Pre-approved

The biggest benefit that is touted in the loan offerings is that the amount is pre-approved. It is shown as if the amount has already been given to the individual. The person to whom this is addressed has to understand that this is not some great benefit being given free but that there is a cost attached to the whole thing because there will be an interest to be paid. The process for getting the amount is not very long but this might not be the best route that a person can take for the purpose of getting a loan.

Interest rate

The interest rate is the most vital point in the whole transaction. And this is where the individual often ends up paying a heavy price. This is because the interest rate that is charged on the loan is quite high standing at over 20% in quite a few cases. This will be seen to be higher than what people can manage under the various different routes through which they can normally get a loan. Often there is no need for a person to pay such a high amount of cost but still people use the loan because it is present to them and available easily.

Other charges

One also has to be aware of several other charges that will enter the fray when the loan is taken. Often there is a processing fee that comes into the picture. Similarly there might be some other charge and this has to be checked for individual cases. All this keeps on adding to the cost for the individual who is taking the loan or making use of the available money.

Final decision

On the whole the person taking the loan needs to have a clear picture of why they are looking at this area for the source of their funding. In most cases there might be other alternatives available where a little bit of work could end up lowering the cost for the individual.

So, here are the summary of points to consider

• Pre-approved loans are not always the best choice
• Convenience comes at a price and are expensive
• There are extra cost involved and interest can go beyond 20%
• Always look for other alternative choice that can save you a lot on your loan

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I wasn’t aware that India has setup institutes where you can get Credit Counselling to reorganize your debt and prevent your income from eroding. You can overcome the debt burden and improve your money management skills too. Abhay and Disha are two initiatives, supported by the Bank of India and ICIC Bank Limited, started in early 2007. They cover the broad categories of - Financial Education, Credit Counselling and Debt Management.

Most developed countries have a centralized counselling centre, started by a number of banking companies together. The National Foundation for Credit Counselling (NFCC) in the US and Consumer Credit Counselling Service (CCCS) in UK are similar initiatives setup in 1951 and 1993 respectively. Other developed countries like Canada and Singapore have similar centers.

These centers conduct one-on-one sessions with financially distressed borrowers. They then contact the nodal officers of banks involved and brief them on the broad indebtedness of the borrower. They usually follow 3

1. examine ways to solve current financial problems
2. create awareness about the costs of misusing credit (it improves financial management and develops realistic spending plans)
3. advises distressed people on gaining access to the structured financial system, including banking

There are even options for pre-credit and post-credit counselling. Pre-credit counselling helps borrowers to decide upon the quantum of loans they can avail, based on their income profile and stream of cash flows. More importantly, the institutes attempts to influence the stability of the borrowers’ flow of income and expenses, thereby lowering the probability of default. Post counselling typically occurs after a crash event, when the borrower has already missed one or several payments.

So, Credit Counselling can help you reset and then restart your life all over again.

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