What is the loan amount you need, what outcomes you expect out of financing and what your repayment options are — these are all important things to consider. You also need to think about more feasible ways to finance your needs in part or full, so the loan amount is as small as possible, in comparison with the asset for which the loan is available.
For example, if you are buying a car for Rs. However, if you can afford to make a higher upfront payment down payment , it is much better as your interest burden will come down significantly. Evaluate multiple offers and financing options Simple research can give you a lot of information on the different types of loan products available at your disposal. For example, if you are considering getting a personal loan, do some research on the loans and offers available with different banks.
Take your pick, although you must evaluate them closely. As a starting point, you can compare key parameters for various banks, including: Interest rates: A lower interest rate is not everything, but it is a good start.
Processing Fees: Lenders charge processing fees in addition to the interest, and this is to be paid upfront. This should also be taken into consideration, and is in many cases, even negotiable. Tenure: Different banks allow you to choose between long- or short-term repayment, as per your preference. Eligibility criteria: Your age, income, nature of income source employment or self-employed , credit score and outstanding loans play a role in determining your ability to get a loan.
Study the loan agreement Once you finalize the bank and the type of loan product you are opting for, one of the best favors you can do yourself as a loan seeker is to read the fine print.
Familiarize yourself with the contents of the loan documents. Invest time to go through the documentation — no matter how detailed it is. The devil is in the details — the key parameters of your loan documentation, its terms and conditions, will impact your finances as the circumstances change. For instance, if you get a windfall bonus later and want to prepay your loan, does the bank charge any prepayment penalty?
So even if you have availed the loan at a cheaper interest, it is subject to change over the long term though you may have locked on to a rate for a short term.
This information will be available in the documentation, so it is important not to gloss over the text while signing. Common Mistakes Made by the Borrowers While Availing Financing Not shopping around: Always understand, the first offer, no matter how tempting, is a baseline against which all other offers are to be gauged.
As a borrower, you need to make sure your deal with the bank is the most favorable among them all. The only way you can effectively do that is by carefully evaluating the multiple lending options available to you in the first place. Going for the cheapest interest rate alone: This is a common mistake. At first glance a loan with a lower interest rate may seem like an obvious choice. But structure it against other parameters, and the argument does not hold water anymore.
Let us assume you are looking for a INR 50 lakh home loan. Being unaware of your credit health: Being informed about your credit score is the first step towards leveraging or improving it. It comes with a range of perks, like lower rates of interest, with banks now allowed to differentially price loans based on credit scores.
Keeping your banker in the dark: Banks understand the issues borrowers face today. The expectation banks have of you is that you come clean about financial struggles, if any. Always provide accurate, reliable and complete information to the bank. This can enable your bank to conduct accurate assessments and sanction the loan without delays.
Opting for longer tenure : In the grand scheme of things, selecting a shorter tenure to repay a loan is often the best option. It lowers the risk factor for the bank, in turn improving the possibility of securing the loan at reduced interest.
More importantly, it reduces the total interest payment to be made to the bank over the period of the loan. Being unaware of consequences: Many borrowers do not understand that credit scoring is a continuous process.
While banks may overlook a couple of delayed or missed payments over the long haul, a history of late payments can bring down your credit score for up to seven years or more. As we have discussed previously, a poor credit score can hamper your chances of getting loans in future. Things to Follow After Taking a Loan Having a loan on your shoulders can be a source of anxiety — and this is the case for most people. Be structured Track your expenses and payment cycles diligently.
Keep an organized record of your loan documents and payment schedules. Being in control can simplify your payment cycles and help you manage multiple outstanding loans. A default can leave a blemish on your credit report , making it hard to borrow money. However, you can still polish up your profile while waiting for the default to be cleared. By taking swift and sensible action, you can reduce the negative impact of your default and improve how lenders see you and it is worth noting that the impact of a default decrease over time.
This might happen to an account you have with a bank, mobile phone company or utility supplier e. A default will stay on your credit file for six years from the date of default, regardless of whether you pay off the debt. Nevertheless, you should continue to meet any remaining payments as the lender could go on to register a CCJ against you. Note that the lender may sell your debt to a debt collector a company that specialises in getting debts repaid.
You can see if you have a default on your credit profile by checking your Experian Credit Report. A default notice is a notification from a lender asking you to catch up with your payments or else have your account closed. You should try and pay the amount you owe immediately to avoid a default.
Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. Though not common, countries can, and periodically do, default on their sovereign debt. This happens when the government is either unable or unwilling to make good on its fiscal promises to repay its bondholders.
Argentina, Russia, and Lebanon are just a few of the governments that have defaulted over the past decades. Of course, not all defaults are the same. In some cases, the government misses an interest or principal payment. Other times, it merely delays a disbursement.
The government can also exchange the original notes for new ones with less favorable terms. Historically, failure to make good on loans is a bigger problem for countries that borrow in a foreign currency instead of using their own. Many developing countries issue bonds in an alternate currency in order to attract investors — often denominated U.
The reason is that when a country that borrows foreign currency faces a budgetary shortfall, it does not have the option to print more money. Research suggests that the presence of checks and balances leads to fiscal policies that maximize social welfare — and honoring debt carried by domestic as well as foreign investors is a component of maximizing social welfare.
Conversely, governments that are composed of certain political groups with a disproportionate power level can lead to reckless spending and, eventually, default. With the ability to print their own money, countries like the United States, Great Britain, and Japan appear immune to a sovereign default, but this is not necessarily the case. Despite a stellar record overall, the United States has technically defaulted a few times throughout its history.
Even if the government can pay its debts, legislators may not be willing to do so, as periodic clashes over the debt limit remind us. Investors can thus experience a loss on government debt, even if the nation has not officially defaulted.
When a country defaults on its debt, the impact on bondholders can be severe. In addition to punishing individual investors, defaulting impacts pension funds and other large investors with substantial holdings. One way that institutional investors can protect themselves against catastrophic losses is through a hedging strategy known as a credit default swap CDS.
With a CDS, the contract seller agrees to pay any remaining principal and interest on a debt should the nation go into default. In exchange, the buyer pays a period protection fee, which is similar to an insurance premium. The protected party agrees to transfer the original bond, which may have some residual value, to its counterpart should a negative credit event occur.
While originally intended as a form of protection or insurance, swaps have also become a common way to speculate on a country's credit risk. Many of those trading CDS, in other words, do not have positions on the underlying bonds that they reference.
For example, an investor who thinks the market has overestimated Greece's credit problems could sell a contract and collect premiums and be confident that there is no one to reimburse. Because credit default swaps are relatively sophisticated instruments and trade over-the-counter OTC , getting up-to-date market prices is difficult for typical investors. This is one of the reasons only institutional investors use them, as they come with more extensive market knowledge and access to special computer programs that capture transaction data.
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