Consumer credit counsiling
Most people are averse to being told that they are heeding towards financial problems. There are ego issues involved, as everybody thinks he or she knows how to manage finances better than the other. This illusion is eventually shattered and the borrower becomes completely dazed with the consequences.
Consumers need to be aware that there is a certain ratio of their income that can be used for leveraging. If, however, this crosses 20 percent of the monthly income from all sources, then the person is asking for trouble. The installments for consumer goods are deceptive. They appear to be mere fractions of monthly income. That is why most people seem to take them lightly. A bunch of such small installments siphons away a big chunk of the monthly income. This is normally realized only after it is too late to rectify the problem. Though the 20 percent norm exists, its only a thumb rule. There are people who are financially disciplined enough to manage such high borrowings.
Consumer credit counseling involves pulling out the borrower from the financial mess he or she might have landed in. What the credit counselor does is identify the assets that are under utilized, and make them start pulling their weight. That is easier said than done. But there are government securities, and real estate properties, that can generate additional funds for the borrower. These additional funds can be utilized to clear costlier debts. Because interest on home mortgage loans is lower than many consumer loans, and credit card loans, the credit counselor may suggest availing such loan. The installments on these loans are spread over a longer period, and therefore, the monthly outflow comes down.
Some people are not aware of available cheaper finance in the market, simply because the terminology is something they have not come across, nor do they understand the advantages. It is up to the consumer credit counselor to explain how a particular transaction works to the advantage and how the other transaction is detrimental to the interest of the borrower.
An example of this is the home mortgage loan. A normal person is inclined to add up the interest paid out over the long term, and find it to be a hefty sum. However, credit counselor may highlight that the loan is repaid over many years, and if the installments are discounted for each such interim year at the inflation rate, the total payout will be far less than other short-term loans. In addition, the interest paid to the banks is eligible for tax deduction against any interest income in the income tax. The same is not true for interest paid on consumer loans.
Borrowers also need to change some of their personal habits. Many people buy groceries on weekly basis, even when they have adequate funds. Quite of few of these tend to purchase some non-essential item on every visit to the mall. These non-essentials, when considered on monthly take away a neat sum from the budget. Therefore, the consumer credit counseling involves studying personal habits of the people.
Recent amendments to Bankruptcy laws in United States have given considerable boost to credit counseling function. The person filing for bankruptcy has to compulsorily undergo credit counseling before filing as well as after the relief granted by the court.
Consumer credit counseling is generally a not-for-profit profession. However, there may be vested interests in some cases. Therefore, the borrower approaching such counseling agencies should also do some homework.
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