Payment Shock: What It Means, How It Works

Payment shock is a term that describes the sudden and significant increase in monthly payments for a borrower. This usually happens due to changes in interest rates, loan terms, or other financial factors. It is important to understand payment shock for anyone taking out loans or managing debt as it can have a big impact on your finances. In this article, we would learn what payment shock is, how it works, and how you can manage or avoid it.

What is Payment Shock?

Payment shock occurs when your monthly loan payment unexpectedly increases by a large amount. Basically, when you’re obligated to pay a higher amount as monthly debts than you can afford from your income.

How Does Payment Shock Work?

Payment shock happens when there is a change in the terms of your loan that affects how much you need to pay each month. Here’s a closer look at how it can occur:

• Adjustable-Rate Mortgages (ARMs): These mortgages start with a fixed interest rate for a few years. After that period, the rate adjusts periodically based on market conditions. If interest rates rise, so do your payments.
• Interest-Only Loans: Some loans have an interest-only period, where you only pay the interest for a certain time. Once this period ends, you start paying both principal and interest, increasing your payment.
• Balloon Mortgages: Some loans require a large payment at the end of the term, known as a balloon payment. This can cause a big jump in your financial obligations.
• Loan Modifications: If you modify your loan to extend the term or change the interest rate, your payment amount can change.

Also Read: What are Instalment loans – Types, process & more

Managing Payment Shock

To manage payment shock, you can take several steps:

1. Budgeting: Keep track of your income and expenses. Knowing where your money goes each month can help you prepare for higher payments.
2. Savings: Build an emergency fund to cover unexpected expenses or higher loan payments.
3. Fixed-Rate Loans: Consider refinancing to a fixed-rate loan to avoid payment changes due to interest rate adjustments.
4. Loan Terms: Understand the terms of your loan and when any changes will occur.
5. Professional Advice: Talk to a financial advisor to get personalized advice on managing your loans and finances.

Airtel Finance and Personal Loans

Airtel Finance offers personal loans of up to ₹9 lakhs that can help you manage your finances and avoid payment shock. Airtel personal loans come with fixed interest rates, meaning your monthly payments will remain the same throughout the loan term. This stability can help you plan your budget more effectively and avoid unexpected payment increases.

Steps to Apply for Airtel Personal Loans:

• Install the Airtel Thanks app on your Android or Apple device.
• Go to the Shop section.
• Tap on Airtel Finance. You will see two Airtel Finance offerings here – Airtel Flexi Credit and Airtel Axis Bank Credit Card.
• Now, click on personal loan section and start your application and complete the KYC.
• If approved, the loan is instantly disbursed.

Conclusion

Payment shock can be a stressful financial challenge, but understanding what it is and how it works can help you prepare and manage it effectively. By budgeting, saving, and considering fixed-rate loans like those offered by Airtel Finance, you can minimise the impact of payment shock on your finances. Always stay informed about the terms of your loans and seek professional advice when needed.

Also Read: Artificial Intelligence in Loan Assessment: How Does It Work?

FAQs

1.    What causes payment shock?

Payment shock is caused by changes in loan terms, such as interest rate adjustments, the end of an interest-only period, balloon payments, or refinancing.

2.    How can I avoid payment shock?

You can avoid payment shock by choosing fixed-rate loans, budgeting, saving, and understanding your loan terms.

3.    What is an adjustable-rate mortgage (ARM)?

An ARM is a mortgage with an interest rate that can change periodically based on market conditions, potentially leading to payment shock.

4.    How can Airtel personal loans help with payment shock?

Airtel personal loans have fixed interest rates, ensuring your monthly payments remain consistent, helping you avoid unexpected increases.