Loans Simplified

Category: Loan Guide

  • Debt Financing: Types, Processes, and Advantages

    A business is always in need of money for a variety of purposes. Whether it is expanding, performing everyday operations, or managing employees, there are different methods to raise this capital, like equity financing, debt financing, or retained earnings. On the other hand, a company seeking to grow will require more funding over an extended time. At this point, a company might think about a debt financing kind of business loan as one of its financial approaches to borrowing money to raise cash. Let’s learn more about debt financing and how it can benefit your business.

    Understand Debt Financing

    Debt financing is the act of raising cash through borrowing money or the issuance of debt instruments. Under this type of financial arrangement, people, companies, or governments borrow money from outside sources and have a set amount of time to pay back the borrowed money along with interest. Debt financing is an alternative to equity financing, which raises money through the issuance of shares.

    Peer-to-peer lending, invoice factoring, company credit cards, bond issuance, and term loans are a few tools for raising debt capital.

    Process to Follow to Get Debt Financing?

    In the process of debt financing, the borrower must agree to the agreement of the lender. This lender can be a bank, NBFC, or financial institution. The agreement outlines the terms and conditions, including the business loan interest rate, repayment schedule, and other relevant terms. You can easily apply for this business loan online. 

    Following the loan’s receipt, the borrower is required to make regular payments, usually monthly or quarterly, to return the principal plus interest. The repayment arrangement varies; some borrowers choose balloon payments, while others choose equal installments throughout the loan. 

    What Are the Types of Debt Financing? 

    There are different types of debt financing, each personalized to fulfill specific needs and circumstances. Some of the common types of debt financing are: 

    Bank Loans: Bank loans are one of the most common forms of traditional bank loans. Businesses and individuals borrow money from banks at a fixed or variable interest rate. The lender must repay the amount over time. 

    Mortgages: This type of debt financing is quite common in the real estate business, where a mortgage is used to buy a property, land, or home. It is an agreement that if the borrower fails to repay the amount, the lender has all the rights to acquire that property. 

    Corporate Bonds and Debentures: Bonds are a common way for businesses to raise money. By buying these bonds, investors are effectively lending the corporation money. The business promises to pay interest regularly and repay the principal amount when it matures.

    Line of Credit: Businesses often try to secure this flexible loan from banks. You can use this money as per your wishes and borrow up to a predetermined limit as required. Businesses have to pay interest only on the amount borrowed. 

    Government Bonds: The government raises capital by issuing bonds to investors. These bonds are debt for the government, and interest is paid to bondholders. 

    Credit Cards: Since credit cards enable users to borrow money up to a certain credit limit for bills or purchases, they can be thought of as a type of debt financing. When someone uses a credit card, they effectively sign up for a brief loan agreement with the credit card company. 

    Convertible Notes: Convertible notes are a type of short-term debt that can be converted into equity at a later time, usually during a subsequent funding round. Startups and early-stage enterprises may employ convertible notes.

    Factoring: Factoring is a method of debt financing for short-term financial needs, even if it is intended to be used temporarily. In this case, businesses sell their accounts receivable to a third party to raise the required capital. The opposite side pays the same sum, less any commissions or other costs.

    Advantages of Using Debt Financing

    Debt financing is an attractive option to choose from, and some of the advantages of debt financing for businesses are: 

    Ownership preservation: Businesses are using debt financing because it is provided by a lender, who will get the repayment of the principal amount along with the interest. Businesses retain control over their business operations and decision-making. 

    Tax-Deductibility: One of the main benefits of debt financing is the ability to deduct interest payments from taxes. Businesses frequently deduct interest costs from their taxable income, lowering their total tax obligation. 

    Leverage: With debt financing, businesses are allowed to use borrowed funds and leverage their operations to invest more in projects with higher return potentials. This strategic leverage can increase profits. 

    Predictable Repayment Structure: It is a fixed repayment schedule, offering borrowers a clear understanding of their financial obligations. Thus, it aids in financial planning and budgeting. 

    Conclusion

    Debt financing is a vital strategy for all businesses that seek capital for expansion or operations. Before going with this, you need to understand the concept of debt financing and accordingly use it as per your requirements. Though it is sensitive to interest rate fluctuations, you can strike a balance between debt and equity for business financial health and development. Loan Simplified can help you get this business loan easily and also advise you on different factors. Thus, you can easily get this loan without having to rely on different sources.

  • Savings Strategies to Pay Off Your Loan Faster in 2024

    Knowing how to pay back your current debt as effectively as possible might save you time and money. Examining your financial status typically provides several ways to pay down your debt, lessen the amount of debt you have, improve your credit score, and bolster your security financially. It is more important than ever to learn the art of smart loan repayment in this age of evolving financial conditions. 

    According to CNBC, Data from the Reserve Bank of India was just made public, and it shows that net household savings in India dropped to 5.1 percent of GDP in FY23 from 7.2 percent in FY22, a 47-year low. Over the same period, household debt rose considerably, from 36.9 percent in fiscal year 22 to 37.6 percent in fiscal year 23.  Household savings gradually decrease as a household’s reliance on debt to pay for costs grows.

    Borrowers are less able to save since they must set aside a bigger percentage of their income for debt service. Therefore let’s discuss some clever loan payback techniques in this blog that can provide you the ability to take charge of your financial destiny and securely accomplish your objectives along with increasing your savings.

    Here are some tips to pay your loan fast together with saving some money for your future:

    Automate Your Savings:

    A great way to accelerate debt payback is to automate your savings. When you are paid, set up automatic transfers from your checking account to a savings or debt payback account. This guarantees that a fixed percentage of your income is always applied to debt repayment without the need for human involvement. 

    Furthermore, consider the automated round-up services provided by certain banks or financial applications. These functions allow purchases made with your debit card to be automatically rounded up to the closest amount and the difference to be put into your loan or savings account. By automating your savings in this manner, you not only create a habit of regular saving, which will position you for long-term financial success, but you also consistently get closer to paying off your debt faster.

    Cut your expenses and Redirect to Savings

    Consider creating a solid cutting-costs plan and applying the savings to your loan balance if you want to pay off your debt more quickly. To begin with, thoroughly review your monthly budget to identify areas where you may make savings. Renegotiating energy or subscription service contracts, cutting back on non-essential purchases, and cutting back on eating out are a few suggestions. 

    After you’ve determined where you can save money, use that money straight toward paying off your loans, paying off the debt with the highest interest rate first to get yourself closer to financial independence. To support your repayment efforts even more, look into ways to boost your income through part-time work, or the sale of unwanted goods. You may expedite loan payments and reach your financial objectives more rapidly by combining strategic savings allocation with disciplined spending control.

    Boost your Income with a Side Job

    If you have spare time on your hands which is probably evenings and weekends you may look for a second job to supplement your income and pay off your debt. If you’re willing to give up some of your free time in the short term to have fewer loan payments to pay in the long term, it will put you ahead of those future loan costs. 

    If you’re a student, you can consider taking up freelancing part-time, working on the weekends while you work jobs that will further your career during the week. It might be difficult to give up your pride and apply for an hourly job if you’re older and haven’t had part-time work in years. It is still a worthwhile route to follow if you have the time and means to make it happen.

    Make Bi-weekly Payment

    The ideal strategy to pay back your loan is to submit half-payments every two weeks rather than monthly installments.

    This strategy offers the following two advantages:

    • Because your payments will be applied more often, interest will not build up.
    • You will pay back the loan in full each year instead of in 26 half-payments, which would decrease the loan’s term by several months or even years. You may cut the 30-year mortgage down to 26 years if you use this strategy.

    Make Additional Payments

    You may choose to make additional loan payments to pay it off sooner, depending on your capacity to do so. There are several methods you might use for this strategy. For example, you might use direct debit to boost your monthly payments, or you may use your additional funds to make erratic payments.

    Always remember to inquire beforehand about any penalties associated with arranging early repayment arrangements with your lender. To make up for the interest they lose when you pay off your loan early, loan companies frequently impose fees. The lender, the amount you owe, and the remaining loan term all play a major role in this strategy.

    Refinance to Lower Interest Rates

    Refinancing is one of the finest strategies to pay off your debt early. It can result in large savings and a reduction in the interest rate. If you have better credit or lower interest rates after taking out your loan, you might want to consider this alternative. One option to achieve this is to shorten the loan period. The reduced interest rate may also help you repay the debt. 

    Conclusion

    In summary, these loan repayment plans offer a road map for handling your debts and constructing a more secure financial future. There are several ways to achieve financial stability, ranging from accepting extra salaries to refinancing choices and saving with leverage. Remember that each strategy you employ to repay your debt will get you one step closer to your ultimate goal of becoming financially independent. Decide which one best suits your needs and circumstances, then take charge of your financial future right now.

  • The Ultimate Guide to Understanding Loan Interest Rates in 2024 

    The Ultimate Guide to Understanding Loan Interest Rates in 2024 

    Are you thinking of taking a personal or home loan in 2024? It is a great decision. Many people in India take bank loans to fulfill their financial needs and each bank has unique interest rates for a loan. It can vary based on several factors and aspects. In this blog, we will discuss detail about interest rates and explore some factors that influence your loan interest rates.

    According to Statista.com, The lending interest rate in India was 8.6 percent in 2022. This represented a minor decrease from the 8.6 percent rate of the previous year. The bank rate that typically meets the private sector’s short- and medium-term financing demands is referred to as the lending rate.

    An Overview of Loan Interest Rates

    A percentage applied to the loan amount you have borrowed is known as the interest rate. Lenders charge it in addition to the loan’s principle. Generally, a loan’s interest rate is stated yearly and represented as an annual percentage rate.

    Loan interest rates are commonly classified into different kinds. They are as follows:

    Types of Interest Rates

    Here is a comprehensive explanation of the various types of interest rates and their operations: 

    Fixed interest rate:  The most common type of interest rate is fixed rate. Lenders usually apply them to borrowers of personal loans. As the name suggests, the interest rate does not change over the loan payback time. Before taking a loan, lenders and borrowers usually agree on the interest rate.

    Variable interest rate: These rates are the exact opposite of fixed interest rates. In this instance, several variables, including the repo rate, affect how much the interest rate changes over time. It usually affects variable interest rates. Home loans typically have variable interest rates.

    Compound interest rate: “Interest on interest” denotes the application of the compound interest rate approach. In this case, banks will charge interest on the loan amount first, and then interest on the interest that has been collected. In addition to a fixed or variable interest rate, most loan options use this method of computing interest. Compound interest typically carries a higher cost than basic interest because of this charging structure.

    Simple interest rate: As the name appropriately indicates, this is a straightforward interest rate that is computed at a set percentage on the loan amount. Multiplying the principal, interest rate, and tenure makes it simple to compute. Banks and other financial institutions rarely employ this method of computing interest on personal loans. 

    Now, you have a basic idea about interest rates. Next, we will see what impacts the interest rates of Loans.

    Factors Influencing Loan Interest Rates

    Numerous factors are considered while determining interest rates, which include:

    Credit Score

    A person’s credit score is now a major consideration when applying for loans with affordable interest rates. Based on a person’s credit payback history, the Credit Rating Agency assigns them a three-digit numerical rank. A credit score is an indication of trustworthiness and financial discipline. A lower credit score indicates a larger credit risk, which would lead to higher interest rates from lenders to offset their risks. A high credit score is indicative of good loan management and timely repayment.

    Loan Term

    Another aspect of concern is time. Since lenders take on less risk when it comes to shorter repayment durations, shorter loan terms sometimes have lower interest rates. In contrast, however, there is a longer period for the misfortune that results in default, and long-term loans have a higher loss rate. Additionally, a long-term loan’s face value is more susceptible to inflationary pressures than a short-term loan’s. Thus, the lender should earn more interest the longer the borrower has to return the debt.

    Income

    The amount of money you make has an important effect on interest rates. Banks typically charge borrowers with higher-income jobs an interest rate that is lower than that of borrowers with lower-income jobs. Because higher incomes are indicative of better financial standing and a greater likelihood of timely loan payback, banks frequently rely on them for loan repayment. Banks charge lower-income customers greater interest rates since they probably have repayment issues.

    Employment Stability

    To qualify for an appealing rate, you must hold a secure job. Salaried staff members, entrepreneurs, and independent contractors can all apply for loans. Both public and private sector workers have stable jobs, which lowers loan interest rates.

    Relationship with Lender 

    An everlasting relationship has considerable effects on the interest rate. Your lender will reduce the interest rate you pay if you are a dependable customer because you have developed a positive rapport with them over time. Building a reliable relationship with your bank early on is crucial since it will influence whether your lender charges a high or low interest rate based on your relationship with them.

    Economic Condition

    Some macro factors can also influence bank interest rates. Here are a few of these variables:

    Inflation

    Another factor affecting interest rate levels is inflation. Interest rates are anticipated to increase in direct proportion to the rate of inflation. This happens because lenders will seek higher interest rates in exchange for the future reduction in purchasing power of the money they receive.

    Monetary Policy

    Any nation’s central bank is in charge of monetary policy. Its goal is to control the amount of money in an economy. It also functions to raise macroeconomic elements to the appropriate levels. The RBI is in charge of overseeing monetary policy in India and uses several tools, including repo rates, open market operations, and credit regulation. It has an impact on the loan rate when it uses any of these tools.

    Conclusion 

    Handling the borrowing procedure and maximizing your financial results require an understanding of loan interest rates. Knowing the basic concepts and factors influencing interest rates can assist you in making informed borrowing decisions. It also help you to lower your debt load in 2024 and beyond. On the whole, whether you’re trying to pay for college, buy a house, or consolidate debt, knowing interest rates will help you reach your financial objectives. If you’re planning to buy your dream car and looking for financial support, Loan Simplified is here for you.