Loans are nothing special. At present, one in three American citizens has an active loan. These include mortgages, hire purchase, car leasing, credit cards and building society loans. Paradoxically, while mortgages and multi-million crowns are usually repaid properly and on time, small loans are often a problem. How is it possible?
Negotiating a small loan, such as microloans, payday loans or other smaller non-bank loans, is very easy and fast. Unlike a mortgage, where the income is documented, carefully checks the creditworthiness of the client and the administration takes quite a lot of time, for small loans, obtaining funds is often only a matter of moments.
This makes small loans easily available. And because these are small amounts, such a loan comes to people at risk. However, it is precisely in the ease of execution that their dangers lie.
Frequent execution due to small loans
The Counseling Center for Financial Distress states that up to 85% of executions concern loans up to $ 10,000. There are several reasons why people are not paying off such low loans:
- People have more loans and simply do not orientate in their repayment. If they do not have a standing order in their bank, they can easily forget one of them. While for mortgages, the bank usually “deducts” the amount from its account, for smaller loans nobody will.
Several credit cards are enough and it may happen that some installments are easily forgotten.
- People take a small loan to pay another debt. However, they are getting into a debt spiral, from which they also do not have to get out. With this procedure, it is highly unlikely that the debtor’s financial situation will suddenly change, and it can be almost confident that he will have the problem of paying off a new debt just like the old one.
- People’s financial literacy is generally improving. Yet there are those who cannot calculate what their overall budget will “carry” and what they do not. A low credit, where the repayment is in the hundreds, does not place a disproportionate burden on the budget. This is certainly true, but if several such loans come together, it may already be a problem.
In general, while mortgages and higher loans are carefully thought out, smaller loans do not. And this leads to problems with their repayment. On the other hand, the statistics of the Non-Bank and Banking Register of Client Information for the second quarter of 2019 indicate that the total debt of the American population increased to $ 2.38 trillion, but the Americans are better off.
The number of debtors decreased in both long-term and short-term loans. While long-term loans are already a long-term trend, short-term loans show a more significant reduction in the number of debtors only less than a year back.
Solutions in the form of refinancing or consolidation
Conditions in the banking and non-banking markets are constantly evolving and changing. In this context, of course, there are different offers of loans at different times and it may happen that one undertakes to repay the loan under conditions that appear to be quite disadvantageous in a few months or years.
You can reduce your monthly installments and thus save money by refinancing. It is essentially an early repayment of an existing loan through a new loan. The applicant applies for a different bank than the one in which he has the original loan. It is advantageous for both parties – the bank gets a new client and the client usually gets more favorable terms.
A situation where one is bothered by repayment of several loans at the same time and ceases to orient in them will be solved by consolidation. It is a combination of several loans into only one loan. Usually this saves the client again, at least on the fees for individual loans. Debt from banks and non-banking institutions, credit card debts, overdrafts or leases can be included in loan consolidation.
Both consolidation and refinancing cannot do without sufficient examination of the applicant’s financial situation. The client’s income and overall creditworthiness are usually assessed.