first. One kind of debt is the debt you incur to fund an expense, which can be called consumption debt, for instance, taking on a personal loan to buy some consumer durable. The second is investment debt, where you take a loan to build an asset like taking a home loan. There are situations where one could avoid using credit, such as making impulsive purchases, meeting luxury expenses, unnecessary foreign or domestic pleasure trips etc.
Avoiding debt altogether can actually prove unwise at times, since the power of credit is tremendous. Credit helps to achieve tangible aspirations and let the borrower build assets much earlier in life. Therefore, sometimes it makes sense to borrow. In fact, generally, major necessities such as buying a home or providing for education, merit borrowings.
Avoid borrowing for frivolous purposes like a vacation, apparel, dining out at expensive restaurants, speculating and gambling, etc.
Sometimes borrowing is a close call. Items like furniture, appliances and certain home improvements fall into this category. Itâ€™s preferable not to borrow for such goods, but one may be able to justify the interest expense if youâ€™re buying items that youâ€™ll keep for 5-10 years or more.