Consumer credit consolidation
When the monthly outflow to serve debts, be they the home loans or consumer credits, exceed 20 percent of the monthly income, then its time to take some serious austerity measures.
Consumer credits are taken for acquiring such gadgets and assets the value of which is consumed and eventually there is no residual value. Examples of such gadgets are the televisions, including the plasma and LCD, or the refrigerators.
Because there is little possibility of recovering debts granted to purchase such assets in later stages, the lenders only offer short-term loans or consumer credits. The interest rates are higher as well, because of the risks involved.
Consumer goods are a whole lot cheaper when compared to real estate properties. Therefore, people often lose track of their indebtedness, especially when they are moving into a new accommodation, and need to buy a whole lot of things. This eventually leads to a situation where there may be defaults on such debts. At times, its merely the number of such consumer credits rather than any financial problem.
In such situation consolidation of the debts is a wiser move. If the credit is good enough to avail consumer credit, then it may also be good enough to get a loan for consolidating the loans. The borrower needs to list out all the monthly dues, and the total number of installments that are outstanding against each different party.
If the borrower has any real estate properties, such consolidation becomes a whole lot easier, as the borrower can take a large mortgage on such properties, which can be used to clear the smaller consumer credits.
By doing so, the borrower will, effectively bring down the monthly outflows, as mortgage loans are repayable in equated monthly installments over a longer tenure than the consumer credits. Though the interest paid out over the longer tenure appears to be higher, it is not so. This is because such delayed payment has to be discounted at the inflation for the respective years. If discounted in this fashion, the interest paid out on mortgage loans will be a whole lot lesser than what the consumer credit lender such as credit card agencies offer.
This, however, is not the only way of consolidating consumer credits. There are credit card agencies that offer a moratorium of specified period, during which they do not charge any interest on the borrowings. Such a feature is meant to attract customers. A creative use of this form of credit may also be made. However, this form of borrowing is essentially for those who are highly disciplined. This is because credit card borrowings carry heavy interest rates at later stages. Therefore it is advisable to clear any outstanding amounts in toto before the expiry of such credit moratorium.
Borrowing on insurance policies or other government securities, including tax saving securities is another way of consolidating the consumer credit. Banks offer overdrafts on many such government or bank securities. These carry considerably higher interest rates. However, there is no time limit here before which the amount is to be repaid. So long a s the borrower pays the interest per month, promptly, there is no danger of losing the rights on the underlying securities. This form of borrowing works on similar lines as the mortgage loans. However, here, the borrower gets to decide how much equated monthly installment he can deposit in the overdraft account. Based on such decision, the repayment period stands extended.
Another advantage of taking loans from banks for consolidating consumer credits is that the interest repaid is deductible against interest earned at the time of income tax calculations. This factor must also be considered while considering the consolidation proposal.
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