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
By Rajiv Raj, Founder & Director, Creditvidya.com |May 17, 2013, 12.51 PM IST| Moneycontrol.com|
Loan against property is better for making your son’s / daughter wedding a grand occasion. Many times people borrow money using personal loans to fund their weddings and end up paying rate of interest in the range of 18 percent to 24 percent if not more.
Come May and the wedding season begins. On the one hand, there would be families that would be fixing dates for weddings, on the other hand, there would be families that have already decided the fate of their sons and daughters. In either case, there is an element of cautiousness about arranging funds and meeting all requirements of the wedding. While a few fortunate ones would not be affected or tossed around by such uncertainties, there is a vast majority of increasing middle class, which on most occasions are short of funds. For these who are short of funds and yet are unwilling to compromise on the requirements and appearance of wedding, there is a way out.
It is a loan against property. Loan against property is a better way to borrow for your son/daughter’s wedding as compared to taking personal loan. Many times people borrow money using personal loans to fund their weddings and end up paying rate of interest in the range of 18 percent to 24 percent if not more. Unfortunately, these loans need to be paid in the period of one to three years. So, if you have borrowed too much money it is cumbersome to pay back.
Loan against property comes at a relatively low rate of interest. The rate of interest typically stands between 12 percent and 14 percent and the term of the loans can be as long as 10 years. Bank offers loan equivalent to around 50 percent of the value of the house. If value of your house is Rs 1 crore, you may get up to Rs 50 lakh loan. To put it simply, you can put up a large sum at a low rate of interest and for a longer tenure. This is far better than opting for a loan by using gold as collateral. Though many people are aware of loan against gold, it does not seem feasible and lucrative since gold ornaments are amply worn and used in wedding season. And hence gold cannot be offered to bank as collateral. In such circumstances, it makes sense to take a loan against your property – your home.
In a loan against property case, typically, the bank inspects the property and conducts the due diligence before approving the loan. The bank ascertains the value of the property, the ownership of the property and the residual life of the property. Depending on the repayment capacity of the borrower, the bank approves the loan after taking into account these and other factors pertaining to the property. All this process takes some time. It can take time from a fortnight to one month. So, you have to start early. Banks also charge a fixed processing fee to the extent of 0.5 percent to 1 percent for the process.
Banks can also offer you a top up loan against your home, which is mortgaged with them. So if you have a home loan running with the bank for some time, you may approach the bank for additional loan – the top-up loan. Bank will approve you some loan if your salary can service such incremental loan along with home loan, if the property value too has gone up.
All these things look tempting and workable. But, do not forget a couple of things. First, you need a good CIBIL credit score to get a loan against property. And second – after getting such a loan repay it on time. This will enhance your credit worthiness for banks.
Source : http://goo.gl/D0PlD
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1 APR, 2013, 02.53PM IST, AMIT SHANBAUG,ET BUREAU
Even if you are a meticulous saver, there may be times when your finances are strained and you need a little help to tide you over. Though borrowing from family or friends is a preferred option for many, if the amount you need is large, it may not be a good idea to stress their finances as well. A better option would be to leverage an asset you own—your house.
You can use your house as collateral to take a loan from a bank. The latter will exercise due diligence as far as the property is concerned, appraise its value, and offer you up to 70% of its value as loan. Since this is a secured loan (you are offering a collateral), you can get a higher amount than the one you will get for an unsecured loan like a personal loan. Of course, you will also have to pay the administrative and processing fee, which is usually 0.5-1.5% of the value of the loan. Typically, the tenure for such a loan is 1-9 years, but some banks may be willing to extend it to 15 years if the loan is large. The interest rate, which can be floating or fixed, varies from 12-16%, which makes them cheaper than personal loans (see table).
“Taking a loan against your property is certainly cheaper than a personal loan, where the interest rate is usually between 14% and 22%. The only loan that is less expensive than the one against a property is a home loan,” says Rajiv Raj, director of CreditVidya.
It’s also a better option since the tenure for these loans is longer than those for personal loans, which offer a maximum term of five years. Of course, you can prepay the loan, with the banks following the same guidelines as those for regular home loans. Though they cannot charge any fee for floating rate loans, there is a 2-4% penalty for fixed rate loans.
How to get a loan against your property
If the property you are taking a loan against has more than one owner, all of them will have to be joint applicants to avail of the loan. You can get a loan against any type of freehold property, from a house to a plot of land. It also doesn’t matter whether you live in that house or have given it on rent. “The most important criterion is that the title of the property should be clear and there shouldn’t be any encumbrances,” says Pankaaj Maalde, head, financial planning at Apnapaisa.com.
The bank will check all the documents related to the title of the property, as well as ask you for proof of residence, such as ration card, electricity bill or telephone bill. You will also have to submit a copy of the proof of identity, such as a voter ID card, passport or PAN card. If you are employed, you will have to provide bank statements for the past six months, while a self-employed person will have to provide a certified financial statement for the past two years.
The loan offered by a bank will vary from person to person since it depends on various factors, including the work profile and age of the borrower. “Typically, the income proof for three years is required to have the loan against a property sanctioned. So, the minimum age is 24 years. Similarly, lenders prefer that the loan be fully repaid while the borrower is employed, which is why the maximum age till loan maturity in case of a salaried person is 60 years, while for self-employed individuals and consultants is 65 years,” says Raj.
The bank will also check your credit history through the Credit Information Bureau India Ltd (Cibil) and go through your repayment track record. Based on your credit score and the above documents, the bank will ascertain your repayment capacity. In case you have ever defaulted on any bill payment, it will reduce your chances of getting a loan. After the bank is satisfied with the paperwork, it will offer you the loan, which will typically range from 40-70% of the value of the property.
Is this the best option?
The main reason people usually don’t opt to mortgage their house is that they don’t want to take the risk of the bank taking over the property if they are unable to pay the dues. Another disadvantage is that there are no tax incentives while paying the EMIs, unlike in the case of home loans. However, this is only in the case of a salaried person. A businessman can claim tax deduction on the entire interest amount paid on the loan if he can prove that the loan was genuinely used to improve his business.
However, this tax advantage is also available if the businessman takes a loan against gold or shares/securities that he owns. The interest rate for a loan against shares or securities, such as the PPF and NSC, varies from 12-15%, while that for gold ranges between 14% and 25%. In the case of the former, a lender will be willing to offer a loan that is 40-60% of the value of the securities, while for a gold loan, you will be able to get 50-70% of the value of the gold you pledge.
In either case, if you default, the bank will sell the pledged shares or gold to recover its dues, which is a smaller loss than losing your home. However, if you need a large amount of money that runs into lakhs, the only viable valuable asset that you may be able to pledge is your house.
Source : http://goo.gl/wIcsH