Pay on time and you won’t get into a non performing loans situation, but if you miss a few payments it can be a major headache. Taking a loan is an investment in the future.
But sometimes, the means are not worth it at the end. Many internal and external factors can affect your loan repayment plans. These can be unforeseen like a calamity and inflation or can be foreshadowed by a poor credit appraisal.
These causes can push the borrowers into a tough situation called non-performing loans. That happens when borrowers don’t pay back on the schedule they were supposed to. Let’s get into how you can avoid that situation.
Causes Of Non-Performing Loans
Inadequate Planning
Most non-performing loans occur because of inadequate planning by the borrower. Sometimes the perks of the loan are too inciting, and borrowers end up taking hefty amounts.
People also sometimes end up taking loans because they see other people doing it. You must make sure you disregard this credit culture and take a loan only if it makes financial sense.
Changes in Real Estate
When rates of properties bought under a loan decreases, the lenders acquire less and less money by seizing the assets of the defaulted borrowers. This results in higher rates of interest and more non-performing loans.
Sudden Market Changes
The market decides the prices of the goods your company is selling. It makes your company’s profit and losses highly prone to market changes.
If the cost of raw material rises and your finished product falls, it becomes impossible for the company to generate enough revenue to pay off loans.
Bank Policies
Few banks provide flexible rates of interest that are subject to market changes. But mostly interest rates are fixed and cannot be tailored to meet the market demands.
Banks sometimes tend not to accommodate borrowers, which results in overall non-performance.
How To Avoid Non-Performing Loans
There are ways you can avoid the non-performance of your loans. Constant vigilance and planning are needed to prevent loan defaults. Take the following measures to reduce the risk of an irredeemable credit.
Carefully Study your Loan Arrangement
Make sure you completely understand the kind of loan you are taking. What the interest-rates are, if they are flexible, what the specified loan term is and what the total cost of acquiring it is.
Use online loan amortization calculators to calculate your estimated monthly-installments and make sure your monthly income is enough to meet the amount.
It is best to compare all similar loans different banks are offering and then choose the cheapest option with the most flexible term.
Borrow exactly as much as you need
You must take a loan only if you have no other option and borrow as little as possible. It does not matter if you are taking an auto loan, a property loan, or an education loan.
It is vital to make as much down payment as you can before resorting to a mortgage. Try to negotiate the price of the commodity with your seller.
Keep track of your loan and resources
You must be highly organized while repaying a debt. It is essential to manage your finances carefully. The best way to do this is to keep track of your earnings and spendings and to keep all the receipts handy.
You must also keep a hard copy and software record of your loan documents like the promissory note, financial aid offers, and amounts of all the loans you borrow, payment schedules, and loan disclosures.
You can keep track of your student loans on the Student Finance website, UK.
Keep sufficient balance
It is best to keep sufficient funds in your bank account till your repayment term lasts. You must save money worth installments of up to three months separately and not touch it until there is an emergency.
It will buy you at least a few months to sort your finances while saving your loans for non-performance.
Rescheduling Your Loan
Some financial institutions have flexible loan terms. If your business is progressing towards possible insolvency or you think your repayment term is too short, you can negotiate with your lender to adjust the due dates and extend the loan tenure.
It will decrease your monthly installments while resulting in higher overall repayment value. But it will give you more time and take a lot of pressure off your shoulders.