FINANCE TIP OF THE DAY
Can you afford your loan?!
Know the quantity of loan you can afford. The banks may sanction loan based on your income but you should look at your monthly expenditure and see if you can afford the maximum that banks offer. As a thumb rule, remember not to let your credit exceed 40% of your income!
Having trouble repaying your loans? Read this!
Vipul needed a quick fix. Fortunately for him, he was in a hurry to invest also and had started young. Things like compounding interest, safe investment options like FDs and some shares that did extremely well, had stocked his treasury quite generously over time. Had he sat back and given a careful thought to his finances, he could have either liquidated some of these assets for his use or taken a secure loan pledging these assets as security, instead of opting for a personal loan.
Vipul Janardhanan always did things in a hurry. He hates to pile up his task list and likes things to be out of his way and out of his head. His sense of urgency was good in a multitasking and competing with time, world. However, in most instances, about 70% of the time it was time lost because of repetitive actions owing to a lack of clarity. He took one such hasty decision, when it came to his home loan down payment, he took a personal loan for it!
He did not stop just with that one loan though. He decided to furnish his new home also with a personal loan. He now had three loans to pay up, one home loan and two personal loans, which had very high interest rates. He was managing fine for the first couple of months running a tight ship. However, everything does not happen always like a clockwork. Unexpected expenses kept cropping up and the repayments started going hay wire and defaults started mounting.
Vipul needed a quick fix. Fortunately for him, he was in a hurry to invest also and had started young. Things like compounding interest, safe investment options like FDs and some shares that did extremely well, had stocked his treasury quite generously over time. Had he sat back and given a careful thought to his finances, he could have either liquidated some of these assets for his use or taken a secure loan pledging these assets as security, instead of opting for a personal loan. Vipul did not have the patience to go through the process nor did he want to disturb his investments in any manner, as he had plans to retire early in life. Thankfully before things spiraled out of control, he tapped into these reserves.
He liquidated some of his assets, made a few bulk repayments and took care of his defaults. He also opted for a home loan transfer to refinance his current home loan. He expected the switch to benefit from the falling interest rates, to a bank that offered a better interest rate and a lesser tenure than his existing loan provider. This eased the pressure enormously as the steep interest hikes in the past were taking its toll and his bank offered the benefits of slashed interest rates, which meant lower EMIs only to new customers, which left him with a distinct disadvantage.
Vipul is not alone, there are many like him who have suffered in the process of repaying their loans.
To avoid a dilemma like Vipul, you need to choose your loan option carefully. Personal loans come with very high interest rates for shorter tenures.
Here are some of the other options you can explore instead:
a. Utilise any investments you might have made so far, like shares, securities, fixed deposits, insurance policies etc. You can pledge these as collateral and obtain a loan against them. For instance, you can obtain a loan against the surrender value of your life insurance policy from the insurance company or from a bank or obtain a loan from your provident fund account if you have had an employee provident fund account for more than 5 years. The interest rates would definitely be lower compared to the personal loan interest rates.
b. You could also obtain a Loan Against Property (LAP), by pledging property that you own. The loan amount you can avail for this loan depends on the value of the property. This can range anywhere between 1L and 3Cr. Another good thing about this loan is that you can get a longer loan tenure (can be as long as 20 years) compared to personal loan tenures, which are shorter. Though it means you will be paying interest for a longer period, these loans come with lower interest rates, which can be anywhere around 12-15% and these might be lesser in the current market conditions of falling interest rates. This will ensure that your money outflow every month will be lesser and hence will be not be a strain on your resources, allowing you to save money as well. The only downside is that this comes with the risk of giving up your property if you are unable to repay the amount in full.