Why is Diversity in Debt Portfolio Essential?
Published on : April 09, 2020

Due to immense competition in the lending market, financial institutes and the fintech firms are working towards providing innovative products to their customers. These products are designed to cater to specific needs of borrowers. You can obtain instant personal loans within 24-36 hours if your eligibility is established and credit checks are in place. The lending market is growing fast and therefore, you must research thoroughly before applying for any kind of loan.

Types of Loans

Loans can be classified based on the security or collateral provided.

  • Secured loans: Such loans are provided by the lender when the borrower pledges an asset in the form of a collateral or a security. Under this type of loan, the lender will hold the ownership of the asset until the total loan is paid off by the applicant. Mortgage loans, loans against property or car or bike loan, loan against gold or life insurance policy are some of the types of secured loans. The main benefit of taking secured loans is that they are available at a lower rate of interest as the risk involved is lower for the lender. Also, the borrower can claim tax deduction against such loans.
  • Unsecured loans: Such loans do not require pledging of any asset as collateral. The rates of such loans are comparatively higher. Also, there is restriction on the amount you can borrow as the risk involved is higher for the lenders. Nowadays, owing to the competitive nature of the financial market, banks and other financial institutes are providing unsecured loans at very competitive rates as per your credit worthiness. Personal loans, credit cards, and personal overdraft are some of the examples of unsecured form of loans.

The loans can also be classified based on the tenure.

  • Short-term loans: These loans have a tenure of 12 months or less and work well for those who want a small amount instantly. These personal loans don’t need you to pledge any collateral and are disbursed quickly with minimum documentation. Since the loan tenure is less, the interest rate may be higher. All leading banks and fintech firms provide these instant loans online.
  • Long-term loans: Most of these loans have a tenure of 12-60 months. For some loan types, such as home loans, the tenure could be as long as 30 years. These loans are more suited for your long-term needs of higher value. You may or may not need  pledging of collateral, depending on loan amount and the discretion of the lender. The loan disbursal process may take longer as the risk involved in handing out loans of large amount is high. These loans involve a lower interest rate than short-term loans.

 

Choosing the Loan Type

The wise say that you must never put all your eggs in one basket. Similarly, you must not be depended on any one form of debt. The market offers various kinds of loans, such as Home loans, Vehicle/Car loans, Bike loans, Personal loans, Travel loans, Wedding loans, Rental Deposit loans, Advance Salary loans, Credit Card Takeover loans, House Owner loans and EMI Free loans. Each loan is designed to serve a specific need of the consumer. They are tailored to provide flexibility and easy access to funds. Therefore, it is very essential to identify your specific needs, study the various products available in the market, and then apply for the loan that fits your requirements.

 

Impact of Debt on your Credit Report

The credit report registers your debts and payments details, including credit cards and loans. The report has detailed information on your loan status and payments of credit cards. The report also gives information of whether the loans have been settled, partially paid, or defaulted. Your credit score is generated based on this report. Let’s see how debt can positively influence your credit report.

  • Timely payments improve credit score For any form of debt, it is very important to make the payments on time. In addition to improving your credit score, regular EMI payments on loans or credit cards create a positive impression on the lender and build your credibility as a low-risk borrower.
  • Credit Utilization Ratio (CUR) – This is the ratio between your used and available credit limit. For instance, if you have a credit card limit of INR 10,000 and spend INR 6,000, your CUR is 60%. For a good credit score, a CUR of 30% is considered desirable. Therefore, you can limit your credit card use and opt for a personal loan instead. This will balance your CUR and create a diverse debt portfolio.

 

How do different forms of debts benefit your credit report?

As we are aware about the different debt products available in the market, it is essential to understand how each of these products help build a good, strong credit report.

  1. Credit cards – These financial instruments come handy when you incur short-term expenses. If used wisely, these can impact your credit score positively. The credit utilization ratio and timely payments help determine how responsibly a borrower services his debts.
  2. Secured loans/Long-term loans – A secured loan, like a home loan, is a debt that requires you to pledge an asset in order to avail one. These loans are long-term loans that are spread over years. Such loans help determine the consistency of a borrower to pay off the obligations associated with the loan. If timely serviced, these loans support your credit report heavily.
  3. Short-term loans – Debt products like Advance Salary Loan come in handy when one is in need of short-term debt, during a temporary shortfall of cash. However, you must ensure that you close your loan in time. This highlights your capability to pay off your debts within your income.
  4. Debt Consolidation – If you choose to consolidate your debts with the help of tools like personal loan or credit card takeover loan, a lender can gauge how responsibly you ascertain your ongoing debts. A wise borrower takes the essential measures to protect his credit worthiness at all times.

Having a combination of a variety of debts products at some point in life will assure you a healthy credit report and adds value to your credit history. Lenders consider multiple factors while studying your profile before being decisive about lending you funds. Thus, you must plan and review your debts timely as a part of financial planning and debt management.

 

Importance of Having a Healthy Credit Score

A healthy credit score or report will help you in these ways:

  • Quick and easy approval for loans and credit cards: When you apply for a personal loan online or a credit card, a lender will check your credit report and score to see if you are a low-risk or high-risk borrower. If you have a good credit score and have paid your EMIs regularly, they will conclude that you are financially disciplined and be willing to offer you a loan at a reasonable rate of interest.
  • Higher loan amount or credit card limits: A higher credit score will make you eligible to get a bigger loan and more credit limit on your credit card.
  • Lower interest rates: If your credit score is high, the lender will be happy to loan you money and may even give you a reasonable interest rate since he/she is assured of timely payments.
  • Cards with better incentives and gains: An individual with a glowing credit report is more likely to be offered credit cards with better deals, rewards, offers, and higher credit limit.

 

Conclusion

Debt is a smart way of enjoying the material comforts of life. If chosen wisely, they can strengthen your portfolio and improve your financial health. Choose wisely and make the best of the available financial products.