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!
Should you invest or prepay your loan?
Equity mutual funds make a great investment. However, given the volatile nature of the market and the loss experienced by investors in the past months, one should keep expectations realistic and be willing to wait it out for at least 10-15 years to see a good return from equities.
To prepay or invest – that is a question most of us ask when we have spare cash in hand. Here’s how to take the decision.
Amar bought a re-sale apartment three years back, for which he took a loan of Rs 7 lakh at 8.5 per cent. He pays a monthly installment of Rs 6,500. Now, he wants to invest his monthly saving rather than use it to prepay the loan; but is unsure. His monthly income is Rs 50,000.
Amar could actually do both – make part prepayment and invest too. Here’s how.
Prepay in installments:
Amar can use part of his savings to prepay the loan thus reducing the tenure. Since his loan amount is less burdensome compared to the income, he can part prepay at intervals. The thumbrule is that loan EMIs should not exceed 30 per cent of monthly income. In Amar’s case, he is well within the limit. Here’s what he can do:
Step 1: Set aside 20 per cent of his income for home loan repayment
Step 2: Accumulate this amount every three months and make a quarterly prepayment
Step 3: Check with the bank if any pre payment charges are applicable. If yes, he will have to plan the pre payment accordingly to avoid charges. For instance, some banks allow up to 25 per cent of prepayment without any charges.
The only thing he should keep in mind – the prepayment charge, should be considerably less compared to the interest saved.
As far as investing is concerned, he has two options: equity and debt. Based on his risk profile and time horizon, he can make a choice. For investments longer than 5 years he can choose equity. For anything of a lower time frame, it is better to opt for debt.
Equity mutual funds make a great investment. But given the volatile nature of the market and the loss experienced by investors in the past months, Amar should keep his expectations realistic. He must be patient and willing to wait it out for at least 10 to 15 years to see a good return from equities.
On the debt side, bank deposits have gained more popularity lately, because of the high interest rates they have been offering. So, if Amar is looking for a safe avenue along with tax benefits, he could lock his money for a five-year term.