By Namrata Dadwal | ET Bureau | Updated: Sep 18, 2017, 03.42 PM IST
A financial emergency can hit any time—a sudden hospitalisation, a natural calamity or even an unexpected celebration at short notice.
While money pundits say you must have an emergency fund equal to six months’ expenses in place, not everyone follows this rule diligently.
So, where do you get cash instantly to tide over a financial disaster? Don’t despair. There are a few ways you can get money in a pinch, depending on how urgently you want the funds. “The key things that will determine where you get the money from are how urgently you want the funds, the tenure of the loan, the interest and how expensive will it be to source the funds,” says Navin Chandani, Chief Business Development Officer, BankBazaar.com
Before you opt to borrow money, be sure that it is really needed. Even then, borrow as little as possible. Remember, it is a loan and you need to ultimately repay it. If you are unable to do it on time, you could end up in a debt trap.
1. BORROW FROM YOUR EMPLOYER
Interest rate : 5-8% ( Could also be interest-free.)
“If you need funds ASAP, consider your workplace first. Many companies extend an advance on salaries,” says financial trainer P.V. Subramanyam. The funds could be equivalent to 1-6 month’s takehome pay and will be deducted from the salary over 3-24 months.
Upside : The loan can be custom-ised to your needs, and you will be able to get the money within three days.
Downside : The loan will be taxable as part of your salary. It will be exempt only if the funds are used for certain medical treatments or if the amount is less than Rs 20,000.
2. CASH WITHDRAWAL ON A CREDIT CARD
Interest rate : 2-3.5 % a month
A credit card can be used to withdraw money from an ATM, the amount being equivalent to 40-80% of your card limit. However, there might be a cap on daily cash withdrawal. Most banks will allow you to over-extend your limit on a caseto-case basis. Be ready to cough up an over-limit fee over and above the usual interest rate on cash advance.
Upside : Instant cash, available anywhere, anytime.
Downside : A transaction fee of 2.5-3%. Interest is levied on the money from the day it is withdrawn until it is fully repaid.
3. TOP-UP LOAN
Interest rate : 9-13%
Already have a home loan? If yes, you can use it to get a top-up loan of up to Rs 50 lakh for a maximum of 20 years or till the balance tenure of your original home. This option works if you have repaid the original home loan for some years as the combined value of the home loan and the top-up cannot exceed 75% of the value of the house.
Upside : You can get a loan quickly, in three days, since the bank has your documents.
Downside : Any default in repayment could cost you big.
4. PERSONAL LOAN
Interest rate 13-24%
One of the quickest options for borrowing money. You can get a loan within 30 minutes to three days, depending on your relationship with the bank. In fact, you might already have a preapproved loan in your name from your bank which will make the process faster.
Upside: Quick disbursement if you borrow from your own bank.
Downside: High interest rate and processing fee of 2-3%. You will also have to pay GST on EMIs. For prepayment, a foreclosure fee of 2.5% of the outstanding amount is charged.
5. LOAN AGAINST PROPERTY
Interest rate 9.5-13%
If you want a large loan and own a house, you could take a loan against property. You can loan Rs 5 lakh to Rs 10 crore, depending on the market value of your house. The loan tenure varies between 2 and 15 years. Both residential and commercial properties can be used as collateral. Banks could to lend you up to 65% of the value of your property. However, the house must be insured. Processing fee is 1.5-2% while prepayment charges are 2-3% of the outstanding.
Upside : Quick disbursement, lower interest charges.
Downside : If portfolio value declines, you will have to put in the differential or pledge more funds/shares.
7. LOAN AGAINST GOLD
Interest rate : 10-17% from banks
14-26% from non-banking financial companies
You can get 60% of the value of your gold and can borrow from Rs 10,000 to Rs 25 lakh. The tenure is usually 6 months or 12 months but you can renew the loan at a nominal charge. While you can repay part of the loan whenever you want, gold you have pledged as collateral is released only after you repay the entire loan.
Upside : You can get funds within a day.
Downside : Gold appraisal charges of Rs 250-2,500. If you are unable to repay loan, you will lose the gold.
SUKANYA KUMAR Founder & Director, RetailLending.com | Dec 01, 2015, 04.16 PM | Source: Moneycontrol.com
While lending money, lenders are keen to ascertain the repayment capacity of the borrower. No wonder, net income of the borrower plays a crucial role. However, there are some ways out to raise money despite low net income.
Almost all the times we find lenders doing loan on basis of your actual net income, which is the safest option. However, given the high levels of cash transactions in many businesses, it becomes a bit difficult for many businessmen and professionals to report high net income regularly. Low net income does not necessarily mean that such businessmen are bad borrowers. Over a period of time, banks have realized this. They have developed loan products that enable a businessman or a professional to borrow for his home buying or to raise money against his property (loan against property -LAP) without having much to show in papers.
These loan products are for those who have proven track record of other loan repayment and/or sustainable business for many years in specific industry and also a reasonably healthy bank balance.
Here are a few of those loan products discussed hereunder:
Other loan track: There are many businessmen, who have accessed big loans such as such as, equipment loan, mortgage, commercial vehicle loan. They have been repaying the existing loans without any default. In such circumstances, a bank may look at such a borrower as a promising customer. A bank may want to lend to such a borrower a sum equal to or less than his previous loan. For example, a businessman borrowed Rs 50 lakh for machinery from Bank A three year back. For last three years, he has been sticking to his loan repayment schedule. In such a scenario, bank B may consider lending him a sum of Rs 50 lakh or lower. Typically bank B may offer him a sum equal to a fraction of his earlier loan, say 80%, which makes it Rs 40 lakh in the aforesaid case. However, the catch is, the other loan should not have been closed or paid-off more than six months ago.
Bank balance: If the borrower has a healthy bank balance and the average monthly balance can well-substantiate the new EMI for the home loan/LAP he wants to take, this could be accepted by the lender.
EMI equaliser: Depending upon the total other loan EMI-s, a borrower is already servicing, the new home loan/LAP can get approved. A market average of 1.5 times of the current EMI is allowed as the total exposure. For example, if someone is already paying Rs 2 lakh as his all other EMI-s put together, then he can be allowed another Rs 1 lakh as additional EMI for the new loan, which will be an approximately Rs 1 crore borrowing.
Same loan track: During a home loan transfer, if the borrower doesn’t want to go through the hassle of doing the paperwork again, then basis the previous track on the same loan, the transfer can happen. The reduced EMI in the new bank can also make for some room to borrow an additional amount as ‘top-up’ loan (cash in hand) without any additional documentation.
Gross profit method: For an industry where the turnover is very high but the profit margin is always low (trading business), the lenders do approve of the calculation basis the gross profit and not the net.
Turnover based on industry margin: If the borrower is in a manufacturing or trading business then a standard profit margin has been internally set by the borrower. For example, a manufacturing unit with Rs 2 crore of turnover is expected to make a 10% profit and thus the income can be considered as Rs 20 lakh and basis this the loan application can be granted, even if it is not shown. Similarly, for a trading business, it could have been set at 5% as there are no assets such as machinery, plant, semi-finished goods. A manufacturing unit typically has such assets and been flagged at a little higher risk grade. At the same time, a service industry may not be considered for this type of surrogate funding at all.
Gross receipts: This programme is applicable for self-employed professionals like chartered accountants, architect, engineer, doctors, who though receive a high gross amount, their net profit may get eroded through salaries to their staff or other establishment costs. For them, a special eligibility calculation method is adopted by the lenders on the gross receipts.
Liquid income programme: An estimate is drawn by a team of chartered accountants appointed by the lender who visit the work premise of the borrower to know the minute details of the business. For example, if someone has a business of stationery-shop or saree-sales or sending truckload of sands from one destination to another, it is not very sure how much of documentation is in place. Most transactions are done without proper bill and challan and sometimes are multiple transactions without a receipt. However, these could be quite profitable business and safe to lend.
No income proof (60:40): If the borrower pays 60% of the property cost towards acquisition and his credit score is fine, then without considering his income-documents, 40% is funded as home loan. This is due to the majority stake (investment) in the property by the borrower, which makes the lender comfortable, especially when he hasn’t had any bad credit history earlier.
Premium relationship pre-approval: Some banks have this facility to offer you a ‘pre-approved’ loan, basis the borrower’s profile and his banking relationship in terms of deposits and investments made through their banking channel. This doesn’t require submission of any income proof and only the mandatory KYC norms to be met with.
So, do not lose your heart if your net profit shown is not too high but you are confident of paying off the loan. There are lenders who understand your business and will help you get the funding too.
It is important to note that a borrower’s assets are not considered as income as many make that mistake of believing that if he owns properties worth Rs 10 crores, the lender will be happy to give him a loan. It is not so. A borrower needs to have regular flow of steady income for the lender to extend even the first rupee.
Source : http://goo.gl/3eAL7c
But tax exemption will depend on the purpose
Priya Nair | Mumbai July 16, 2015 Last Updated at 22:33 IST | Business Standard
Balance transfer of home loans has become very common after the removal of penalty on pre-payment. Many banks are offering borrowers the option to avail of a top-up loan while doing the transfer. The advantage is the possibility to shift to a lower interest rate loan and getting a higher amount at the same time. The additional amount can be used for any purpose as long, as it is not speculative in nature.
Today, banks are willing to offer top-up home loans at the same rate as a home loan, as a strategy to entice borrowers to do a balance transfer, says Gaurav Gupta, of Myloancare.in, a home loan advisory.
“Most banks tend to price top-up loans closer to rates on loan against property (LAP). But to make balance transfers attractive, many are offering discounts on top-ups as an incentive,” Gupta says.
As compared to an LAP, the advantage of a top-up home loan is a lower interest rate and longer repayment period. Processing is also faster since the bank already has your property documents, says an official from State Bank of India. “We offer up to a maximum of Rs 5 crore and repayment period of up to 15 years on a top-up loan. If the repayment period on the original home loan is 10 years, the top-up can continue up to five years after that.”
Some reasons why people take a top-up loan include home renovation, home extension, childrens’ education, medical emergency, etc. In the case of businessmen, the loan can be used to meet a cash flow requirement. Remember that the tax exemption will be available only if the purpose is home extension or home renovation and not for any other purpose, points out Gupta.
“The bank will take an undertaking from the borrower about the purpose of the loan. If the purpose is children’s education or investing in business, then the top-up amount will not be eligible for tax exemption,” he points out.
A top-up loan can also be used for repaying off other loans like auto loan or personal loans, says Brijesh Parnami, chief executive officer, Destimoney Advisors. “If customers have the ability then we advise them to take a top-up and consolidate other loans, as it will work out cheaper. Today, with banks offering similar repayment terms as a home loan, it makes sense to take a top-up loan. We see lot of customers opting for top-up while doing balance transfer,” he says.
Typically, the rate on LAP is 11-12 per cent, while on top-ups it is around 9.5-10.5 per cent. The eligibility for top-up depends upon two factors — value of the property and the EMI paying capacity of the borrower.
Assume, borrower took a 25-year home loan of Rs 50 lakh at 10 per cent to buy a property worth Rs 65 lakh when he was getting a salary of Rs 75,000 per month. The EMI would come to Rs 45,435. Then after five years, the borrower wants to take a top-up loan.
Assuming the property value has grown at nine per cent, it will be worth around Rs 1 crore. The bank will offer home loan at a loan to value (LTV) of 75 per cent and top-up loan at 65-70 per cent LTV. In this scenario, the maximum top-up loan possible is around Rs 25 lakh (given that the home loan is still running). The combined LTV would be around 73 per cent.
Similarly, if the customer’s income has grown to Rs 1,25,000 per month, he would be eligible for a top-up loan of up to Rs 35-37 lakh. So, the customer would be eligible for the lower of the two amounts as a top-up loan – that is Rs 25 lakh in this case.
The eligible amount for LAP would be lower by about 20 per cent due to the higher rate of interest. The second issue is that since the house is already mortgaged to the bank for a home loan, an LAP might not be possible on the same property at the same time.
All said and done, borrowers should avail of loans only if extremely necessary. For those borrowing more or merely extending the tenure, they will end up paying more interest to banks, not prudent for their financials. But, if one is combining all other high-cost loans into a single top-up loan at a lower interest rate, it would be the best, provided the tenure is the same or lesser.
Ashwini Kumar Sharma | MON, JUN 15 2015. 01 26 AM IST | Live Mint
Use and possession of the secured assets differs depending upon the type of loan
Loans have become an integral part of our lives. Most people either service a home loan, a car loan, or a personal loan, or a combination of these. According to the Reserve Bank of India (RBI), as on 17 April 2015, total outstanding loans to individuals by banks was to the tune of Rs.11.77 trillion. These loans include those taken for consumer durables, housing, auto, education, credit card outstanding, advance against fixed deposits, shares and bonds. Most of these are secured loans (given against an asset). However, use and possession of the secured assets differs depending upon the type of loan.
This is the oldest form of a loan. Under this, the lender takes any asset as security in her custody or possession when giving the loan to the borrower. In case of default by the borrower, she has the right to sell the asset under her possession to recover the outstanding dues (principal along with interest). Common examples of loans by pledging assets in current times are gold loans and loans against securities such as shares, mutual funds or bonds. Typically, banks provide loans up to 50% of the value of approved securities.
Under this method, the lender provides a loan against movable assets. For instance, a vehicle loan (for a car, two-wheeler or any other vehicle). When you borrow from a bank to buy a car, the car gets hypothecated to the bank. The vehicle that is being hypothecated to the bank will remain in the possession and use of the borrower, but in case of default, the lender has the right to seize the vehicle and sell it to recover the unpaid loan amount. The total outstanding vehicle loan to individuals, as on 17 April, was Rs.1.26 trillion, according to RBI.
Another example of hypothecation loan is loan against goods or inventory (stock) and debtors. The borrower hypothecates the stock that she has to the lender and borrows a certain percentage of its value. The borrower has the right to trade the stock, but needs to maintain the minimum agreed value of stock. If the lender finds that the value of stock is less than the agreed value, it has the right to take the stock as pledge till the borrower pays the outstanding dues.
This is an agreement in which the lender provides a loan against immovable assets. A common example is a home loan. Of the total loan to individuals by banks, about 55% (Rs.6.42 trillion) is home loans. Just like hypothecation loan, here, too, the asset that is mortgaged to the lender remains in the possession and use of the borrower. But in case of a default or non-payment of estimated monthly instalment, the lender, say, a bank, can seize the property. The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (Sarfaesi Act), 2002, allows it to do so. If a borrower fails to repay her home loan, the bank can auction the property to recover the outstanding amount.
Source : http://goo.gl/ltYJri
By Anita Bhoir & Atmadip Ray | ET Bureau | 10 Jun, 2015, 04.22AM IST | Economic Times
When Reliance Industries with its triple-A rating goes to a bank for a loan it is sure to get the best terms possible. A company rated many ranks below may end up paying 5 to 6 percentage points more than Reliance. That reflects the difference between good credit and bad credit.
But when it comes to retail individual borrowers, banks do not provide the same benefit on cost of borrowing even if the applicants have a top credit score. More than 15 years after the credit information bureau, CIBIL, was born, neither are individual borrowers benefiting from good behaviour and sound financials, nor are banks treating retail customers the way they do companies, which are charged based on their financials.
Credit bureaus have helped banks in reducing their bad loans from the retail portfolio, and CIBIL assigns scores ranging from 300 to 900 based on the ability to repay with historical financial behaviour. Still, retail borrowers have continued to pay almost similar interest rates whether their score is 600, 890 or even 900.
All that CIBIL, the biggest credit information bureau, says is, “Higher your credit score, higher your chances of loan approval.” Almost four-fifths of bank loans to retailers are for those with a score of more than 750. This is akin to lending only to companies with triple-A to single-A, and not to those with lower ratings.
“Credit score helps retail customers in getting a loan,” says SBI’s Arundhati Bhattacharya. “We don’t give a loan unless a customer has good credit score. At present, we don’t offer an interest rate benefit to retail borrowers for a good credit score.”
Interest rates on home loans, car loans, or loans against property for investments or starting businesses are almost fixed at banks’ discretion. Home loans are charged between 10% and 13%, but within the bank, there is hardly any difference in interest rates between an individual with a credit score of 600 and the one with 890, or even 900.
In developed countries such as the US, credit information bureaus rank customers as prime, sub-prime and Alt A. Banks charge interest rates based on their rating, and do not just use that as a tool to decide on giving a loan.
“In advanced economies customers that are highly rated demand finer interest rates,” says Romesh Sobti, managing director and CEO, IndusInd Bank. “In India, banks run on the basis of portfolio pricing. Credit score has evolved, but it is being used to decide loan eligibility of an individual.” That retail borrowers are not deriving the benefits for good behaviour is partly attributed to the fact that consumer activism is not prevalent unlike in the West and that the regulator has not been pushing the case for banks to end the discriminatory stance between corporates and individual borrowers.
Furthermore, Indian banks, which are saddled with huge bad loans from lending to companies, partly offset their losses by charging more from retail customers. “Retail customers are paying for corporate clients,” says Ashvin Parekh, managing partner of Ashvin Parekh Advisory Services.
Economic slowdown and bad lending decisions on the part of banks has left them saddled with defaults. While the recovery is a long and difficult process, banks tend to offset their losses by charging other customers.
The banking sector has taken a loss of over Rs 50,000 crore as loans given to companies have turned bad at the end of March 2015. The economic slowdown and volatile recovery has taken a toll on corporate balance sheet.
Banks have restructured debt to the tune of Rs 2,86,405 crore at the end of March 2015 which is up 18.22% from Rs 2,42,259 crore last year. Loan defaulters include Bharati Shipyard, ABG Shipyard, GTL, Essar Steel, Sterling Oil Resources, KS Oil, Deccan Chronicle and Kingfisher Airlines among others, and their debt runs into thousands of crores.
Bad credit calls on the part of banks besides postponing the problem of bad loans will ultimately hurt good borrowers, for whom the cost will go up, Reserve Bank of India governor Raghuram Rajan has said.
“I am not worried as much about losses stemming from business risk as I am about the sharing of those losses — because, ultimately, one consequence of skewed and unfair sharing is to make credit costlier and less available.” Rajan said.
These huge bad loans are one of the reasons banks are reluctant to lower their lending rates even after the Reserve Bank of India reduced its policy rates. Indeed, the RBI governor had to publicly criticise banks for not doing so, after which banks reluctantly reduced the rates.
Although big lenders to retail customers such as SBI, ICICI and HDFC Bank may not be deciding on lending rates based on individuals’ credit score but rather, lend on the fixed-ticket rate, smaller banks such as Federal Bank do so to gain market share and boost their presence.
“We use the Cibil TransUnion Score to give retail customers a finer interest rate on loans,” says R Babu, consumer banking head at Federal Bank. “Credit score of 580 onwards get an interest rate advantage which could be around 200 basis points.”
Lenders like Federal may be few and far between to make a meaningful impact on the lives of retail borrowers in the next few years. But the transformation to credit score-related lending rates like in the West may be possible in the distant future.
“Using credit score to give customers an interest rate advantage is work in progress in India,” says Mohan Jayaraman managing director, Experian Indian Credit. “Very few banks are using this as a tool for rate differentiation. Globally, credit scores are used as an interest rate differentiation tool. This would be the natural progression in India as well but it will take time.”
Creditvidya.com | Updated On: February 02, 2015 12:26 (IST) | NDTV Profit
The happiness of buying goodies and spending on parties you might have attended during Christmas and New Year may have come to naught for you, if you are staring a hefty credit card bill right now. While this is definitely not the best way to begin a new calendar year, the damage is already done. If you don’t have the money to repay your dues right away, here’s what you could do.
1. Take stock of the situation
The first and most important step to take is to acknowledge the problem in hand. If you become a defaulter on your repayment on your credit card, it will impact your Cibil score negatively. While making one late payment may not hit you immediately, but if you get into the cycle of late payments it may be difficult for you to get out of it over a longer period of time (ranging over 60-90 days), which will then shave the points off your Cibil score eventually. To ensure that your Cibil score remains intact, you need to handle your credit card debt pronto. There are several ways to do it such as a balance transfer, converting your debt into an EMI or opting for a cheaper loan to repay your debt. Let’s look into these options in greater detail.
2. Balance transfer
This is a facility that banks offer to people who have a large outstanding balance. In this facility you can transfer the outstanding balance from one credit card to another. You could opt for a fixed duration balance transfer (usually a 3-12 month window) within which you can make the repayment at an interest rate that is lower than what you would have paid on your regular credit card. The rate of interest is usually 9-10 per cent (differs from bank to bank). Some banks also offer a “lifetime duration” option to make the repayment, though the interest rate in this case is much higher (in the range of 12-24 per cent, depending upon the bank). In order to get this facility, you will have to pay a processing fee, which will be around 2 per cent of the outstanding amount you wish to transfer. After the bank verifies your details, they will send you the cheque or the demand draft in favour of your existing credit card that you can use to repay the first card.
Although a balance transfer sounds like a great way to handle credit card debt, and other banks will be more than glad to issue yet another credit card to you, you must take cognizance of the fact that it is only postponing your problem instead of solving it. Your attempt should therefore be to use this facility sparingly. Besides, if you get into the habit of frequent balance transfers, you will end up opening a large number of credit lines. A large number of open credit lines may also impact your Cibil score, albeit marginally, in a negative way.
3. Converting outstanding balance to EMI
If you do not want to go through the hassles of balance transfer from one credit card issuer to another you could consider converting your outstanding balance into monthly instalments. Banks may offer a rate of 1.49 per cent to 1.99 per cent per month to their existing customers, but this too may vary from bank to bank. However, the point to be noted here is that if you miss a payment cycle during the EMI repayment, the bank will revert to the regular interest charges and you will find yourself stuck back in the same situation.
4. Opt for cheaper loans
Of all the debts you service, the rate of interest you pay on your credit card is the highest at 36-42 per cent per annum if it is not serviced on time, so it makes sense to opt for a cheaper loan to repay this high cost debt as soon as you can. You could therefore consider a personal loan for a period of three years if you are in a position to service it. The interest rate you would pay for it would be in the range of 16-24 per cent.
You could also opt for security backed loans such as a top up loan on your home loan or a gold loan. If you have a good track record in servicing your home loan, you will be eligible for a top up loan which is available at an interest rate of 12 per cent. Similarly, if you have some gold jewelry stashed away in a locker, you could use it to get a gold loan at an interest rate 13-15 per cent.
If you have other investments such as a fixed deposit, you may also opt for a loan against it. Such loans are available at a rate of interest that is one percent higher than what is offered on the investment itself. For instance, if you are earning a rate of interest of 9 per cent on your fixed feposit, a loan against it will be available at a rate of 10 per cent. Loans against other investments such as traditional life insurance policies, mutual funds, etc. are also available at similar rates. If you have accumulated a large debt pile, you can also think about liquidating some assets to pay off your credit card debt.
5. Negotiate for a lower rate of interest
If you feel that none of the above options are feasible for you could pay a visit to the bank and explain your financial situation to them. If you can convince them about your willingness and intention of repaying, chances are, that you can get a low interest rate or a flexible repayment schedule depending upon the bank’s policies. However, do consider the feasibility of the other options discussed above, before you think of doing this.
6. Cash is your best friend
Till such time you have paid off your credit card dues, cut down on your expenses and live on cash. It’s a good idea to lock away your credit card till all the debt has been cleared on it. You will need to be patient as you atone for reckless financial behaviour, but this will probably serve as a lesson for a lifetime for you. Once you are in the pink of your financial health once again, you will feel good about your frugality.
A credit card debt pile can indeed be intimidating, so do be careful and responsible while using it in the first place. However, if things have gotten out of hand already, the above mentioned hacks can be used to get things back to normal. Once things are back in order, it is also recommended that you pull out your Cibil report. This is to ensure that your efforts to repay your debt are reflecting on your Cibil report and your Cibil score is in order.
Disclaimer: All information in this article has been provided by Creditvidya.com and NDTV Profit is not responsible for the accuracy and completeness of the same.
By Preeti Kulkarni, ET Bureau | 18 Apr, 2014, 02.56AM IST | Economic Times
In its annual monetary policy announced on April 1, the Reserve Bank of India (RBI) issued an advisory to banks asking them to consider abolishing pre-payment penalty on floating rate loans. The regulator has also indicated that if banks failed to implement the advisory, it might make it mandatory. If implemented, the move will benefit borrowers of auto, personal, education loans, who are unable to switch over to cheaper loans due to the stiff prepayment penalty of 0.5% to 4%.
Earlier, the RBI had scrapped the pre-payment penalty on floating rate housing loans. The regulator’s working committee’s draft report on credit pricing also calls for more transparency, fairer pricing and penalty structures. Clearly, it indicates the path the RBI wants banks to follow.
“In spirit, the advisory’s objective is to promote transparency in pricing. Often, we have seen that the interest burden on car loans or personal loans never goes down, as rate cut benefits are rarely passed on to the customers. An option to switch or pre-pay without any obstacles could force banks to treat their existing customers on par with the newer ones,” says Harshvardhan Roongta, CEO, Roongta Securities.
In the absence of this penalty, the customer can shift the loan to another bank that offers a cheaper rate. “The process (of transferring loan) will be easier if pre-payment penalty is abolished. At the same time, the pricing of loans by banks will also be competitive to ensure that good customers remain with the bank,” adds VN Kulkarni, chief credit counsellor with the Bank of India-backed Abhay Credit Counselling Centre.
Clean Your Portfolio
Experts say borrowers shouldn’t hold on to their existing “unproductive” loans like auto and personal loans in anticipation of an abolition in penalty for pre-payment of loan. They advise individuals to clear them with higher interest rate, even if it means paying the penalty. Credit counsellors call for full pre-payment of car, personal and credit card dues. “Prepaying a loan which has no benefit for holding on to is always advised.
Credit card or personal loans should be closed as soon as the requirement is over, and with the first available cash in hand,” says Sukanya Kumar, founder and director, RetailLending.com, a loan aggregator and advisory portal.
In the months of April and May, corporates hand out annual increments and bonuses to their employees. You can use the lump-sum amount to repay your loans. However, before that, set aside an amount equal to six months’ expenses for a contingency fund, and buy life and health policies if you do not have adequate insurance cover.
Home loans and education loans, meanwhile, are considered ‘good’. It necessitates a cost-benefit analysis before taking a call on full pre-payment.
Both the loans lead to creation of assets — tangible and intangible respectively — apart from yielding considerable tax benefits. Hence, they are considered ‘good’ loans. The pre-payment of such loans, therefore, will depend on your assessment of actual savings, which is not the case with personal, credit cards or car loans.
Points to Bear in Mind
If you do decide to go ahead with full pre-payment, ensure that you see the procedure through till the end. Don’t assume that your loan will be considered closed once you deposit the required funds into the loan account. “Borrowers need to inform banks when they pre-close. If you just make the payment, the loan may still remain open and incur an annual fee,” points out Kumar.
Then, there are other aspects to be taken care of.
“Enquire about the exact amount of outstanding balance for the actual date of closure. For example, if you enquire today and go for a closure after three days, the bank may have not factored these three days’ interest. So, even after you pay, this amount could be treated as ‘balance due’, though you believe you have closed the loan,” she adds. Also, take back all blank cheques you would have given to the bank during loan disbursal.
Source : http://goo.gl/P20GHn