Borrowing money nowadays is fairly easy. You can take loan or credit for any amount ranging between Rs.1,000 and Rs. 10 million or even more from banks, financial organizations and assorted lenders. Indeed, borrowing has also become commonplace.
Why people borrow money
People take credit for almost everything- for buying groceries, mobile phones and home appliances, vehicles, homes or to launch a new business. Sometimes, people take loans for medical treatment while others take credit for marriage. Yet others borrow money for a dream vacation and some pay recruitment fees for jobs abroad. Nowadays, taking loans for higher education is gaining momentum
Understanding various types of credit
Whatever your reason for taking credit or borrowing money, there are various ways in which the funds are handed to you. These include:
- Cash loans: These loans or credit are given in cash. Usually, they are credited to your bank account by means of direct transfer. Sometimes, you may be given a cheque or demand draft drawn in your favor, which can be redeemed at your bank. Occasionally, the lender may hand you currency notes for the requested amount. Here, you may be required to give a guarantor or two. Meaning, should you default on repayments, the guarantor is legally responsible to pay your loan. Repayment is by fixed monthly installments of the borrowed amount. Additionally, you will pay an interest to the lender along with your monthly installment. Generally, these repayments are called Equated Monthly Installment (EMI).
- Credit Line: A personal line of credit of is a combination of personal loan & credit card, and yet much more than that. A credit line is revolving in nature and keeps renewing each time you repay the total amount used. It is an unsecured loan and the interest in charged only on the amount used and not the entire amount. In India, MoneyTap is the 1st to launch an app-based credit line in India.
- Mortgage: A mortgage means, the lender finances something like house, vehicle or machinery. Here, you do not get money. Instead, the lender pays for whatever you wish to buy. You are required to repay the cost price plus service charges, interest and other dues to the lender every month.
- Credit card: Banks and certain financial organizations are empowered to issue credit cards. Remember, credit card is also a loan of sorts and carries a terribly high interest rate, if you repay partially. Credit cards are issued by two global brands, Mastercard and Visa International. Usually, they are accepted worldwide and can be used to buy stuff, pay for services or withdraw cash. Usually, banks issue credit cards under these brands.
- Loans against collateral: Nowadays, loans against collaterals are very common. Simply put, they mean you hand over your gold jewelry or pledge your home or other property to the lender while taking the loan. This means, the lender need not return your jewelry or stake legal claim to your home or office or land, should you default in The lender will take all documentation from you before advancing the loan. These documents give the lender the right to claim your jewelry or home to recover unpaid dues. In some countries, the system is termed ‘pawning’. Meaning, you pawn something precious in exchange for cash.
- Usurer loans: These types of loan are generally given in cash. In most countries, such loans are illegal. Usurers are individuals or a group of people who will give you a loan in and charge a hefty interest. Some usurers hire thugs to recover any unpaid loans who threaten the borrower. They can also take blank cheques that are signed by you without mentioning the date, payee and amount. Beware, the interest you pay can be used to fund terror and criminal activities.
- Crowdfunding: This is an easy way to raise money for your project if you are planning to take the entrepreneurial route. Here, members of the public and organizations contribute some amount to help you start a business. In return, they hold stakes in your company and are entitled to a share of your profits.
- Venture capital: Also a type of loan that is given by businessmen or organizations. They advance the money to help you set up the company. Venture capitalists hold a share in your business. Hence, they are entitled to a share in your profits. Sometimes, you may need to pay interest on the funded amount plus hand out a share of you
- Loans against bonds, insurance and fixed deposits: Here, you pledge your insurance, fixed deposit or bonds and other financial instruments issued by reputed banks or financial institutions, to the lender. Meaning, your assets can be forfeited by the lender, if you are unable to repay the loan. These financial instruments are utilized as surety that you will pay the loan. Till the loan is repaid, you cannot cash you fixed deposits or bonds. In case of your death, the insurance policy payout is utilized to repay the loan.
Guidelines to avail credit
Banks, financial institutions, private lenders, venture capitalists, crowd funding platforms and others have their own parameters to judge whether you qualify for the credit. Hence, if you are a first-time borrower, there are certain guidelines you can follow. They will help you get the best possible loans and help save money or unnecessary hassles.
Tip-1: Finalize the type of credit
As we have seen earlier, there are eight different options available for you to take credit. You can study each option more carefully and determine which one bests suits your requirements. In fact, you can consider multiple options to find how credit can be availed easily and at competitive interest rates.
Tip-2: Self-assessment for loans
Nowadays, there are several tools available online for assessing your credit eligibility. Meaning, you simply need to key in your incomes, expenses and value of assets, tax and other liabilities on the online calculator. This tool will give you a near accurate estimate about how much credit or loan you can avail. It will also indicate the EMI amount, duration of the credit and other details.
You can also add your family income, such as your spouse’s earnings and other sources such as rent from any leased properties, among others, to increase your credit limit.
Tip-3: Scan the market for loans
Obviously, you cannot walk into a bank or office of a lender organization to seek credit. Firstly, you need to check how much credit any financial institution would give. Importantly, you need to know how much interest you will pay for the credit. Furthermore, lenders levy service charges, processing fees and other incidental expenses on your application.
These fees are payable regardless of whether the loan is approved or rejected. Therefore, it is best to scout the market and find out who offers the best credit deal suited to your requirement.
Tip-4: Get your credit ratings
Usually, a bank or other lender will scrutinize your credit applications for ratings. Meaning, they will check whether you are capable of repaying the loan and how. If you are a first-time borrower, you can get a higher rating, provided you have fewer liabilities and higher income. Getting a credit report from an authorized rating agency and submitting it with your application helps expedite sanctioning of your loan.
Tip-5: Get your documents ready
Lenders of all sorts insist you submit several documents along with your credit application. These can include your latest bank statements for a specific period, tax certificate, proof of income including job appointment letter or contract, statement of liabilities, details of expenses and much more. It is best to procure these documents at the earliest while applying for credit.
Tip-6: Learn to bargain
Banks and lenders always quote interest rates that are higher than what they look for. This is usually done to ensure higher profits for themselves and their shareholders. But that does not mean they are averse to bargaining. If you have very strong credit ratings, stable income and meet or exceed other parameters for borrowings, you can bargain for a preferential rate of interest.
Tip-7: Check for credit insurances
This is the best way to hedge yourself against any financial doldrums you may inadvertently encounter. These days, banks and other lenders offer a loan or credit insurance when lending. The insurance is either given as part of the credit or offered as an option. Taking this insurance is worthwhile. If you are unable to repay the loan for any reason, the insurance policy will cover the amount.
However, for the insurance to cover your credit, you need to meet certain strict criterion. Therefore, it is best to read and understand the fine print before taking such credit insurance.
Tip-8: Hedge yourself against uncertainties
Keep sufficient savings to repay at least three installments for your credit amount. This is especially important for employed people. Nobody can claim to have a secure job nowadays. Hence, if you lose employment for any reason or wish to change jobs, you will have sufficient funds to repay the credit. This will help you focus on the new job rather than get bothered by an outstanding loan.
Tip-9: Apply while young
Remember, your age counts while applying for credit card of any sorts. So does your work experience and employment history. Lenders are generally more willing to offer credit to younger people with a good employment record as compared with older people. This is because of the common belief that younger people are better poised to clear their loans as compared with older people who may encounter health and job problems.
With employers preferring younger people, banks too are adopting this trend increasingly.
Tip-10: Borrow only if you must
Advertisements for everything tempt people to take credit for anything. You will see ads offering expensive mobile handsets on credit, jewelry on installments and loads of other stuff that are unessential. These advertisements play on your mind, leading you to subconsciously believe that you are paying a small price. However, buying such stuff on credit increases your liabilities.
Remember, these too count as credit or loan. And larger lenders like banks will consider these credits as part of your liabilities. Hence, you will be entitled to a smaller loan for some genuine purpose.
Remember that credit or loan is money taken and spent before you have earned it. Medical research in the US and reports published by the American government’s National Library of Medicine clearly indicate that loans and credits can have detrimental effects on physical and mental well-being. This is mainly due to the self-created Sword of Damocles of repayment and fear of default.
However, this does not mean you should avoid credit. Go ahead and avail of loans to fulfill your dreams. Just ensure that a credit does not cause you to run into financial doldrums and health problems.
About the Author: Harshal Pedamkar is a passionate writer and a technology enthusiast. His content is mostly focused on money saving/making tips and digital marketing. A writer by night and reader by day, he has a passion for sharing his knowledge through his writings.