|
By Andrew Baker
Loans are not of a recent origin. People used to take help
from others even at times when money was unseen and barter
was the mode of trade prevalent. However, the form of loans
has changed over time. In those days the loans used to be
offered in kind. Now, they are offered in money or in terms
of money.
However, the concern for the safety of the amount lent has
not changed a bit. The most preferred loans are those which
are offered with sufficient backing. The backing in most cases
is of the house and property of the borrower. Thus, these
are also known as loans for homeowners.
Loans for homeowners, as can be recollected from the above
are loans which are offered to homeowners with home or property
serving as a collateral. These accrue interest at a certain
rate which is added to the principal amount. They are repayable
through small instalments or any method desired by the borrowers.
Offering the home as collateral does not cease the rights
of the borrowers as the owner of the home. Though the lender
holds the ownership rights to the home, these are exercisable
only when the borrower does not repay the entire amount of
the loan. The borrower stays in the home and even regains
the rights when the final instalment to the loan is paid.
Borrowers can sell off the home put as collateral, provided
it is allowed by the lender. They will however have to repay
the entire amount of the loan with the sale proceedings received.
Alternatively, the loan will be attached to the new home or
property purchased.
But, can the worst nightmare regarding the repossession of
home ever come true? Yes it can. The lenders will, after resorting
to all steps to get the money back, resort to repossession
of the home, if the borrower does not repay the loan in full.
The failure in making payments to the loan is generally attributed
to an intentional default on the part of the borrower. Though
the reason cannot be altogether cancelled out, the cases are
relatively less. Seldom will borrowers desire to endanger
their homes by being irregular in the repayments.
A more relevant reason explaining the defaults are the wrong
decisions that people tend to make when going for loans. Most
of the decisions are made in haste or without having a proper
knowledge of the subject. People rarely foresee the effects
the decision can have on the future of the loan. These make
the repayments difficult. People try to provide for them with
their limited monthly incomes. When they cannot or when other
important expenditures take a major share on the income, they
default on the repayments.
The following section will describe the wrong decisions made
by borrowers and how they can improve their state by learning
from their mistakes.
Decision on the amount of loan:
This is the biggest mistake that people tend to make when
looking for loans. Had the loans required no repayment, there
would have been no limits to the borrowings. Since these are
to be repaid along with an interest for the period, it will
be necessary to consider carefully ones repayment capacity
before deciding the amount of loan. Not only the present income
but the projected income at the time of repayment will have
to be considered while deciding the amount. The amount of
equity in the home also decides the loan granted. However,
it will not be advisable to exhaust the equity in home at
one single instance.
Decision on the interest rate
Who thought interest is simply a single digit factor having
not much of significance in the final cost. The search process
can be time taking. People take up loans with interest rates
higher than what they are eligible to get.
Interest is set as a percentage of the loan amount. It is
dependant on a number of factors like the interest rate prevalent
in the market, type of loan taken, case factors of the borrower,
etc. Thus the interest charged may differ with the lenders.
People can get exclusive deals in loans if a proper search
is made. Awareness of the various interest options like discounted
interest rate, capped rate, and fixed rate can also help lower
the cost of repayments.
Decision on the loan provider
The loan provider as we learnt plays an important role in
the loans for homeowners. The offerings of the lenders may
differ because of the discounts and offers appended. A reputable
lender is attached to many more lenders. Thus a single application
is routed to hundreds of other lenders. This increases the
size of lenders available. There are many more advantages
of dealing with the reputable lenders. The service that these
lenders provide is more trustworthy. They comply with the
legal and quality certifications in offering the financial
products, thus making their services unmatched.
Decision on repayment
The borrower rids himself of the loan by repaying the amount.
The most conventional form of repayment is through monthly
or quarterly instalments. This is useful for the borrowers
who receive a fixed income. The instalment is chosen by the
borrower according to his income. Borrowers can lessen the
amount of monthly repayments by paying only the interest.
This is an interest only method of making repayments. Repayments
can also be made all at once to save on the interest cost.
According to an old maxim it is human to do mistakes, but
it is foolish to repeat the mistakes. The experiences with
a former loan can serve as a lesson for those who are struggling
to come out of the loan trap. The first timers in the loans
market however do not need to take the dip to learn the ways
of the loan market. Learning from the experiences of the predecessors
can protect them from being trapped in such deals.
Summary
Getting loans is easier for homeowners. However with the home
at stake they need to tread with care. One wrong decision
and they lose their home to the lender. Barring loans from
the sources of finance altogether will not be a viable solution
though. Loans used with caution minimise their ill-effects.
The borrowers must be aware of the intricacies of the loan
and make a thorough search of the market to access that the
loan product is the best he could have, before conceding to
loan agreement. Though the chances of default cannot be altogether
cancelled out, these can at least lessen its chances.
Andrew baker has done his masters in finance from CPIT. He
is engaged in providing free, professional, and independent
advice to the residents of the UK.He works for the personal
loan web site http://www.loansfiesta.co.uk for any type of
uk secured loans and unsecured loan please visit http://www.loansfiesta.co.uk
|
