Consumer debt consolidation
Consumer debts are those debts that are incurred on purchasing consumer goods such as cars, refrigerators, television sets, computers, air conditioners, blenders, microwaves, and coffee makers. These goods are costlier than the regular grocery stores items, and last for a long time. However, they have a limited lifespan unlike other assets like antiques, artworks, and houses. And unlike wood that needs to be transformed into furniture to become useful to mankind, these goods can be used directly.
Lenders offer a variety of loans on costlier assets such as houses, jewelry, antiques and artworks. These assets may be pledged, hypothecated, pawned or mortgaged, depending on the type of assets. The loans may be for short or long-term. This is because the value of these assets tends to appreciate over a period, unlike television sets, and cars. With every new model of car or new technology in the market, the value of the previous model or technology depreciates . However, the value of these rarely touches zero within a short span.
Because of the inherent appreciation potential of costlier assets, lenders are more amenable to offer loans on such assets at interest rates that are lower than the prevailing market rates for other purposes. The lenders perceive this appreciation potential in these assets as a form of security for their funds and interests.
Purchasing these costlier class of assets requires planning. They cant be bought just like a candy. Therefore, the quantum of business of this class is much lower . As the risks involved are much lower than in other forms of lending, lenders offer loans for even purchasing such assets, instead of traditional pawning and mortgage loans.
Like the costlier class of assets, if consumer goods like cars are sold within their limited lifespan, they too fetch some residual value, unlike for example, a used cake of soap. Therefore, they too offer lenders an opportunity to earn some profits in form of interests. However, loans for purchasing consumer goods are given on short term, which may at the most extend to 5 or 7 years. The lender decides the term, depending on lifespan of the asset class.
Additional security on other assets is not taken; therefore, these consumer goods loans are the closest to being unsecured loans . These loans also carry much higher rate of interest than house loans and the like .
Sometimes the refrigerator gives way, at other times, it could be the geyser or the car. These are the indispensable comforts of life now. Therefore, wittingly or unwittingly, at times rather optimistically, many people end up accumulating a lot of consumer debts, and then laboriously struggle to pay off the debts.
Whenever the outflows towards loan repayments, whether short-term or long-term, exceed 20 percent of the income, then the borrower is in serious trouble. Therefore, caution must be exercised when contracting a debt . Quite often, it is possible to postpone the requirement, or even do without it, like the second car, which may not be all that necessary.
Consolidation of consumer debts is a popular way of bringing down the interest burden. For this, the borrower prepares a list of all the debts along with the rates of interest. He then ranks them in order of preference, that is, the most preferred debt is the one that carries the least interest rate. Borrower must bear in mind that if the interest is calculated on reduced balance of the principal, then effectively it is much lower than the same rate of interest calculated on the entire principal.
Sometimes it is possible for borrower to obtain additional loans on existing mortgages. Mortgage loans on assets such as homes are long-term loans . The value of underlying property, that is the house, increases over a period, making the borrower eligible to borrower some more funds against the same property. Additional advantage is the fact that these loans carry much lower interest rates .
If the borrower has paid the installments of mortgage loans regularly, then the lender would be more inclined to loan him additional funds for consolidating consumer debts. This is because the lender is assured of a reliable customer for the additional funds . If the lender were to lend these additional funds to new customers as consumer loans, there would be an element of risk apart from the fact that every couple of years, the lender would have to search for a new financial responsible customer. Moreover, if the consumer becomes insolvent, then he could approach the bankruptcy court, forcing even the secured loans providers to compromise on some component of their loans.
Therefore, offering such additional loans on long-term to the borrower guarantees the recovery of the existing debt, apart from giving a new and reliable business to the lender.
From borrowers perspective, such mortgage loan is definitely a whole lot cheaper, and the loan being long-term, installments are much lower than the short-term loans. This makes the loans affordable as well as brings down the percentage of installments going out every month towards loan repayments.
Apart from extending the mortgage or taking a second mortgage on an asset, borrower could also get a good bargain from an existing lender, willing to takeover all or some of the other consumer loans. Here too, the regularity of payment counts, and the financially responsible nature of the borrower is considered.
Taking consumer loans from various sources has another major drawback. Not all debts start on the same day, therefore, it is possible that repayment of a debt or two slips the mind, and adequate provision is not made in the monthly budget for repayment of this debt. Such inadvertent failures can set off a series of calls and reports to credit rating agencies.
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