LoanRaja Blog- Personal Finance Guide

Low home loan interest rates which had contributed to the real estate boom during the past few years are now spiraling upwards upsetting the calculations of borrowers. Higher interest rate means a higher monthly payment to the financial institution or an extended tenure for repayment. Coupled with escalating price of properties due to higher input costs the rate hike has compounded the woes of a homebuyer. The recent RBI steps like hike in CRR and repo rates to bridle inflation have forced banks to raise interest rates on home loans.

Some banks have already asked borrowers to pay the differential interest as a single sum by the end of the financial year. Others have increased the loan tenure. When the housing loan rates were 7 to 8.5 per cent banks vied with one another to slash it down further to woo customers. Interest rate that remained as low as 7 percent five years ago has more than doubled now. Some banks have only raised their floating rates. Some have increased the processing fees on all loans. It is a tricky situation for borrowers.

Impact on EMI

For a .5 per cent hike in the home loan rates, the borrower will have to shell out anywhere between Rs 25 and Rs 35 per month extra on every Rs 1 lakh borrowed. The EMI is calculated based on the interest rate, loan amount and term. On a home loan, the EMI for a Rs. 20 lakh loan at 13 per cent for 20 years is Rs 23,432. If interest rate goes up by 1 percent EMI is Rs. 24,871. Additional monthly burden is Rs.1439 and yearly outgo Rs.17,268 more. EMI has two parts — the principal and interest. The money that goes into the interest component will be higher. When interest rates rise the interest component of the EMI too increases and the principal repayment component comes down. Borrowers who have opted for floating rate are the worst sufferers during interest rate hike.

How can borrowers beat the inflation? It is always better to pre-pay the housing loan if extra cash is available with you. A customer can liquidate fixed deposits if any to prepay the loan, as the yield will be lower than the interest on home loan. Before opting for prepayment a customer has to ascertain whether the loan agreement has any clause on pre-closure penalty. Charges vary from 2 to 3 per cent. Another disadvantage is that the income tax benefit available for repayment of interest up to 1.5 lakh per annum won’t apply in the case of foreclosure. SBI is one of the banks that charges no penalty if the loan is pre-closed from own savings or windfall gains.

Part-prepayment

Another option is part pre-payment to help reduce the loan tenure and interest rates. This can lower the EMI and thereby limit the interest cost. The problem of penalty on pre-closure of home loan can be got over by resorting to partial payment of principal amount as no bank levies penalty on part-prepayment. It is tempting to migrate from floating rate to fixed rate. But this also will invite a charge. Besides, genuinely fixed home loans for long term are not available now.

Earlier a status symbol and now an integral possession of every wage earner and self-employed person in urban areas, the ubiquitous credit card is a pointer to the rising consumer spending in India. Aggressive campaigns by banks and NBFCs over the years to cash in on the burgeoning middle class consumers’ itch for ‘buy now pay later’ led to a phenomenal rise in the penetration of the plastic money. Foremost advantage of a credit card is its mobility. For shoppers and travellers, choice of a credit card is a matter of convenience. The cards have increased the purchasing power of the individuals and the younger generation is on a shopping spree.

Basically credit card operations rely on four players. Visa, Master, Diners, American Express and JCB are the providers. The second group comprises of vendors or the respective banks and financial institutions, which issue cards on behalf of the providers, like ICICI, HSBC, Citi bank, SBI, HDFC, Standard Chartered etc. Then come the cardholders. Lastly there are shop owners or any other establishments that accept the cards from the holders and honour the purchases made by them or the service rendered to them. Many cards have special features like accident insurance cover to make it attractive. Good customers get rewards too.

Strict terms

It is easy to get a credit card if you can provide the bank /NBFC proof of identity, address and income. Before taking the plunge compare the terms offered by different banks and make a wise choice. Watch out for any hidden charges. Ignorance of some of the charges levied can prove costly later. Terms, which used to be stringent, have been liberalized. Along with attractive offers to lure customers towards their credit card banks also set some strict conditions for non-repayment, penal interest and late payment charges. All bank websites display the dos and don’ts of credit card use. These are also given on the reverse side of statements. Besides customers get email alerts also.

A credit card customer normally enjoys a free credit of 50 days and the shopkeeper gets his payment from his banker as soon as he presents the statement of the purchases made. The bank then sends the vouchers to their respective head offices or clearing offices where the money is collected from banks that have issued the cards. The whole operation takes about three weeks whereas the credit enjoyed by the customer is much more than that. Credit-free period is the time given by a bank to a customer to make payments on credit card purchases without having to pay any interest. If wisely used, credit card can be a source of interest-free working capital for a self-employed person.

Cash withdrawals

If you have an urgent need for cash you can swipe the card to draw cash. You have to consider this as the last resort since this facility is accompanied by some harsh terms. Every time you draw cash you have to pay a minimum service charge of Rs.500. The interest also is higher. Repayment of cash withdrawal also is a complicated process and you can fall into a debt trap. Credit card is short-term credit, which is costlier than a personal loan. Banks charge high interest rates of over 36% per annum on credit card debt, as it is unsecured. Delinquency rates are high. In default cases there is a high degree of write-offs.

Before selecting a credit card the customer must be clear about all fees a bank is charging. Compare the rates of different banks first. Credit cards have different types of fees like joining fee, annual fee, renewal fee, add on fee, card replace fee etc. Prompt payments can avert problems. If you pay only the minimum balance you may have to pay interest on next month’s bill also. RBI has clear guidelines to make credit card operations transparent. The terms and conditions on credit card must be clearly conveyed to the customer and banks are barred from collecting any fee other than what was mentioned at the time of issue of the card. There are ample avenues for grievance redressal.

Unforeseen circumstances can land anyone in a financial crisis. Sudden loss of job, divorce, a serious accident, a major surgery or death of a dear one create need for urgent cash for which we may not be prepared. There may arise an opportunity for a foreign travel for which you don’t have immediate cash. How to find the required amount in the shortest possible time is a difficult choice to make. Do you want funds readily available to you whenever you need or desire? Personal loan is the answer. It is an any-purpose, no-questions-asked loan given by most banks and NBFCs. Interest rate is high as it is unsecured loan.

In case you have a little more time at your disposal you can explore the possibility of a Loan Against Property (LAP). If you own a valuable asset like a house or commercial property you can raise a loan against it. It is much cheaper than a personal loan as it is secured loan. But processing and documentation will take more time. First the lending bank has to get the property valued and has to be convinced about the repaying ability of the borrower. The loan is given as a certain percentage of the property’s market value (around 40 -60 per cent). Lending institutions have different threshold limits for Loan Against Property.

Tenure

Such a loan is usually available for a five-year period. LAP will have a longer tenure than a personal loan, usually a maximum of 10 years. The advantage of personal loan is that it requires less paper work and is sanctioned sometimes within three days. But the lender has to be convinced on your ability to repay the loan. Nobody is going to give you a personal loan of Rs.1 crore. The only way to get a loan for such an amount is to mortgage a property valued around Rs.1.75 cr. One can get personal loans from Rs.24,000 to ten lakhs. The threshold limit for loan against property is much higher.

Eligibility

Eligibility norms and documentation for personal loans and LAP slightly differ. While a customer seeking a personal loan must have a net monthly salary of at least Rs.7,000, a person seeking LAP must have a net monthly salary of at least Rs.12,000. Age requirement is 21-60 years in the case of salaried and for self-employed it is 21-65 years. It is same for personal loan and LAP. For both the loans identity proof, residence proof and income proof have to be furnished. Salaried individuals have to submit their latest salary slip, Form 16 and bank statement for the last 3 months.

Self-employed customers have to furnish copies of their IT returns for the last 2 years, balance sheet, and profit & loss account, bank statements for the last 6 months. For loan against property, photocopies of all documents related to property have to be handed over before approval of the loan. A valuation report of the property from the professional valuer appointed by the bank is a must. Some banks insist on the borrower to give an undertaking that the loan won’t be used for any purpose other than what is mentioned in the loan agreement. This is to avoid diversion of loan for speculation.

A borrower has to submit three additional documents apart from what is required for a normal housing loan. Copies of all the property documents have to be handed over before approval of the loan. Borrower has to give a declaration stating that the loan amount would not be used for any other purposes. A valuation report of the property from the professional valuer appointed by the bank is a must. Identity proof and proof of residence along with income proof has to be provided. Salaried individuals have to submit their latest salary slip, Form 16 (along with salary certificate from the employer), and bank statement for the last 3 months. Self-employed people have to furnish copies of their IT returns for the last 2 years, balance sheet, and profit & loss account, bank statements for the last 6 months.

LAP allows you to keep your property and have liquid funds. It is the cheapest retail loan after housing loan. Fixed rate loans are rare now as banks find floating rate more profitable. It is 30-40 percent cheaper than personal loan. Entrepreneurs find LAP an ideal source for funds for business expansion. Many borrowers land in debt trap after availing personal loans, which attract stiff penal interest in case of delayed payments. Failure to read the fine print can push a borrower deeper into debt.