Cons and pros of credit

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Loans have long been a part of almost every person's life, and at the moment it is one of the most common banking services that can be offered not only to individuals, but also to legal entities, in order to help them solve their financial problems. Getting a loan today is not a big problem. You just need to provide a minimum of necessary documents, submit an application to the bank, and the terms for approval of such an application, as a rule, are not long at all. Therefore, people actively use this opportunity, because it is very difficult to save money for the purchase of any property or, for example, household appliances, especially when a person needs such property urgently. As with any phenomenon, a loan has its pros and cons. We will talk about this and much more later.

Loan classification

Loans that the bank can provide to citizens are classified according to the followingfeatured:

1. According to the method of repayment, loans are divided into individually defined payments, one-time and annuity, which are the most common and involve monthly payments on the loan in a certain amount.
2. According to the method of collateral, there are also several types of loans - surety, pledge or without collateral. The higher the loan amount, the more guarantees the bank needs in order for the borrower to confirm his solvency. In these cases, the bank may require collateral as security. Most often, such collateral is real estate or vehicles. Or the bank requires a guarantee, which is a written confirmation of such guarantees from third parties. However, a loan without collateral has the advantage that there is no risk of losing the pledged property.
3. According to the loan term. As a rule, the term of a loan does not exceed five years, but if it is a secured loan, then in this case its terms can be much longer.
4. By interest rate.

Next, let's analyze the benefits of a loan.

The advantages of such a phenomenon as lending

In general, this process has a lot of positive aspects:

1. Loan processing does not require a lot of documents, but only a minimum number of them. Depending on what requirements the banking organization puts forward, sometimes the list of documents is limited to only a passport and a driver's license, and a certificate from the place of work andother documents are not required.
2. Short application processing time - just a few days.
3. Ability to receive funds immediately. The obvious advantage of a bank loan is that the client receives money on the day of application, which allows him to realize his plans or solve financial problems as soon as possible. If a bank client needs to make a purchase, then receiving the money immediately, he does not risk his plans, because it often happens that the product that he planned to purchase is sold in a few days and disappears from the counter, or the price for it changes significantly – goods may rise in price.
4. Plus credit - is gradual payments. Currently, almost any client can choose the most suitable loan option for himself. This is due to the fact that banks are constantly reforming and developing their credit system, which allows them to have a sufficient number of customers for their development and prosperity. The loan can be repaid monthly - such loans are called annuity. In this case, the borrower can choose the amount of payment individually, taking into account their financial capabilities
5. Pros of a secured loan - a large cash loan limit and lower interest rates, but you need to evaluate all the risks.

Are there any benefits for institutions?

The advantage of a loan for an enterprise is the ability to expand its field of activity. For some organizations, this banking tool generally serves as the start of work. In addition, there are a variety of lending conditions for enterprises.

What does on-lending mean?

Refinancing (on-lending) is the receipt of a new loan in order to repay the previous loan in another bank on other, more favorable terms. In other words, this is a new loan to pay off the old one.

Pros and cons of refinancing a loan

The advantages of on-lending are as follows:

1. Decrease monthly payments.
2. Change the currency in which payments are made.
3. Combining loans from different banks into one.
4. Lower interest rates.
5. Removing the encumbrance from the pledge.

Disadvantages of refinancing:

1. Additional expenses, meaninglessness of the process.
2. You can combine up to 5 credits into one.
3. Obtaining permission from the lender's bank.

Credit Disadvantages

The main disadvantages of loans include:

• High interest rates on loans, which is the main disadvantage of consumer credit. Provided that this bank loan instrument is one of the most popular, because consumer credit also has advantages.

By providing loans to customers under a simplified system of lending and application processing, the bank experiences huge risks of non-repayment of funds. In these cases, banks do not have enough time to check all the necessary documents and the solvency of the borrower, andsince one of the goals of banks is to attract as many customers as possible, banks are forced to compensate for possible losses in such a way that they benefit in advance from higher interest rates on loans. Interest is calculated according to general principles - the longer the loan repayment period and the larger its amount, the higher the amount the borrower will have to pay as interest, and the higher the overpayment will be if you compare the amount with the original, which is not an obvious advantage of the loan.

Recently, banks began to offer their customers the so-called interest-free loans and advances, which is a very effective marketing ploy. In such cases, the borrower is attracted by bright promotional offers, but he forgets that no bank ever works to the detriment of its financial well-being. Usually in these cases, numerous commissions for issuing a loan and its servicing are disguised as the principal amount of such loans, so the bank does not lose anything here, moreover, it gains the necessary benefit, even if it is minimal.

• During the loan processing procedure, only the official income of the client is considered. If a bank issues a loan only if the borrower has a certificate of income, then this is also a significant disadvantage of lending, since today not every person can boast of having a “white” salary. The borrower does not have the opportunity to confirm other types of earnings, and in these cases he is often denied a loan. Or he can get a loan, but his amountwill be quite small.
• Restrictions related to place of residence and age. Quite often there are cases when banks limit the age limits for borrowers. Thus, neither the too young nor the elderly are given credit. Plus, there are certain requirements regarding the citizenship of the borrower and his place of residence.
• High responsibility, which concerns not only material obligations to the bank. This disadvantage of lending lies in the fact that if the borrower violates the terms of the loan agreement, this may adversely affect his credit history, which in the future significantly complicates or even makes it impossible for this borrower to obtain a loan from this or any other bank. However, sometimes it happens that temporary financial difficulties force the borrower to delay the loan payment by one or more months, and this is already a reason for the bank to note his insolvency and keep it in mind in the future.



• Multiple fees and commissions. When lending, many banks try to offset their costs of advising clients, as well as other work of their employees related to lending. So there are various additional commissions and fees that increase the size of the borrower's interest obligations. According to the law, banks are required to provide the borrower with all the necessary information about the terms of the loan, as well as about all the commissions and additional fees that apply. This is a prerequisite for lendinghow a borrower should have an idea of what financial payments he should be ready for and whether they correspond to his capabilities.

• Psychological factor. If credit disciplines some people, then its presence acts in the opposite direction on others. Many people know how to plan their expenses, others do not. It often happens that the borrower purchases a certain product with credit funds, but over time, the pleasure of buying disappears, the product may become unusable, be lost, etc. However, credit obligations remain and the borrower's responsibility for these obligations remains. Not every person is able to realize this responsibility and predetermine their ability to repay the loan in advance. Over time, such people take loans again and again, finding themselves in a "debt hole", with all the ensuing consequences, in the form of courts and collectors.

  

Leverage credit

A loan should be taken only in cases where you need to purchase some expensive, but at the same time necessary items for life - vehicles, household appliances, furniture, or building materials for the repair of a dwelling. In such cases, it is advisable to take a loan for a short period, approximately 2-3 years, in order to repay it as soon as possible and thereby terminate your material obligations. It is not recommended to take on credit responsibility in case of various kinds of “force majeure”, for example, a loan to pay for treatment or vacation,since in these cases there is too high a risk of not overpowering such liability.

It is very practical to take out a loan in order to purchase a home, because there are special mortgage loans in banks that can take the necessary amount of money at low interest rates.

For those who decide to start their own business

There is a big risk of not paying off the loan in cases where the loan is taken from borrowers to develop their own business. Such a loan should pay for itself within six months, but if this does not happen, the person is at a loss. Financial liabilities grow and accumulate, and if the business does not generate the necessary income, the risk increases even more.

Don't be influenced by shopping

You should not take on credit obligations directly in stores, in cases of purchasing certain goods. Such express loans imply extremely high risks for banks, therefore, in any case, banks compensate for the costs incurred by increasing loan interest. The overpayment for the goods in these cases will be unusually high. When purchasing goods in stores, it is much more profitable to use credit cards. In most cases, with this credit scheme, a one-time commission is charged upon purchase, which is about 20% of the total cost of the purchased goods. However, when returning the goods back to the store, such a commission is usually not returned, as it is considered as payment for services for drawing up a loan agreement.

Bconclusion

Whatever your attitude towards loans, it is important to remember one very important thing. Under any circumstances, you need to carefully read the contract that you conclude with a financial institution. Otherwise, the consequences may not be the most rosy and overshadow your joy from quickly received money.