When you raise funds for your real estate purchase by using your existing property as collateral, it is known as a mortgage. If the borrower defaults the payments, the lender can take possession of the property and use it to cover his losses or recover his money.
Based on the Federal Reserve Bank of New York, the US mortgage loan currently stands at $11.7 trillion amongst 40 Million individuals. Mortgage loans can be tricky and one has to be careful while availing it. Typically, a mortgage loan could last over 5 – 25 years. They are either medium or long term loan.
Below are top 10 things to consider before you take out a loan –
Read the fine print: Read through the reams of document to know exactly what you are getting into. Often, mortgage and loan related papers are verified through an attorney with debt specialization.
Long term impact on financials: Mortgage loan is a long term commitment, one has to consider the impact on your budget
False representation: Declaring your assets and liabilities appropriately is pertinent; not doing so could lead to complications at a later date.
Interest rate comparison: Often, loans are taken on an impulse. Interest rates should be compared and one that is most attractive should be availed. Many builders provide a list of lenders who are pre-approved. This means, lesser paper work and quick disbursement of loan. It is important to shop around before you avail mortgage loan.
Negotiate: You can negotiate on the realty price on offer. Similarly you can negotiate for the best interest rate on mortgage loan. If the interest rate is unalterable, there are changes that you could avail a discount on processing or other such charges.
Floating loans vs. Fixed loans: Floating interest rates may work well if the interest rate market has peaked and there could be a downward trend in the market. Fixed rates could work if the direction is uncertain or there is a likelihood of upward trend.
Overall cost: There are other costs involved apart from the equated monthly installments. Costs such as processing, pre-closure, late payment other penalties etc., You should understand how these could impact your budget
Insurance: Mortgage loans are expensive affairs, for both the parties – lender and borrower, it is highly risky. Hence, lenders insist on availing an insurance to ensure that the equated monthly installments continue to be paid off even in case of defaults.
Overextending yourself: Assessing how much you can afford now and in the future. Often financial institutions try to push higher loans which will help them get additional business. It is not advisable to approach a bank / financial institution to assess how much loan you could afford. Approach a financial consultant or wealth planner who could guide appropriately.
Maintaining financial discipline: It is important that you stay on course and don’t go overboard with adding more debt or getting new credit cards. Any large purchases should also be avoided to make sure that it doesn’t dent your budget plan.
What is a personal loan?
Personal loans are also called consumer loans or signature loan. They do not have any underlying collateral. Typically, the loan amount is smaller than in the case of mortgage loan. These are extended purely based on the credit worthiness of the borrower and their ability to repay. Most personal loans come with high interest rates between 12% P.A to 30% P.A.
Top 10 things to consider while you take out a personal loan
Debt trap: Many individuals borrow to pay off another loan and are caught neck deep in debt which becomes too tough to untangle.
Credit score: For personal loans, maintaining a high credit score is pertinent. Paying bills and loans on time will ensure a good credit score.
Assessing repayment capacity: The payment capacity of the borrower has to be assessed properly. Considering future incomes that are uncertain like a bonus or inheritance can result in over estimation.
Misrepresentation of existing debt: Though hiding your existing debts could get you a better loan from your lender, it will result in legal actions when the lender learns about it.
Reading documents: read the offer document very carefully and note all the conditions stated. Penalties in case of late payment and legal implications on non-payment are important aspects to consider before signing the dotted line.
Don’t Over Indulge: Personal loans can be availed for any purpose, for any amount. When you take a loan to satisfy your fantasies, think about the long term implication, before signing the papers.
Proper documentation: Loans get processed faster if all the documents are in place. It is best to avail the assistance of the bank personnel and get the documentation appropriate.
Need vs. want: While taking a personal loan, assess if there is an actual need to take out the loan. Check if you can avoid it or choose to raise funds from alternate sources.
Choosing tenure: Although, it may sound foolhardy to take in a large EMI with short tenure. It works out well in the long run cost-wise. However, make sure that the EMI does not affect your monthly budget.
Include your family in your finances: When you take out a loan, inform your family. They should understand the impact of the cash outflow on the budget. You could also discuss to see if there are alternate sources of raising funds.
What is a student loan?
Many students use education loans to fund their college expenses. These loans help students to pay post-secondary (Post graduation) tuition fee and other associated fees such as supplies, books, residential expenses etc.
The repayment of such loans is deferred till the student graduates or finds a job whichever, is earlier. The regulations that govern student loans differ from country to country.
Student loans in USA
Student loans are offered as a package aid to cater to tuition fee, grants, scholarships, work/study options. The interest paid towards student loan is not tax deductible.
Two types of student loans are offered in USA – Federal loans and private student loans.
Point of difference
Private student loans
Other financial institutions including banks
No interest accrues while in school / college
Interest accrues on loan disbursement
Income based repayment available
Normal repayment schedule
The repayment begins after graduation or on procuring a job, whichever is earlier. The student can also opt for income based repayment in Federal Loans. This allows the borrower to repay based on what income he makes, independent of the amount he actually borrowed. This is available only under the Federal loans and not under private student loans.
Debt forgiveness is an interesting aspect of the repayment method in Federal Loans. Typically after a 10 year period, the outstanding balance is forgiven, if the student is working in the public sector. In case the student is working in the private sector, the period is 25 years. In case of bankruptcy and insolvency, debt forgiveness income which otherwise becomes a taxable income, is excluded.
Top things to consider while you take out a student loan – Federal loans
Loan tenure: Although keeping the tenure short is ideal cost-wise, the repayment should not be burdensome. Hence, it is best to first get an idea of typical salaries for new entrants in your field. Then you could decide on the loan tenure.
Read the fine print: Read through the document. A loan is a financial commitment. Irrespective of whether you graduate or not, find an employment or not, the repayment has to take place as per agreement.
Update your loan servicer: Ensure that you update the loan servicer on any problems you may face – dropping out of college, getting a transfer, drop below half-time status, finding it difficult to gain employment etc. The loan services will have multiple options which will to enable you to keep the loan off the bad loan list. Getting into the bad loan list will bring down your credit worthiness drastically.
No partial payments: The equated monthly installments are to be paid in full. There cannot be any partial payments and it has to be done on time. The repayment schedule is fairly relaxed in case of student loans.
Top things to consider while you take out a student loan – private loans
Take a private loan only if you don’t qualify for a federal loan. Some colleges or schools may not be eligible for federal loans. You should always double check if there are chances that you could qualify for a federal student loan.
The cost of private student loan is significantly higher than the federal student loan. Instead of merely comparing the interest rates, consider the overall costs and tax deductions to make the comparison effective.
With very limited knowledge on your finance, you are bound to over extend yourself. Include adults, experts to help you avail a loan which you can afford to repay.
Private loans are often offered with lower interest rates in the initial years, but they could easily double or even triple over a long haul. Some banks have started offering fixed interest private loans for shorter periods; others offer the option of converting a floating rate loan into a fixed rate loan.
Credit checks are run on students who seek private loans. Since they do not have a long standing credit history, often a co-signer is required. A co-signer will have to repay the outstanding amount in case the student is unable to make the repayment as per schedule.
What does it mean to take out a loan with no credit?
Sometimes, you may need to take out a loan without much of a credit history. You may have very less or no money in your savings bank account. No credit cards in your name.
In such cases, the bank may lend using the title of the investment (real estate, household item etc.,) as collateral. Else, it may insist on a co-signer who is willing to assure the repayment of the loan. The interest rates are typically higher here and you would be eligible for lower loan amounts.
What does it mean to take out a loan with bad credit?
You may have defaulted in the past on credit card bills, loan repayments which is likely to reflect badly on your credit history. Maintaining a good credit score is pertinent for loan borrowings. Here again, the interest rates may be high and loan amount lent would be lower. In some cases, they may insist on a co-signer.
Does it make sense to take out a loan to pay off credit cards?
This is a typical way to get into a debt trap. Credit card bills penalize late payments. The penalty could range from a nominal 1% per month to 3% per month, in some cases even higher. If the loan you are borrowing offers a lower interest payment (as compared to the penalty rate), it may make sense to borrow and repay your credit card bill.
However, it is best to assess if you can raise funds from other means such as borrowings from friends / relatives, taking interest free advances at work etc.
To avoid such situations, cap your credit card usage to the extent that you can comfortably repay. Once you get into a debt trap it becomes almost impossible to get out of it unscathed.
Irrespective of the type of loan you avail, make sure it does not affect your household budget. Repay them on time to maintain a good credit history. Shop around for availing the optimal rates.