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Posted on Friday March 27th, 2020

Nowadays with the widespread of lending institutions, the great offers are provided by lenders to lure the borrowers to grab them particularly in the aspect of interest rates. When we are shopping for a loan, it would naturally seem that the lower the interest rate would be the better deal. However, that may not always be true, for number of reasons, and one of those reasons is that sometimes the interest rate we receive on a loan is outside of our budget. When you avail a loan, there are a few components that make-up the loan itself such as how much you are asking to borrow, how long you wish to borrow the money for, your credit score and credit history and the rate of interest. The rate of interest for a loan is important to the borrower, as it determines how much the loan is going to cost you. The higher the interest rate, the more money the lender makes off the loan. This fact makes a Lower Interest Rate Loan seem like a better deal but the amount of interest depends upon the repayments period of the loan.

What Determines the Interest Rates on Loans?
Every lenders use various criteria to determine the interest rate for a loan such as loan amount, term, and credit scores. For instance, if the loan has a low interest rate, which seems appealing, but the term is only 12 months, then it draws high monthly payment which may not be a best deal for you. So a shorter term means lower interest rate, but higher monthly payment whereas a longer term means higher interest rate, but more affordable payments. Most of the lenders use the tenure as a strong basis for the rate offered as shorter term loan means lender will get their money back quicker.

Credit Score: Your credit score can be used to determine the interest rate for a loan. Higher will be your credit score, then lower interest rate you can receive for a loan and vice versa. Sometimes the interest rates are negotiable; you can always ask the lender about lower interest rates. If you have bad credit and need a loan, you will be considered a high risk, you will be charged a higher than usual interest rate.

Early Repayment Penalties: If a lower interest rate is a better deal or not, we need to be aware of how long we will be paying the loan back as well as early payment charges or pre-payment penalties. The percentage or fee can change on a sliding scale depending on how early we Repay the Loan. To exemplify, if we have a loan that was to be for 36 months, and look to pay it off in 12 months, the pre-payment penalty may be higher than paying the loan off early after 24 months. The reason for these pre-payment penalties is due to the fact that every lender expects to be earning a certain amount of interest during the full term of loan.

So shopping for a loan can get complicated, if we get attracted towards what may seem to be a low interest rate, but remember there are other factors to take into consideration while applying a loan.

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Posted on Monday February 17th, 2020

A loan guarantor can be a family person, friend or colleague who is legally liable to pay off the outstanding loan amount in case if the primary borrower is unable to repay it. Initially, it seems very simple that it’s just a matter of doing signature only but there is lot more to it. If the primary applicant does the timely repayments then there is nothing to worry about but if he starts skipping EMIs then lender can reach out to the guarantor and ask him to pay the outstanding amount. If both the borrower and guarantor fail to Repay the loan then lender can take legal actions against both the borrower and guarantor too. In this article, we have mentioned few things to keep in mind Being a Loan Guarantor that one should not take lightly.

Impact on your Credit Score: When you sign as a guarantor for someone else and the loan is defaulted, it negatively impacts the credit report of guarantor. However, if the applicant is prompt and repay the loan in timely manner then there will be a good impact on both the borrower’s and guarantor’s credit score.

Impact on your assets: In case of default, if the primary borrower is able to repay the loan then lender will initially try to liquidate the borrower’s collateral to recover money. If the borrower denies or escapes out then lender may ask you to pay off the outstanding amount. If you are unable to pay off then lender can seize and liquidate any of your personal asset such as land, property, etc. to recover the loan money.

Impact on the eligibility to get credit: If you are a guarantor for any loan then it will be counted on your open lines of credit, therefore, your personal eligibility will be hampered but if there is default then your credit score will take a hit too. In that case, if you want to Apply For Any Loan then you may face difficulty due to poor credit rating.

Read the agreement clauses carefully: You must always be careful being a loan guarantor with the clauses in loan agreement that what will happen to the obligations of a guarantor in case of default. For instance, in case where the primary applicant dies or partners get separated after divorce, in these circumstances, loan should not be passes onto heirs.

Track the repayments yourself: Always keeps an eye on the repayments regarding the loan for which you have signed up as guarantor. A single default in monthly installments can be reflected in your credit report too, so be attentive and take an regular update regarding the loan repayments.

After reading all this, it is important for you not to take the role of guarantor lightly and be sure and keep these things in mind before signing up the agreement because you cannot back out later till there can be a suitable replacement and the primary applicant should agrees to do so.

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Posted on Thursday January 9th, 2020

In India, loan defaults and frauds are the major reason behind unpaid loans. Lenders believe lending is risk free when borrower have a good credit score and a regular income source but recent slowdown in economy, vanishing jobs and increased unemployment in the country has led to a rise in number of loan defaulters. The majorly popular loans in India are Home loan, loan against property, Gold loan, Used car loan, Machinery Loan, Business loan, Personal loan etc. These loans have been classified into two categories; one is secured loan and second is unsecured loan. There are Some Reasons You Should Know Behind Loan Defaults such as delays in salaries, job loss and business turn down are some of the top reasons for debt defaults.

Delay in Salary: It is the most common reason behind 40% of the loan defaults in India. The salary delay is common whether you are in government job or private job. Therefore, borrower is no left with any other option of delayed payment of loan for more than a month affecting your credit report.

Job Loss: As the Indian economy has been slowing down after demonetization, the number of job losses has increased and in such a case, borrower is left with no money to repay his/her ongoing monthly installments.

Business Loan: Business is always unpredictable where nothing is sure and most of the business owners take a working capital loan for the smooth operation of their venture. In case of any loss or failure, the repayment of the loan becomes tough leading to loan default.

Frauds: It might sound unrealistic but fraud is one of the major reason of loan default because some people take loans with a pre-planned intention of not to repay it. It is difficult to qualify for a loan without having legal documents still some manage to do so. Some of them misguide the lender and get underground not to Repay the Loan Amount.

The defaults are most common in business loans and personal loans as they are unsecured, so in that case of fraud borrowers do not pledge collateral equivalent to the borrowed amount and later on they do not repay. The consequences related to loan defaults are additional charges and penalties, drop in credit score, less chances to qualify for future credit, loss of ownership of collateral with lots of stress and tension. When you are not able to repay the loan for more than 3 months, the lender will send you a legal notice if you do not take any considerable step. The court will provide you a time period to repay the amount but if you failed to utilize that time, then your collateral will be considered as non-performing asset.

In order to lessen the defaults in country, every lending institution needs to tighten their loan eligibility and have a thorough check on the borrower’s repayment history and job security. Moreover, in case of business loans, every lender needs to be more sure about the repayment before they lend.