Loans have long become a part of the life of almost every person, 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 deal. It is only necessary to provide a minimum of necessary documents, submit an application to the bank, and the approval terms for such an application, as a rule, are not very long. Therefore, people are actively using this opportunity, because it is very difficult to save money to buy any property or, for example, household appliances, especially when a person needs this property urgently. As with any phenomenon, a loan has its pros and cons. We will talk about this and much more later.
Credit classification
Loans that a bank can provide to citizens are classified according to the following criteria:
- By the method of repayment, loans are divided into individually defined payments, one-time and annuity, which are the most common and involve payments on the loan in a certain amount monthly.
- By the method of collateral, there are also several types of loans - surety, pledge or without collateral. The higher the size of the loan, the more guarantees the bank needs in order for the borrower to confirm his solvency. In these cases, the bank may require a security deposit in the form of security. Most often, such a guarantee is real estate or vehicles. Or the bank requires a guarantee, which is a written confirmation of such guarantees from third parties. However, the advantage of a loan without collateral is the absence of the risk of loss of mortgaged property.
- By loan term. As a rule, the loan term does not exceed five years, but if it is a secured loan, then its terms can be much longer.
- According to the size of the interest rate.
Next, let's analyze the advantages of a loan.
Advantages of the phenomenon of lending
In general, this process has a lot of positive aspects:
- To obtain a loan does not require a lot of documents, but only the minimum number of them. Depending on what requirements a banking organization makes, sometimes the list of documents is limited only to a passport and driver’s license, and a certificate of employment and other documents do not require.
- A short application review period is just a few days.
- The ability to receive funds immediately. The obvious advantage of a loan at the bank is that the client receives money on the day of treatment, which allows him to quickly realize his plans or solve financial problems. If a bank client is required to make a purchase, then receiving 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 - the goods may rise in price.
- Plus credit - this is the gradual repayment. Currently, almost any client can choose the most suitable loan option for themselves. This is due to the fact that banks are constantly reforming and developing their credit system, which allows them to have enough customers for their development and prosperity. A loan can be repaid on a monthly basis - such loans are called annuity. In this case, the borrower can individually select the amount of payment, taking into account his financial capabilities.
- The advantages of a secured loan are a large limit on a cash loan and lower interest, however, all risks must be assessed.
Is there any benefit to institutions?
An advantage of a loan for an enterprise is the ability to expand its field of activity. For some organizations, this banking tool is generally the beginning of work. In addition, lending conditions for enterprises are very different.
What does re-lending mean?
Refinancing (refinancing) is the receipt of a new loan in order to repay a previous loan in another bank on other, more favorable terms. In other words, this is a new loan to pay off the old.
Pros and Cons of Loan Refinancing
Advantages of on-lending are as follows:
- Reducing the size of monthly payments.
- Change of currency in which payments are made.
- Consolidation of loans in different banks into one.
- Interest rate reduction.
- Removal of encumbrance from bail.
Disadvantages of refinancing:
- Additional expenses, the meaninglessness of the process.
- A maximum of 5 credits can be combined into one.
- Obtaining permission from the lender's bank.
Loan Disadvantages
The main disadvantages of loans include:
- High interest rates on loans, which is the main drawback of a consumer loan. Provided that this bank loan instrument is one of the most popular, after all, consumer credit also has advantages.
By providing loans to customers through a simplified lending and application processing system, the bank experiences enormous risks of non-repayment of funds. In these cases, banks do not have enough time to check all the necessary documents and solvency of the borrower, and since 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 from an increase in interest in advance loan rates. Interest is accrued 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 if you compare the amount with the original, which is not an obvious plus of the loan.
Recently, banks began to offer their customers so-called interest-free loans and borrowings, which is a very effective marketing move. In such cases, the borrower is attracted by bright advertising offers, but he forgets that no bank ever works to the detriment of its financial well-being. Usually in these cases, under the principal amount of such loans, numerous commissions for granting a loan and servicing it are disguised, therefore the bank does not lose anything here, moreover, it acquires the necessary benefit, even if it is minimal.
- During the process of applying for a loan, only the official income of the client is considered. If a bank grants a loan only if there is a certificate of borrower income, this is also a significant minus of lending, since today not everyone can boast of having a “white” salary. The borrower is not able to confirm other types of earnings, and in these cases he is often refused a loan. Or he can get a loan, but its amount will be very small.
- Restrictions related to residence and age. Quite often, when banks limit the age limits for borrowers. Thus, neither too young nor old people are given a loan. In addition, 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 minus of lending is that if the borrower violates the terms of the loan agreement, this can negatively affect his credit history, which in the future will significantly complicate or even make it impossible for the borrower to obtain a loan in this or any other bank. However, sometimes it happens that temporary financial difficulties force the borrower to delay the loan payment for one or several months, and this is the basis for the bank to note its insolvency and in the future had this in mind.
- Numerous 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 amount of interest obligations of the borrower. According to the law, banks are obliged 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 collected. This is a necessary condition for lending, as the borrower must have an idea of what financial payments he should be prepared for and whether they correspond to his capabilities.
- The psychological factor. If some people are disciplined by credit, then on others its availability acts completely in the opposite direction. Many people know how to plan their expenses, others do not. It often happens that a borrower purchases a certain product with credit funds, but over time the pleasure of the purchase disappears, the product may become unusable, be lost, etc. Nevertheless, loan obligations remain and the borrower remains liable for these obligations. Not every person is able to realize this responsibility and predetermine their ability to pay a loan in advance. Over time, such people take loans more and more, finding themselves in a "debt hole", with all the ensuing consequences, in the form of ships and collectors.
Rational use of loans
A loan should be taken only in those cases when it is required to purchase any expensive, but at the same time necessary for life items - vehicles, household appliances, furniture, or building materials for the repair of a residential building. In such cases, it is advisable to take a loan for a short period, about 2-3 years, in order to pay it off as soon as possible and thereby stop your financial obligations. It is not recommended to take credit responsibility in case of all kinds of “force majeure”, for example, a loan to pay for treatment or rest, since in these cases there is too high risk of not overpowering such liability.
It is very practical to take a loan in order to purchase housing, because banks have special mortgage loans that can take the necessary amount of money at low interest rates.
For those who decide to start their own business
A big risk is not to pay off the loan in cases where a loan is taken from borrowers to develop their own business. Such a loan must pay off itself within six months, but if this does not happen, the person is at a loss. Material obligations grow and accumulate, and if the business does not bring the necessary income, the risk increases even more.
Resist the influence of shopping
It is not necessary to incur credit obligations directly in stores, in cases of the purchase of certain goods. Such express loans imply extremely high risks for banks, therefore, in any case, banks compensate for the costs incurred by increasing credit interest. Overpayment for 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 such a lending scheme, a one-time commission is charged upon purchase, amounting to 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, since it is considered in the form of payment for services on drawing up a loan agreement.
Finally
Whatever your attitude towards loans, it is important to remember one very important thing. In 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 will overshadow your joy from quickly received money.