9 Commonly Used Consolidation Loan Terms You Need to Know

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Consolidation Loan Terms Commonly Used by India Banks

Looking for a loan to lower your debt burden? Learn the commonly used terms for consolidation loans first.

Many people try to reduce their debt burden, whatever be the amount, by partially or completely paying off their debt by leveraging the power of their assets or taking a new loan altogether. This is called debt consolidation and most people have tried to do this. However, despite this, most of us are unaware of “consolidation loan” schemes. This is not entirely your fault since banks do not label specific loan schemes as consolidation loans. The term is also not very popular in India. Instead, it is a concept. To put it simply, any loan used to consolidate debt can be a consolidation loan.

But before you head off to the bank to reduce your debt burden, here are 9 commonly used terms you should know for consolidation loans by Indian banks:

#1 Collateral: An asset that can be offered to the lender as security whether it is property, fixed deposit or gold, is known as collateral. This reassures the lender that they have an asset to liquidate (get ownership and sell off) if the borrower cannot repay the loan. For example, if a borrower avails a loan against property then the borrower has to give first/primary charge of the property to the lender. In this case, the property (against which the loan is availed) becomes collateral for the loan. If the borrower is not able to repay the loan, the lender can recover their money through the property (by selling, auctioning, etc.)

#2 Unsecured Loans: The loans that do not require collateral or other types of security to be given by the borrower to the lender are known as unsecured loans. Personal loans are unsecured loans. These loans come with a risk, since the lender has no way of recovering the loan amount if the borrower does not repay the loan, and a relatively high-interest rate as compared to secured loans. Lenders also tend to insure these loans with a third party to guard against potential non-payment by paying a higher premium which is reflected in the loan’s higher processing cost as against that of other loans.

#3 Margin: Margin money, sometimes simply referred to as margin, is the amount that the borrower contributes to the overall amount required. You can think of it as the down payment of a house while the rest is covered by the bank. For instance, if the total amount needed is Rs. 2 lakh, and margin is 20%, then you will have to contribute Rs. 40,000 (margin money). The bank will provide the balance of Rs. 1,60,000.

#4 Disbursement: The term is used to denote the release of the loan amount from the lender to the borrower. A loan is disbursed only after the borrower has submitted the requisite documents for the loan application and the bank has approved the loan. Sometimes, the terms “full disbursement” or “partial disbursement” may be used. These terms, as you may have already guessed, mean that the full loan amount is disbursed at once or only a portion of the loan amount is disbursed to the borrower.

#5 Moratorium: Loan Moratorium, also known as repayment holiday or simply moratorium, is a period during which loan repayment is deferred but simple interest incurs on the principal loan amount. Moratorium period starts after the full disbursal of the loan amount. For example, if the moratorium period of a loan is 6 months and the disbursal of loan is complete by 30th June 2020, the moratorium will start from 1st July 2020 and end on 31st December 2020. The repayment period will start from 1st January 2021.

#6 EMI: If you did not already know, EMI, short for Equated Monthly Instalments, are monthly payments that the borrower has to make each month to repay the loan until the maturity date of the loan. And as the name suggests, the monthly instalment is the same every month. It combines both the principal loan amount and the interest owed. The principal amount is less at first and the interest component is higher but as the outstanding loan principal decreases with each EMI, the principal component increases and the interest component decreases.

Usually, EMIs are decided by the bank at the time of loan approval after taking into consideration the loan amount, applicable interest rate and repayment period. If a borrower wants a lower EMI, they can ask for a longer repayment period and vice versa. Just keep in mind that a longer tenure means you pay more interest.

#7 Prepayment: If a borrower decides to partially pay off the loan, over and above the EMI, before the end of the repayment period then it is called prepayment of the loan. Some banks charge money for making partial payments towards the loan which are labelled as prepayment charges / fees / penalty on loan documents. For example, if the EMI is Rs. 9,000 for the loan and the borrower decides to pay in Rs. 10,000 in a month to the lender then Rs. 1,000 is the pre-payment they made towards the loan (in the case of no prepayment penalty).

The banks may charge up to 3.5% or more as prepayment penalty. Since these charges add to your financial burden and get in the way of you reducing your debt burden in the future, we suggest finding loan schemes where the bank does not levy a prepayment penalty.

#8 Foreclosure: Instead of making a partial payment (prepayment), if a borrower decides to repay the loan entirely before the end of the repayment period, it is known as foreclosure of the loan. Some banks do not charge money if the borrower repays the loans early while others may levy a foreclosure fee for paying off the loan before its ending date. For example, if the repayment period for the loan is 5 years but the borrower decides to pay off the entire loan in the 3rd year, it is known as loan foreclosure.

For debt consolidation, loans with no foreclosure charges work well if you can find them. Make sure to use this factor into consideration while comparing different loans.

#9 Loan Maturity: The loan repayment period starts once the loan has been fully disbursed, moratorium (if any) has passed and ends at loan maturity, i.e. the date by which the loan must be fully repaid. The loan maturity date is set by the bank at the time of sanctioning the loan. For instance, if a borrower avails a loan on 1st September 2020 with a repayment period of 5 years then the loan maturity date is 1st September 2025.

Let us know if you want us to elaborate on other commonly used terms for consolidation loans.

A Final Word

Understanding loan terminology will help you comprehend consolidation loans-related information easily and also make informed decisions. Please check our consolidation loans page, if you are interested. We have covered debt consolidation loans offered by major Indian banks.

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