LoanRaja Blog- Personal Finance Guide

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.

Every entrepreneur has aspirations to make it big in business. But paucity of finance is a hurdle quite often. Now business loans are offered by almost all banks to help traders, businessmen and professionals to start or expand their commercial activities. Loans to self-employed professionals such as chartered accountants, architects and doctors also form part of this. These loans are available at competitive interest rates and low EMIs to widen the customer base. Every small and medium sized enterprise needs access to working capital. Simple unsecured business loans are available to small and medium enterprises for all the working capital needs.

No uniformity

Business loans are both secured and unsecured. Banks give business loan in the form of business installment loan, overdraft, loans against property, security and fixed deposits. The minimum tenure is 12 months and maximum 48-60 months. There are wide variations in the schemes provided by different banks and the amount of loan granted. It can be anywhere from Rs.25,000 to Rs.5 cr. SBI’s Traders easy loan scheme provides loans to entrepreneurs, professionals and self-employed. Standard Chartered Bank has a business installment loan. A business installment loan (BIL) is a loan, which allows you to borrow cash to accommodate your business needs whether for short-term working capital funding or to support your expansion plans. Repayment is by EMI through post-dated cheques.

Loan under SBI’s scheme is sanctioned against equitable mortgage of property. The loan can be repaid in monthly or quarterly, or half yearly installments in a period up to 5 years. Minimum and maximum amount of loan is Rs 25,000/- and Rs 5 crore. Business requirement is assessed on the basis of projected business turnover. Interest at floating rate is charged at monthly intervals on daily reducing balance. Standard Chartered Bank offers two borrowing options: Borrowing against the fixed deposit and taking an unsecured loan. When your enterprise requires urgent finance, an overdraft against your investments may be just the right option. An advantage is that you pay interest only on the amount utilized.

Every lender wants to make sure that loan will be paid back. Collateral property is the common way. But risk factor is always there. Banks will analyse your previous experience in the business and your success chances of your new business plan. If you want to take a loan for expanding your business the lenders will analyze your business history, tax returns, revenues and liquid assets. If you are planning to start new business the process may be complicated. How you present your business plan plays key role in getting a loan.

Eligibility

Business credit is generally offered to the following types of concerns: Sole proprietorships, partnerships and private limited companies. Income requirements: Net Income of the concern should be more than Rs. 1,50,000 per annum for business credit up to Rs. 15 lakh and over Rs.3 lakh for business credit above Rs. 15 lakh and up to Rs. 35 lakh. A maximum of two incomes of the partners / directors holding a minimum of 25% stake each can be clubbed to the income of the concern.

Documents

There are differences in the documents required for sole proprietorship firm, partnership firms and private limited companies.

• Proof of identity of the sole proprietorship firm.
• Proof of individual identity to be submitted for the proprietor.
• Proof of residence address to be submitted for the proprietor.
• Certified profit and loss and balance sheet for last two years.
• Copies of IT returns for the last two years.
• Bank statements for last 6 months for business credit up to Rs. 15 lakh and last 12 months for business credit above Rs. 15 lakh.

In the case of partnership firms proof of identity of the partnership firm as well as proof of individual identity for the all partners have to be submitted along with a copy of the partnership deed. For a limited company proof of identity of the limited company, copies of memorandum and articles of association, certificate of incorporation, board resolution, copy of annual return establishing the shareholding pattern have to be submitted.

Charges

A processing fee of minimum one percent of the loan amount is generally charged. There are variations. Banks deduct it from the loan amount, which will then be credited to the current account of the borrower. Some banks charge prepayment charge of up to 5 percent while others don’t charge anything. In the case of overdraft there is an annual review and lender will charge an annual fee every year.

A personal loan is the most popular form of an unsecured loan available to consumers. Although we often see advertising from banks and finance companies making it appear very simple to get such a loan, its rarely as simple as that. Since the loan is unsecured banks go to great lengths to determine that your creditworthiness and repayment capacity is verified and secure.

Eligibility norms and requirements may differ slightly depending on the bank, but broadly fall in the two categories:

• Salaried persons between the ages of 21 and 60
• Self-employed individuals between 25 and 65

Lenders also have different policies for the minimum income requirement and maximum loan amount offered. For example, ICICI Bank would require a net monthly salary income of Rs 8,000 whereas HDFC Bank may accept Rs 7,000 and Citibank insists on a minimum of Rs 8,500. Public sector banks such as SBI and other nationalised banks have different eligibility levels for customers in metros, urban and non-urban centres. Some banks consider gross salary for income calculation. The loan amount also differs from bank to bank. The personal loan limit depends on the borrower’s profile, income, repayment capacity and credit rating.

For government owned banks minimum loan amount offered is usually around Rs.24,000 in metro and urban centres and Rs.10,000- in rural/semi-urban centres. The maximum loan amount can go upto 12 times net monthly income for salaried persons subject to a ceiling of Rs.10 lakh. But some foreign banks like Standard Chartered and Citibank have higher limits. Most banks have lists of approved companies whose employees will find it easier to get a personal loan.

Some banks also verify your application against a negative lists of professions. Banks will usually prefer to offer loans to employees or owners of reputed companies which lend a certain amount of lending credibility to their employees. You also have to reside within the prescribed city limits of the bank. Most public sector banks insist on a guarantor for personal loan even for existing account holders although some banks may offer better rates and discounts on other charges. You can increase your eligibility by clubbing the spouse’s income and taking a joint loan.

Banks and other lenders use direct sales agents normally to run a background check on the loan applicant to crosscheck the information provided at the time of application such as details on employment, salary and the place of residence. The bank wants to be convinced of your income and surplus available to service the personal loan. This is done to ensure that you are capable of making regular payments on your personal loan and repaying it on time.

Be honest in your income disclosures and keep your credit rating high. This increases chances that your loan will be approved quickly, but if you have defaulted on any loans it may go against you at the time of verification and in case you have ever declared bankruptcy it will be very hard for you to get a personal loan