Lenders prefer to offer home loans to individuals who have a credit score in excess of 750.
Nikhil Walavalkar | May 16, 2018 09:46 PM IST | Source: Moneycontrol.com
Issuance of a credit card marks the entry into the world of credit for most millennials. The journey that starts with a credit card generally peaks when one opts for a home loan, thanks to sky-high home prices. Obtaining a home loan at an attractive rate is a task for many. But they forget that if one uses a credit card prudently, it can help strike a better home loan deal. Here is how it works.
Lenders prefer to offer home loans to individuals that have a credit score in excess of 750. This score is not built overnight. If a borrower has been repaying the loan on time, it can help build a credit score over a period of time. Here is how your credit card usage aids in building a credit score and obtain a home loan at an attractive rate of interest.
Timely repayment of outstanding
Credit cards allow you to access funds without interest for a stipulated period of time, if you pay the entire bill before the due date. “Failure to pay the bill in full attracts interest but also harms your credit score,” Satyam Kumar, co-founder and CEO of LoanTap Financial Technologies, said.
He advises paying all credit card dues in full before the due date to ensure that the credit score goes up. If possible use standing instructions on your saving bank account, so that the lender debits the bill from your account. If you pay the minimum amount due, even though the banker is not treating it as a default, credit score companies do not take it positively.
If you miss your bill payment once in a while by a couple of days, it may not kill your credit score. But avoid repeating such instances a few months before applying for a home loan.
Credit utilisation ratio
“Keep your credit utilisation ratio low at around 30 percent,” Kumar stated. For beginners, it stands for how much credit one uses out of the allotted limit. It is calculated for each card separately as well as jointly for all cards. For example, if you have two credit cards – A and B – with a credit limit of Rs 1 lakh each. and spend Rs 60,000 and Rs 2,000 on these cards, respectively. Then the credit utilisation ratio for Card A and B stands at 60 percent and two percent, respectively. Jointly it stands at 31 percent. Had the user spread this expenses equally on both cards he would have been closer to the 30 percent mark.
Once in a while this number may go up. But consistently high numbers shows a credit hungry behaviour. If you are using a credit card with low limits, it makes sense to ask your banker to increase the credit limit on the credit card. This will ensure that your credit utilisation ratio falls, if you keep spending a similar amount.
Longevity of your credit card accounts
Credit score gives more weightage to older credit accounts. Longer the repayment history, better is the credit score. Avoid closing your old credit card accounts. Keep using the old credit card and repaying it before the due date helps the credit score.
Personal loans on credit cards
Many prefer to avail personal loans on their credit card to avoid paying a high rate of interest. This move blocks their credit card limit. The borrower is also expected to repay the loan on time. Late payments or defaults on these loans also pull down one’s credit score.
“Be diligent while repaying these personal loans as they are high-cost credit compared to other secured loan options. Also, failure to repay leads to a fall in credit score,” Vishal Dhawan, Founder and Chief Financial Planner at Plan Ahead Wealth Managers, said.
If there is a dispute with the lender pertaining to a transaction or charge on the credit card, do not ignore it. “Sometimes individuals tear the credit card as they are unhappy with the service. However, it does not help. One has to ensure there is no outstanding and formally close it,” Dhawan added.
Opting for a one-time settlement or not paying it up will lead to adverse remarks in your credit report. “If you spot a disputed transaction or a charge on your credit card, it makes sense to speak with the card issuer and follow up for an amicable resolution,” Kumar said.
If you use your credit card prudently, there is a high possibility that your credit score will remain good and you will be offered a better deal.
No need to press the panic button. You can still ensure your child has the dream wedding you envisioned.
Rajeev Mahajan | May 15, 2018 08:27 AM IST | Source: Moneycontrol.com
Preparing for your child’s wedding? You may want the nuptials to be fabulous – with a dreamy ambiance, excellent food and scented flowers. While Indian parents invariably create a decent corpus for the auspicious occasion, there may emerge a scenario when the budget spirals out of control and resources are just not enough.
No need to press the panic button just yet. You can still ensure your child has the dream wedding you envisioned. Read on for some easy options that can help you in organise the funds needed for the special day.
A personal loan is an excellent way to defray expenses without fretting over offering collateral. Most financial institutions, including nationalised banks and NBFCs, offer personal loans. Since it is unsecured in nature, the interest rate is a tad steep and ranges between 14 percent and 24 percent a year. There are, however, a few criterions for sanction, chiefly your monthly income.
Lenders also review your current financial health, monthly commitments, debt payments, assets, existing equated monthly instalments (EMIs) and unsettled loans. They look into your credit report and score. Simply put, lender needs assurance that you have the resources for loan repayment.
Loan against property
This is another option that provides you a financial buffer against unexpected wedding costs. You can pledge residential/commercial property or a plot of land at its prevailing market value to avail funding from a bank.
The approval for loan against property is straightforward, provided all valid documents are in place. Since it is a secured loan, the rate of interest is affordable as the lender can recover the borrowed amount by selling the mortgaged property in case of default.
One can also avoid a cash crunch by opting for a wedding loan. These loans are granted by many financial establishments under the personal loan category. A wedding loan is sanctioned on the basis of factors like your employment status, net monthly income, credit score, past loan history and your ability to pay back.
Given that no guarantor is required, the interest rates are high. Also, the tenure option is flexible. You can avail the pre-payment facility and settle the outstanding balance amount before the due date, thereby saving on the high interest rate.
Loan against securities
Another way to ease the financial burden of your child’s wedding is by opting for a secured loan. Banks and financial institutes offer assistance against mortgage of financial assets: term deposits, savings certificates or life insurance policies. The amount sanctioned depends on the value of the collateral. Since lenders have the security of retrieving their investment in the event of an interest rate default, the interest rate is low around 12-15 percent annually. Also, unsecured loans don’t require much documentation.
P2P lending platform
Do you have a less favourable CIBIL score? You may want to consider a peer-to-peer (P2P) lending platform to raise money for essential wedding expenses. The P2P route though still in infancy is being viewed as an attractive alternative to personal loans.
The online lending phenomenon is uncomplicated and allows you to borrow money directly from investors at attractive rates on the basis of your creditworthiness. What’s more, the entire funding procedure is accomplished with speed and without too much paperwork.
Looking for another alternative to bail you out from a stressful situation? Adopt the crowd-funding path to offset some of the rising wedding costs. It is an innovative measure that can help raise funds quickly to cover the shortfall. In recent years, crowdfunding websites have mushroomed in large numbers.
The concept is simple. Just create a compelling page online along with a target amount and then share the link with close friends, neighbours, relatives, co-workers, among others. You might be surprised at the number of contributions that come towards the wedding kitty.
Borrow from family members
Tried all the above options in vain and still running short? Seek the support of close family members to tide over the wedding expenses that have suddenly emerged. But before taking this step make sure you have a repayment plan in place after the big day.
This is important since loans taken from loved ones are interest-free and flexible with no signed agreement. The best way is to hand over a promissory note with the assurance that the borrowed amount will be reimbursed by a specific date.
Exploring the above funding options will help you in planning your child’s wedding without any financial constraints. It is important to exercise restraint and not exceed the wedding budget drastically, so that the borrowings do not lead to financial distress. At the end of the day, one must remember that the loan acquired is a debt that has to be repaid.
The writer is Co-Founder, CEO & Director of Antworks Money
There are many easy ways to quickly improve your credit history and score. But if you are not careful, these measures may even jeopardise your financial security
Shaikh Zoaib Saleem | First Published: Mon, Nov 27 2017. 12 37 AM IST | Livemint.com
If you need a loan to buy something you cannot fund immediately, you approach a financial institution—typically a bank or a non-banking financial company (NBFC). When you do that, the financial institution runs a background check on you, from its own database (if you are an existing customer) and also from a credit information bureau. The credit information bureau is authorized by the Reserve Bank of India (RBI) to gather information on loans and borrowers from banks and analyse it to arrive at a score of creditworthiness of an individual. If your creditworthiness is good, you would get a loan relatively easily and at better terms. If not, either the loan will be rejected or you will be charged a higher interest rate. This is especially true in case of personal loans. The institutions’ decision to lend is based in large measure on the credit score and the credit report.
What is a credit score?
It is a number based on your credit report, which is a summary of your past and current borrowing and repayment history. If you were regular with repaying loans, including your credit card bills, your credit score is likely to be higher. This score helps banks assess your loan repayment capacity and your chances of defaulting on it. “Credit score is derived from the credit history of an individual. A consumer needs to have a minimum of 6 months of repayment track record on a loan or credit card or closed credit accounts less than 2 years old before a credit bureau can generate a credit score,” said Hrushikesh Mehta, vice-president and head of direct-to-consumer business, TransUnion CIBIL. A credit score is created as your lending and repayment relationship with financial institutions evolves. However, if you are new to credit, here are some ways you can quickly start to build a credit score.
Credit cards or personal loans
If you are new in the workforce, you can start by getting a low-limit credit card from the bank where you have a salary account, said Sumit Bali, senior executive vice president and head-personal assets, Kotak Mahindra Bank Ltd. “Based on their income, banks can give them a card with low limit. Use that card sensibly and build a credit history,” he said.
In the past, people considered taking personal loans to build their credit score. However, with a personal loan you will necessarily have to spend your money in paying the interest, whereas with credit card repayments within the stipulated time, you do not have to shell out extra money. For slightly older professionals, about 35 years old, credit history is not much of a worry if their bank account status and average balance are good, and investments and tax returns are in place. They “don’t really need a credit card to prove credit worthiness. Any bank would sensibly look at it and take a call,” Bali said.
Peer-to-peer (P2P) lending platforms are an emerging option for creating and enhancing your credit history. The RBI has recognized these platforms as special category NBFCs and has mandated them to share lending data with credit information bureaus. “Once the P2P lenders receive their licence, they will be able to begin data submission. Once that happens, P2P lending will become a viable option in helping one build a credit score,” said Mehta. However, in this case too, you will have to pay an interest on the borrowed amount.
In some cases, especially where customers have a long relationship with their bank, the banks may also look at own data to determine creditworthiness, Bali added. “Credit score by and large is a good indicator but it may not be the only indicator,” he said.
Alternative credit scoring
Evaluating someone who has never taken a loan can be difficult. This is where alternative credit scoring comes in. Here, instead of relying on a credit score, lenders consider your transactions and behavioural data like bill payments, online buying behaviour and information from your social media platforms to understand your repayment capacity.
“Often people are refused big-ticket loans like a home loan for the lack of credit history, even if their finances are in order,” said Abhishek Agarwal, chief executive officer and co-founder, CreditVidya, a credit advisory that also works on alternative credit scores.
While the RBI-regulated credit bureaus are currently not allowed to use alternative data for credit scoring; in other developed markets parameters like utility bill payments, insurance premium payments have been used for credit scoring (read more on it here.
However, financial institutions including top public and private sector banks and NBFCs in India, have started using alternative data in multiple verifications and validations across the credit value chain, Agarwal said. “Innovative offerings like pre-approved offers or instant loans are leveraging alternative data from multiple sources to provide seamless customer experience,” he said, adding that leveraging alternative data for credit risk assessment of secured loans is still distant. Banks use the alternative scores “in conjunction with other things, like data that you have about the customer. This is happening for personal consumption products like credit cards and salaried personal loans. We are putting it to use but what is the outcome from that, it is too early to say,” Bali said.
While credit cards and loans help to build a credit history and score, caution needs to be exercised. If used carelessly, these can put you in a debt trap, and ruin your credit history too.
Not just that, you should also keep your digital and transactional behaviour in check, as going forward more and more data could be used to assign you a credit score.
Source : https://goo.gl/m7Ns7g
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.
Personal loan is an unsecured loan with one of the highest interest rates of all credit products. To avail one, an applicant must have a reliable credit rating. Do carefully consider the following points and assess which personal loan is the best for you.
By: Adhil Shetty | Published: August 23, 2016 6:04 AM | The Financial Express
Personal loan is an unsecured loan with one of the highest interest rates of all credit products. To avail one, an applicant must have a reliable credit rating. Do carefully consider the following points and assess which personal loan is the best for you.
The eligibility of a borrower varies from bank to bank. The primary criterion is the capability of loan repayment. Other criteria include your age, profile, place of work and lots more depending on the bank’s requirement.
In August, the interest rates of personal loans from some of the leading banks of India ranged between 11.15 and 22%. The better your credit score, the lower your interest rate would likely be while obtaining a loan. A CIBIL score of 750 or more will get you a favourable interest rate. You could also go to a bank with whom you have a long-term association, based on which you could get a bargain.
Tenure of loan
Typically, such loans are of a 12-60 month tenure. Long-term loans may carry higher interest rates than shorter ones, but you can have the option of paying smaller EMIs on a longer term. Evaluate your EMI burden and arrive at an amount you are comfortable with before settling on a tenure. Have the shortest possible tenure to avoid paying a lot on interest.
Flexibility of repayment
Check out if you have the option of making principal payments on your loan at no cost. Some lenders charge a prepayment fee for settling a loan before its tenure. You may want to skip lenders who have prepayment charges since they disincentivise the quick settling of loans.
The amount you would receive from the lender is tied to your income. The higher your disposable income, the bigger the loan you stand to receive. Often, lenders with whom you have a relationship such as a credit card or a savings account, would approach you with a ready-made offer of a personal loan. You should take a loan according to the size of your requirement. Make sure the borrowed amount is used productively and not squandered on expenses it wasn’t meant for.
Fees and charges
Besides rate of interest, banks also charge fees on documentation, processing and pre-closing the loan. Processing fees mostly range from 2% to 3% of the loan amount. The pre-closing fees also vary from 2-3% of the loan amount. If you are good at haggling, you can get the per cent of fees and charges reduced.
Finally, don’t go overboard
Avoid the temptation of applying to too many lenders for a loan. This would reveal you as credit-hungry. Too many inquiries into your credit history could also bring down your credit score, making it tougher and more expensive for you to avail a loan.
The writer is CEO of BankBazaar.com
Source : http://goo.gl/nzxiZe
A declining interest rate scenario also leads to several people opting to refinance their home loan.
Sanjeev Sinha | ET Bureau | 17 May 2016, 11:00 AM IST | ET Realty
Refinancing a home loan means availing a new loan from another lender to pay off an existing one. Two primary reasons for switching a housing loan (also known as refinancing) are:(1) To get the benefit of a lower rate of interest and (2) To avail a top-up on the original loan amount. However, besides these two, there could also be many other reasons for taking a new loan to pay off an older one. These can be poor service quality of the existing lender and consolidation of loan portfolio, among others.
Here we take a look at five most common and compelling reasons for home loan refinance:
1. Saving on interest cost: This is the most common reason for shifting the home loan to a new lender. If an individual, for instance, is paying higher interest on an existing home loan than that offered by another lender, he would naturally be tempted to go for a new loan that brings down his total interest cost and consequently his EMI.
A declining interest rate scenario also leads to several people opting to refinance their home loan. It is common knowledge that most home loans are floating rate loans, which means they are linked to overall macro interest rate movements. Not all lenders reduce the interest they charge on their loans when the general interest rates in the economy fall. Some lenders reduce their rates after a lag and some do not reduce the rates as much as the base rate declines.
“It is often seen that when home loan rates move upwards, all customers’ loan rates tend to go north. However, there is a possibility of the rates of not all loans coming downwards in the reverse situation. This also makes home loan refinance an attractive option as your current loan gets adjusted to prevailing market interest rates, giving you significant interest cost savings and reducing your monthly EMI burden,” says Parth Pande, co-founder of Finance Buddha, a marketplace for retail lending products.
2. Moving from floating rate loans to fixed loans or vice versa: Home loan customers may be in any of these two scenarios. They may be paying a high floating interest rate and therefore are likely to see value in moving to a fixed rate home loan, in which case their EMI will be constant for a certain period of time. Alternatively, they may be stuck with a fixed home loan at a higher rate (fixed rate loans typically are at a higher rate than floating rate loans at any point of time). In this case, they may realise that the overall interest rates have moved southwards and floating rate loans are much cheaper than their existing loan and there is value in switching the loan. In both these scenarios one may like to opt for refinance.
Let us take the example of an individual who had opted for a 20-year fixed rate home loan of Rs 50 lakh at 12.25% per annum two years ago and is now paying an EMI of around Rs 56,000. “After paying the EMI for two years, his outstanding loan amount is Rs 48,67,866. For the rest of the tenure (18 years), he decides to shift to another bank which is offering floating rate home loan at 9.75% per annum. This way he reduces his EMI from Rs 56,000 to close to Rs 48,000 and his total interest cost comes down from Rs 84 lakh to Rs 67 lakh,” says Rishi Mehra, co-founder of deal4loans.com, a loan comparison service engine.
True, the individual may have to incur some charges for pre-closing his loan and getting his loan refinanced from another lender, but those charges are likely to be negligible compared to the savings he will be able to get during the remaining tenure of the loan.
3. Additional loan opportunity: Along with home loan refinance, customers also have an option of taking incremental funding (also known as top-up) at the prevailing home loan rates. For example, Mr A took a Rs 40-lakh loan for buying a Rs 50-lakh property 5 years back. After paying the EMIs for 5 years, let’s assume that the loan value has come down to Rs 30 lakh, however the property value has appreciated to Rs 1 crore.
“This means that Mr A can now get a home loan of up to Rs 80 lakh on this property, if he so desires. But he can’t avail the entire amount as loan as he still has an outstanding loan of Rs 30 lakh which he has to clear first before taking the new loan. In this case Mr A can get his loan refinanced from another lender to transfer the Rs 30-lakh outstanding amount at a lower interest cost, while he can also get incremental funding of Rs 50 lakh (Rs 80 lakh minus Rs 30 lakh) at more or less the same interest rate,” informs Pande.
However, you should opt for a top-up of your loan from another lender only if you are getting the benefit of lower rates, otherwise try to get it from your existing lender as that would be easier and you also won’t have to incur charges for getting the loan refinanced. “Should you plan to switch your housing loan to avail the ‘top-up’ option, I would advise you to approach your existing bank for a top-up plan, in case the interest rates are similar. If your loan repayment track record is good as well as the value of the property has appreciated, there is a good chance that the existing lender would consider your request for a top-up,” says Naveen Kukreja, co-founder and CEO, PaisaBazaar.
4. Poor service of the existing bank: If the bank from which you have taken your home loan does not service you properly- for instance, if it does not issue loan statements on time, provides bad customer care services or is slow in reacting to changes in interest rates-there is every reason for you to get your loan refinanced from a lender which is known for providing good services.
5. Change in financial status: Any increase or decrease in your income would affect your ability to service your EMIs. In case your monthly income has decreased due to any reason or another financial obligation has come up, refinancing a home loan by replacing it with one with a longer tenure is a good idea to reduce your EMI amount. “On the other hand, in case you are in a better financial position compared to when you had taken a home loan, it may be a good time to opt for home loan refinance and reduce the tenure of the loan, thereby increasing your EMI amount but making sure you will be now be able to repay your home loan sooner,” says Adhil Shetty, founder & CEO of BankBazaar.com.
Thus, apart from other benefits, one can save significantly if one refinances one’s home loan keeping in mind the overall interest rate movements in the economy. However, there is need to take some precautions.
Here’s what you need to keep in mind while opting for home loan refinance:
# Try to switch the loan early on during the tenure. “It is advisable not to make the switch after 5-6 years of loan payment as you would have already paid most part of the interest amount during the initial period,” says Kukreja.
# Secure clarity on processing fee, valuation fee and other charges that will be applicable in case you opt for a fresh loan.
# Be aware of the fact that the new bank/lender would treat your request for home loan as fresh and hence, you will have to go through all procedures again. This is inclusive of legal verification of your property credentials, credit appraisals etc.
# Make sure that you get a statement from your current lender stating that all relevant documents will be transferred to the new lender within a stipulated time-frame.
# You may not be able to switch the housing loan if you have been irregular with loan repayment in the past.
Source : http://goo.gl/qALCF3
Nov 2, 2015, 08.00AM IST | Economic Times
Arvind is an IT professional, living in a metro with his wife and children. His income has been steadily rising over the last 10 years. The family leads a comfortable life, despite servicing a home loan taken eight years ago. Arvind’s wife now wants to renovate the house. The family had not planned on or saved for this expenditure. Arvind is unable to spare any funds and he does not want to draw from his existing investments. Since the renovation is going to be a one-time expenditure, his wife suggests that they take a personal loan. Is that the right thing to do?
Arvind is not keen on going through the hassless of applying for a new loan. Since he already has a running home loan, his financial adviser suggests taking a top-up loan, which would be a better and faster option than a personal loan. Arvind will be eligible for a top-up loan now since the original loan was taken eight years ago and he has been diligently paying all the EMIs towards repaying that. Moreover, thanks to the steady rise in his income, he will be eligible for a sufficiently big topup loan.
Considering Arvind is an existing customer, the documentation and the overall process will be fast in case of a top-up loan as there is an existing relationship and the history is known by the lender. Moreover, with a top-up loan, he gets the benefit of a longer repayment tenure. The maximum tenure for a personal loan is 5 years while a top-up loan’s tenure could go up to the remaining tenure of the home loan. Also, the interest rates on top-up loans are lower than a personal loan. A personal loan is unsecured, while the top-up is an additional home loan secured by the property. Additionally, Arvind will be able to seek tax benefits as he plans to utilise the top-up loan amount for renovating the existing house.
For someone like Arvind who has a good repayment track record, availing a top-up loan may work out to be an efficient solution. He would get the benefit of a secured loan (lower interest rate and EMI, longer tenure) without having to mortgage a new asset. He should, however, review the insurance cover for the loan and ensure that it is also modified to cover the new increased liability.
In order to get a loan at competitive interest rates, it is mandatory to have a CIBIL score of 750 and above.
By: CreditVidya | October 5, 2015 3:32 PM | Financial Express
In order to get a loan at competitive interest rates, it is mandatory to have a CIBIL score of 750 and above. This is a fact that most people are unaware of despite the information overload about credit score and its impact. There are a lot of articles online and offline about how it is mandatory to keep your CIBIL score high. Your CIBIL score is a measure of your credit worthiness. In other words, banks look at your CIBIL score to find out how you have handled your finances and whether or not you have behaved responsibly with the credit you have already availed of in the past. But the fact is, that people are still unclear about what exactly should they do to maintain a high CIBIL score. If you too are among those who are still confused as to what really impacts your CIBIL score, here is the lowdown on what really matters:
1. Make timely payments – The one top trick to pump up your CIBIL score is to make all your payments on time – very basic requirement, indeed. This is applicable to all the credit you already have. This includes credit card outstandings and EMIs on loans. Also make sure you make other payments such as insurance premiums etc on time, though it does not fall under the credit bracket. Even a single late payment on a home loan or an unpaid outstanding on your credit card, will bring your CIBIL score tumbling down and be a blemish on your CIBIL report.
2. The total amount of credit you have availed of – Credit is something that is easily available today. You therefore probably have at least two or three credit cards that you are using simultaneously, along with a home or a vehicle loan. While you are particular about repaying EMIs, you think its OK to pile on the debt on your credit card, because you are far from your credit limit. If you are under any such impression, stop right there! The amount you owe to your lenders makes a large impact on your credit score. The closer you are to your credit limit, the worse its gets! Ideally you should not be using more than 30% of your total credit limit at any given time.
3. For how long you have had credit – “Credit history” as it is called in financial parlance has a large impact on your CIBIL score. If you have availed of credit for a long time and have serviced it well, it certainly fetches you brownie points to increase your CIBIL score. A good credit history gives a prospective lender the confidence to lend to you.
4. Too much credit in a short period of time – If you apply for too many credit cards or loans close to each other, it sets the alarm bell ringing for any bank. As for your CIBIL score, it inches lower each time you apply for a new loan. Every time you apply for a new credit card or loan, there is a “hard enquiry” made on your CIBIL score and CIBIL report, bringing down the score a few notches lower each time.
5. Good and bad debt – Believe it or not, the kind of debt you avail of, makes an impact on your CIBIL score. While home, vehicle and student loans fall under the category of good debt because they are “secured” in nature, “unsecured” loans such as too many credit cards or personal loans spell trouble and bring your CIBIL score down.
Source : http://goo.gl/yqf81M
Neha Pandey Deoras,TNN | Sep 21, 2015, 06.46 AM IST | Times of India
In an ideal world, everybody would have enough money for all his needs. In reality, many of us have little option but to borrow to meet our goals, both real and imagined.For banks and NBFCs, the yawning gap between reality and aspirations is a tremendous opportunity . They are carpet bombing potential customers with loan offers through emails, SMSs and phone calls. Some promise low rates, others offer quick disbursals. Online aggregators help customers zero in on the cheapest loan and banks take less than a minute to approve and disburse loans. However, while technology has altered the way loans are disbursed, the canons of prudent borrowing remain unchanged. It still doesn’t make sense to borrow if you don’t need the money. Or take a long-term loan only to enjoy the tax benefits available on the interest you pay . Our cover story this week lists 6 such rules of borrowing that potential customers must keep in mind. Follow them and you will never find yourself enslaved by debt.
Don’t borrow more than you can repay
Don’t live beyond your means.Take a loan that you can easily repay .”Your monthly outgo towards all your loans should not be more than 50% of your monthly income,” says Rishi Mehra, Founder, Deal4Loans.com.
With banks falling over each other to attract business, taking a loan appears as easy as ABC. But don’t take a loan just because it is available. Make sure that your loan-to-income ratio is within acceptable limits. Take the case of Hyderabad-based Phani Kumar, who has been repaying loans right from the time he started working.
It started with two personal loans of `5 lakh six years ago. Then, he was paying an EMI of `18,000 (or 40% of his take home). Kumar took a car loan of `5.74 lakh in 2012, adding another `12,500 to his monthly outgo. Last year, he took a third personal loan of `8 lakh to retire the other loans and another top-up loan of `4 lakh. Today, he pays an EMI of `49,900, almost 72% of his take-home pay .
If your EMIs gobble up too much of your income, other critical financial goals, like saving for retirement or your kids’ education, might get impacted.Retirement planning is often the first to be sacrificed in such situations.
Keep tenure as short as possible
The maximum home loan tenure offered by all major lenders is 30 years. The longer the tenure, the lower is the EMI, which makes it very tempting to go for a 25-30 year loan. However, it is best to take a loan for the shortest tenure you can afford. In a long-term loan, the interest outgo is too high. In a 10-year loan, the interest paid is 57% of the borrowed amount. This shoots up to 128% if the tenure is 20 years. If you take a `50 lakh loan for 25 years, you will pay `83.5 lakh (or 167%) in interest alone. “Taking a loan is negative compounding. The longer the tenure, the higher is the compound interest the bank earns from you,” warns financial trainer P .V . Subramanyam.
Sometimes, it may be necessary to go for a longer tenure. A young person with a low income won’t be able to borrow enough if the tenure is 10 years. He will have to increase the tenure so that the EMI fits his pocket. For such borrowers, the best option is to increase the EMI amount every year in line with an increase in the income.
Assuming that the borrower’s income will rise 8-10% every year, increasing the EMI in the same proportion should not be difficult. If a person takes a loan of `50 lakh at 10% for 20 years, his EMI will be `48,251. If he increases the EMI every year by 5%, the loan gets paid off in less than 12 years. If he increases the EMI by 10% every year, he would pay off the loan in just nine years and three months.
Ensure regular repayment
It pays to be disciplined. Wheth er it is a short-term debt like a credit card bill or a long-term loan for your house, make sure you don’t miss the payment. Missing an EMI or delaying a payment are among the key factors that can impact your credit profile and hinder your chances of taking a loan for other needs later in life. Never miss a loan EMI. In an emergency , prioritise dues. You must take care never to miss your credit card payments because you will not only be slapped with a non-payment penalty but also be charged a hefty interest on the unpaid amount. If you don’t have the money to pay the entire credit card bill, pay the minimum 5% and roll over the balance.At an interest of 24-36%, credit card debt is the costliest loan you will take.
Don’t borrow to splurge or to invest
Never use borrowed money to invest. Ultra-safe investments like fixed deposits and bonds won’t be able to match the interest you pay on the loan.And investments that offer higher returns are too volatile. If the markets decline, you will not only suffer losses but will be strapped with an EMI as well. There was a time when real estate was a very cost-effective investment. Housing loans were available for 7-8% and real estate prices were rising 1520%. So it made a lot of sense to buy a property with a cheap loan. Now tables have turned. Home loans now cost around 10% while property prices are rising by barely 4-5%. In some pockets they have even declined.
Similarly, avoid taking a loan for discretionary spending. You may be getting SMSs from your credit card company for a travel loan, but such wants are better fulfilled by saving up.”It’s not a good idea to take a personal loan for buying luxury watches and high-end bags,” says Vineet Jain, Founder of LoanStreet.in. If you must go on a holiday, throw a party or indulge in luxury shopping, start saving now.
On the other hand, taking a loan for building an asset makes eminent sense.For instance, Mumbai-based Sandeep Yadav junked plans to go on a foreign holiday and instead used the money for the downpayment of a house, bringing down the overall loan requirement.
If you take a large home or car loan, it is best to take insurance cover as well. Buy a term plan of the same amount to ensure that your family is not saddled with unaffordable debt if something happens to you. The lender will take over the asset (house or car) if your dependents are unable to pay the EMI. A term insurance plan of `50 lakh will not cost you too much.Banks push a reducing cover term plan that offers insurance equal to the outstanding amount. However, a regular term plan is better. It can continue even after the loan is repaid or if you switch lender. Moreover, insurance policies that are linked to a loan are often single premium plans. These are not as cost effective as regular payment plans.
Keep shopping for better rates
A long-term mortgage should never be a sign-and-forget exercise. Keep your eyes and ears open about new rules and changes in interest rates. The RBI is planning to change the base rate formula, which could change the way your bank calibrates its lending rates. Keep shopping around for the best rate and switch to a cheaper loan if possible. However, the difference should be at least 2 percentage points, otherwise the prepayment penalty on the old loan and processing charges of the new loan will eat into the gains from the switch. Also, switching is more beneficial if done early in the loan tenure.
The same applies to prepayment of loans. The earlier you do it, the bigger is the impact on loan tenure. The RBI does not allow banks to levy a prepayment penalty on housing loans but they may levy a penalty on other loans. Some lenders do not charge a prepayment penalty if the amount paid does not exceed 25% of the outstanding amount at the beginning of the year.
Source : http://goo.gl/ocTwU6
Till a few years earlier, HDFC Bank’s benchmark lending rate was about 50 basis points (bps) more than the market leader
Manojit Saha & Nupur Anand | Mumbai | September 2, 2015 Last Updated at 00:20 IST | Business Standard
Till recently, State Bank of India (SBI), the largest public sector bank which controls 17 per cent of the loan market, showed the way and others followed. SBI was the first bank to cut deposit rate in September 2014, much ahead of the rate cycle cut started by the Reserve Bank of India (RBI) in January. It also became the first bank to cut the base rate – the benchmark lending rate to which all loan rates are linked. Others followed suit.
Till a few years earlier, HDFC Bank’s benchmark lending rate was about 50 basis points (bps) more than the market leader. The most valuable bank of the country kept on narrowing the gap. And, from earlier this year, they started to match the largest lender and the largest private sector lender.
Now, with a sharp cut of 35 bps in the base rate, HDFC Bank has ensured that no bank will be able to match them in the near future without bleeding on margins. This was the sharpest move by any bank in this rate cut cycle.
“It is not too clear on what is likely to be the response from other banks as they need to strike a balance between growth and NIM (net interest margin) outcomes… We expect other banks to follow but the quantum may not be the same; it may not be immediate with more action likely on deposit rates,” Kotak Securities said in a research report.
Why other banks can’t flex muscle like HDFC Bank It is the NIMs which gave HDFC Bank the room to cut rates sharply. Its NIM has ranged between 4.1 per cent and 4.5 per cent for many quarters, despite profit growth falling to 20 per cent from 30 per cent in the last four to six quarters. Compare this with other banks, which struggle to maintain NIM at 3.5 per cent. One reason for the high margins is the share of current and savings (Casa) deposits, the low cost ones. HDFC Bank’s share of the Casa ratio was 39.4 per cent as of June-end – one of the highest in the sector, though it fell sharply from 44 per cent a quarter ago.
“We think the ability of corporate banks to take such large base rate cuts is limited without impacting their NIMs as 70-75 per cent of their loans (FY15) are linked to the base rate,” Nomura Securities said in a note to clients.
According to the broking firm, HDFC Bank was able to take such a large base rate cut as only 30-40 per cent of its loan book is linked to the base rate. ICICI Bank, Axis Bank and public sector banks have 65-75 per cent of their loan book linked to the base rate and their NIM impact will be higher due to base rate cuts.
The consensus on the Street is while HDFC Bank will also see pressure on margins, it will still be able to maintain it at over four per cent. HDFC Bank has a significant portion of its loan portfolio consisting of automobile loans and personal loans, those are given at fixed rate. So, its return from existing customers will not be affected by this sharp cut. In addition, the bank doesn’t sell home loans – which are mostly floating loans – directly to the customers.
Suresh Ganpathy from Macquarie Securities explains that HDFC Bank is in a better position to take such a steep cut in their base rate because their entire loan book will not re-price immediately.
“Since they don’t have a home loan book, it is of help because the home loan is mostly floating and therefore the impact for them on margins would be lesser than other lenders which have a big home loan portfolio. I believe that because of this reason other lenders might not be able to reduce base rate in the same quantum at one go.”
Source : http://goo.gl/jjEJSm
Jehangir Gai | July 12, 2015 Last Updated at 22:06 IST | Business Standard
Customer cannot fault the bank to cover up his own default
Pradeep Bhupendrabhai Desai, a businessman, had an account with Hong Kong & Shanghai Banking Corporation (HSBC). The bank issued him a credit card. Later, a second credit card, too, was issued.
According to Desai, he used to make timely payment of all credit card bills. His record was so clear that the bank even sent a letter offering him a pre-approved personal of Rs 5 lakh at an interest rate of 14.95 per cent and one per cent processing fee. The loan would be repayable in 48 monthly instalments of Rs 13,903, payable by the 15th of each month.
The bank deposited the EMI cheques three to four days prior to the due date of the 15th of each month. There were occasions when the EMI instalment was credited two days prior to the due date. The bank also added one extra instalment of Rs 3,346.37 as the 49th instalment. Desai felt aggrieved as his financial planning got upset when the bank deposited the cheque before the due date. Some cheques also got dishonoured due to shortage of funds as he had not made the provision for payment prior to the due date. The bank also penalised him for the dishonour. This continued to happen in spite of his complaints to the bank. Consequently, he was branded a defaulted and his credit rating with the Credit Information Bureau (India) Limited also suffered.
Aggrieved, Desai filed a complaint before the Gujarat State Commission, claiming Rs 25 lakh as compensation for deficiency in service along with 35 per cent interest. He claimed another loan of Rs 25 lakh that had been sanctioned by ICICI Bank was not disbursed as his credit rating had suffered. He also lost his reputation because of the financial problems created by HSBC due to advance deposit of the EMI cheques.
The bank contested the complaint, claiming Desai had been explained the system in vogue by which the cheque would be deposited around the 10th of the month so that the EMI would be realised by the bank by the 15th. Accordingly, cheques were deposited a few days in advance to take care to the time it took for clearing. The bank also pointed out that Desai had filed the complaint to avoid his liability to repay the loan amount. The bank explained that the additional instalment of Rs 3,346.37 was towards charges for the overdue payment.
The bank pointed out that ICICI Bank had offered to advance a loan to Desai subject to his submitting certain documents and fulfilling certain conditions. The loan had never been sanctioned. Desai had lost his credit rating because he had defaulted on payment, for which he was not entitled to blame the bank. Refuting the allegation of any deficiency in service on its part, the bank sought a dismissal of the complaint.
The State Commission observed that Desai was academically well qualified and a businessman. He had signed the documents undertaking to repay the loan, but had defaulted. The Commission concluded that there was no substance in Desai’s complaint and that it was devoid of merit. It upheld the bank’s contentions and dismissed the complaint. Desai challenged the order in appeal.
The National Commission noted that Desai had admitted having defaulted on repayment of the loan, but had attributed this to be due to the bank’s action of upsetting his financial planning by depositing the EMI cheques in advance of the due date. The Commission observed that the entire dispute revolved around the question whether the bank was entitled to deposit the EMI cheque three or four days prior to the due date of 15th of every month. The Commission found that the documentary evidence on record showed that the bank had acted according to customary norms and practice and in accordance with the terms and conditions of loan repayment. The Commission indicted Desai for wanting to avoid making payment till the last minute.
By its order dated July 8, 2015 delivered by Suresh Chandra for the Bench along with V B Gupta, the National Commission concurred with the view taken by the State Commission that there was no deficiency in service on the part of the bank. Accordingly, Desai’s appeal was also dismissed.
A customer cannot fault the bank to cover up his own default.
The writer is a consumer activist
By Rishi Mehra | 25 Jun, 2015, 10.21AM IST | Economic Times
Personal loan has been a very popular product in the country because of the flexibility it brings in. Often taken to tide over a temporary shortfall in money, personal loans are taken for weddings, to buy consumer durable, medical emergencies, vacation and to fulfill many other needs.
While interest rates on a personal loan continue to be the single biggest factor in deciding which bank to take a loan from, another important factor in deciding the bank is on prepayment provisions. Since many take a personal loan to repay it back before the stipulated tenure, prepayment policies around a personal loan are important. Also, personal loans are a form of “bad loans” and often do little to increase your asset or improve your financial position. Hence, it makes sense to repay the loan if possible. In such a case, prepayment policies play a vital role in choosing the bank.
There are generally four reasons to prepay a personal loan:
The amount is less – Many choose a full payoff of the loan when the principal amount left is relatively small and the borrower wants to save on whatever interest he can by paying off the loan early. Full payoff generally happens when the loan has been serviced for a considerable period of time and the remaining loan balance is small.
Refinancing – A prepayment also happens when the borrower decides to switch banks to take advantage of a lower interest rate. Personal loans often carry very high interest rates and borrowers often switch banks to refinance their loans at a much lower interest rate. Once the lock in period (generally a year) is over, a large percentage of borrowers refinance their loans. In such cases prepayment provisions are very important.
Increase in Salary – When a personal loan is first taken, a borrower’s financial condition can be quite different from what it is say two years down the line. An increase in salary or a bonus may lead to greater cash in hand. Keeping such eventualities in mind, it may make sense to factor in provisions of prepayment for the personal loan before taking one.
No Tax Savings – Unlike a home loan that helps a borrower save taxes, there is no such provision when it comes to a personal loan. In such a case it makes sense for a borrower to look to prepay off the loan and save on the high interest outgo. Coupled with the fact that personal loan, often does not lead to an increase in asset, looking to prepay the loan is a very important factor when choosing a bank.
People tend to prepay personal loans, especially since the interest rates on the product are significantly higher. Interest rates on personal loans often range anywhere between 12 %- 26 % and borrowers look at paying off this loan before they look to tackle any other credit. Also, since the amount in questions is significantly lower, unlike a home loan, it is possible for a borrower to, perhaps, save and prepay the loan. For a shorter time frame, even a few thousand can be a significant savings generated out of prepaying the loan.
The personal loan prepayment is also a relevant factor since it is easier to refinance a personal loan since there are very less documents involved. Unlike a home loan where the property documents are with the bank that has originally extended the loan, a personal loan has no such documents with the bank and is relatively easy to be refinanced.
What a borrower must look at before taking a personal loan that he intends to prepay is whether it has a prepayment fee tied to it. Banks often charge this rate because they have to forego the interest that they would have got if the borrower would have stuck to the agreed loan agreement. Some banks in India have a prepayment fee and as a borrower it is very important to find out if the benefit of prepaying is more than the fee you have to pay.
Bank Prepayment Charges: ICICI Nil (For Loan amount >10 lakh & 12 EMI paid), else 5% HDFC Nil (For Loan Amount > 10lakh with >Salary 75k) else 4% Bajaj Finserve Nil Tata Capital Part Prepayment with ZERO Charges SBI Nil Kotak Mahindra 0% – 5% Fullerton India Zero after 3yrs (Otherwise 4%) Axis Bank Nil
Personal loans are relatively easy to understand when it comes to their terms and conditions. While rate of interest is the most important factor when choosing a bank, the often neglected, but equally important factor is prepayment provisions of the lender.
(The author is co-founder deal4loans.com, which is a platform for online comparison for retail loans in India. Views expressed are personal)
Source : http://goo.gl/POYl3H
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.”
Opt for balloon schemes if you are capable of paying a large instalment upfront
Gaurav Khurana | June 13, 2015 Last Updated at 22:26 IST | Business Standard
In India, 80 per cent of car buyers avail of a loan to buy their dream car. The car loan market is growing at a rapid pace and the leading financial institutions are launching innovative and attractive schemes for the buyers.
Buyers have a variety of offers and repayment schemes to choose from depending on their needs. For elasticity in loan repayment, there are options such as the Tata Balloon Scheme, a bullet scheme. Then, there are external top-up options from HDFC or Tata Capital for those looking for money against their cars.
The balloon scheme
Tata Balloon Scheme is for customers who can periodically repay a larger instalment for their car loan. It allows customers to repay a fixed amount in two different formats 11- 1 and 1-11. For a loan tenure of one year, if the criterion is 11-1, a customer pays 11 smaller installments first and then one larger installment at the end of the year. This plan is especially beneficial for those who expect cash flows at the end of a certain period – for example, salaried employees who expect a bonus during a certain month. The other format allows customer to pay one large instalment followed by 11 smaller instalments.
Let’s take an example to understand this. Thirty-year-old Karan Singh works in an IT company and has availed of a car loan of Rs 1 lakh. If he avails of a normal repayment scheme, he will pay a fixed equated monthly instalment (EMI) of Rs 8,840 for one year. On the other hand, if he avails of a balloon scheme using the first format, he will pay 11 smaller installments of Rs 7,553 and one larger instalment of Rs 23,800. In the second format, he will pay one larger instalment of Rs 22,800 followed by 11 smaller installments of Rs 7,500 each.
As can be seen from the table, the balloon scheme has two sides to it. Depending on the format chosen, either the borrower or the bank will benefit. If you pay the larger EMI first and the smaller later, the borrower stands to gain. If you pay the smaller EMIs first and the larger EMI towards the end, you will end up paying more interest compared to a normal loan scheme. So, borrowers wanting to avail of the Tata Balloon Scheme will do well to choose the 1-11 format.
The top-up option
Those who have taken a car loan but are not able to pay their next EMI, can avail of an external top- up loan from banks. They can get a loan against the financed car to get their engrossment brought to a close. So, the scheme has two benefits: foreclosure of your previous car loan and an additional loan at a rate (about 15 per cent) which is cheaper than a personal loan (17-18 per cent).
HDFC, for example, has a special scheme if you are looking for cash against your car. The bank will foreclose your running car loan and initiate it with the additional amount. HDFC will calculate your eligibility and provide you finance according to your eligibility. To avail this scheme, 18 EMIs of your car loan should be paid and your EMI track record should be clean. The formula to calculate the eligibility is:
EMI amount*tenure paid*multiplier (1.5) = loan amount
This will be your additional loan amount.
Let’s take an example to understand this. Pankaj Rao has a running car loan of Rs 5 lakh from a bank ‘X’. He has repaid Rs 3 lakh to the bank by paying 20 EMIs. Rao requires another Rs 2 lakh to close the loan. According to the eligibility criterion, he can get a top-up of Rs 4.5 lakh. After availing this top-up, HDFC will close his running loan by repaying remaining Rs 2 lakh and also provide him an additional Rs 4.5 lakh. Thus, Rao will become a customer of HDFC by availing a total loan amount of Rs 6.5 lakh. Though the process is a bit lengthier, the top-up scheme can help borrowers purchase their dream car as well as get an additional loan.
NBFCs are more lenient regarding top-up schemes. Tata Capital, for instance, is a recent entrant into the market. If you have not defaulted in paying 18 EMIs for your existing car loan, you can get a funding of 120 per cent against your car from Tata. If you have a clean track record of paying 12 EMIs, you become eligible to get 100 per cent funding.
By availing such options, one can enjoy a certain amount of flexibility during repayment. Borrowers should, however, acquaint themselves with different aspects of these schemes to ensure that they choose the right option and do not fall into a debt trap. For instance, if you are opting for 11-1 balloon scheme, be certain that you will be able to pay a larger lumpsum at the end of 11 months.
The writer is CEO, Dialabank
Source : http://goo.gl/DMhrvN
Manju AB | Monday, 1 June 2015 – 7:00am IST | Place: Mumbai | Agency: dna | From the print edition
Helps banks frame a strategy to sell financial products, have tie-ups with retail stores or simply entice with a good deal so that a good customer transfers his/her loan account.
Ever wondered why you are getting calls offering personal loan? Why personal loans are being sanctioned to you instantly? Or why you get inundated with calls for a credit card even if you don’t need them?
The answer is banks are engaging in data mining, where they analyse customer’s profiles and behaviour. They even track down your favourite restaurant, your eating habits, shopping preferences, movies you watch, books you read, the hospital visits you made; in fact, just anything about you.
Your loan repayments too are intensely scrutinised. These informations help banks take a quick call whether to offer you a loan or deny one, and effectively check bad loans. It also helps banks frame a strategy to sell financial products, have tie-ups with retail stores or simply entice with a good deal so that a good customer transfers his/her loan account.
A senior SBI official said, “We compile such customer data which help us decide on how to sell our insurance, mutual fund products or lure one customer to bank with us or have more than one relationship with an existing customer. Suppose a customer has a savings bank account with us and a home loan with another bank we try to woo the customer to shift his loan account.”
According to Harshala Chandorkor, senior vice-president, Consumer Services and Communications at Credit Information Bureau (India) Ltd (CIBIL), “Banks are engaging in data mining to understand the profile of their customers and understand the health and behaviour of their portfolio. It helps them to deepen their relation with existing customers, enhance credit limits on your credit cards, deny credit cards if your credit history is poor and have tie-ups with retailers. We at CIBIL undertake data mining to understand the profile and behaviour of the customers which help banks to define their strategies.”
The bank has a data mining centre in Belapur, Navi Mumbai. With strict KYC (Know your customer) norms in place, banks get all the basic information from the customers themselves. And often customers with a savings account will be having a debit card, a credit card, a home loan or a car loan. Each time your card is used your bank gets a feedback of what you do with your money.
All banks, especially those in private sector, undertake data mining to understand the customer better before marketing various financial products to them and to avoid bad loan decisions. Tie-ups with online retailers are also undertaken considering the customer profile. HDFC Bank debit card has offers on various travel portals, and jabong and ebay. Banks like ICICI and HDFC are active in making calls to sell credit cards and personal loans.
For example, SBI debit card has tie-up with LG and other traders that the bank markets it as a 24×7 market place; ICICI Bank has tie-up with Shoppers Stop, Flipkart etc. Thus, each bank, depending on the kind of customer profile, will go in for tie-ups with merchant establishments who, in turn, will give discounts on the bank’s credit, debit cards.
A senior banker with Union Bank of India said, “We regularly monitor our savings bank customers to find out from where they may have taken a home loan or a car loan. And try to find out how the bank could not have caught the customer. His relationship with the bank cannot just be a savings bank account. It makes sense for the bank to have more than one relationship with the customer.”
Source : http://goo.gl/7SKAuG
By Sangita Mehta, ET Bureau | 13 May, 2015, 10.48AM IST | Economic Times
A bank’s facilities typically come loaded. For the unsuspecting customer, it could just be a question of filling out a fixed deposit form or being granted a home loan. But there are some entrapments the bank will slip in that you need to be aware of, says Sangita Mehta.
HOME LOAN: Double Trouble
Watch out: When you apply for a home loan, the bank will sell you property insurance — which covers damage to property — and mortgage protection term insurance, which covers the loan in the event of the borrower’s death
What you should know: The housing society may already have property insurance. You don’t have to opt for an insurer the bank has a tie-up with. Ensure the premium is not clubbed with the loan, in which case, you will have to pay interest
CREDIT CARD: Take it or Leave it
Watch out: Banks often sell credit cards with the promise that for the first year, they will not charge any fee and the customer can discontinue it from the second year. However, at the end of the second year, the card company sends an innocuous mail stating they will renew the card for a fee unless the customer explicitly rejects it.
What you should know: The Reserve Bank of India has banned banks from giving such negative options. Customers should ideally use the credit card of a bank they do not have a savings bank with. In case of a dispute, banks often debit money from the borrower’s account
DEPOSITS: Auto Route
Watch out: When you’re opening a fixed deposit, watch out for ‘auto renewal’ in the fine print
What you should know: If you do not opt for auto renewal, the money is transferred to the savings account after maturity, where the bank offers about 4% interest as against 7-9% on FDs. You may forget to renew the deposit and the bank won’t remind you. When you tick that ‘auto renewal’ box, the bank cannot charge you a penalty on premature withdrawal of the deposit
ATM, CYBER FRAUD: Cry ‘Thief’
Watch out: If you find a fraudulent transaction in your account, immediately notify the bank
What you should know: If you are the unfortunate victim of an ATM or e-transaction fraud, watch out: the bank is liable to prove its innocence. If the bank is not notified, the maximum loss to you is `10,000 Postnotifi cation, the customer is not liable to bear any cost
LOCKER FACILITY: Keep your Freedom
Watch out: Banks put a price tag on a ‘scarce’ commodity like the bank locker
What you should know: Your bank may ask you to invest in fi xed deposits or mutual funds or even third party insurance, with the bank locker, even though they are not allowed to to do so by the RBI. You anyway need to pay an annual rental
PERSONAL LOANS: Don’t Rush to Pre-pay
Watch out: Banks have stiff conditions on prepayment of personal loans
What you should know: The RBI has mandated banks to not charge a penalty for pre-payment of a home loan if the interest is on a floating rate. But the rule does not apply for other personal loans. Some banks charge as much as 5-10% on pre-payment of loans. Some banks don’t even permit you to repay the loan for the fi rst six months or one year
PROCESSING FEES: No Free Lunches
Watch out for: For every home loan, auto loan and personal loan, banks charge a processing fee, which can be steep
What you should know: This fee is mostly at the discretion of the bank and can be as high as 1 percentage point, which itself will infl ate your outgo. If any bank says they have a lower rate, ensure the processing fee is also low.
Source : http://goo.gl/r0S6eK
Collateralisation of other loans and prior approval for additional leverage are things to watch out for
Divakar Vijayasarthy | April 18, 2015 Last Updated at 21:33 IST | Business Standard
This is a good time for home buyers, with several lending institutions slashing their home loan rates recently. Home buyers have a tendency to skip through the details of a home loan agreement. That should not be the case. Borrowers need to keep in mind a few key clauses while signing the agreement to avoid unpleasant surprises later.
Cross-collateralisation of other loans: Imagine a scenario where you have taken a personal loan as well as a home loan from the same institution. Without your knowledge, you could have actually given your home as collateral for the personal loan. Some lending institutions have an ‘Indebtedness of the Borrower’ clause where the home is automatically made available as a security for all past, present and future borrowings of the borrower with the same institution. Effectively, your personal loan is secured against your home but the rates being charged are at par with an unsecured loan. In such a scenario, a top-up on the existing home loan would have worked out to be far cheaper than your personal loan.
Worse, few institutions cover borrowings from their associates, subsidiaries as well as affiliates under this clause. So, if you have taken a home loan from XYZ Bank Ltd and a car loan from XYZ Car Loans Ltd, a group company, your home could serve as an additional collateral for your car loan. In some cases, the lenders may have an unconditional right to set off any amount paid by the borrower as per the home loan agreement against other borrowings of the borrower with the bank or its affiliates, associates or subsidiaries even without any prior intimation to the borrower. Hence, it is always recommended to have your home loan from an institution with which you do not have any present unsecured obligations.
Schemes where equated monthly instalments (EMIs) are borne by the developer: In a typical 75-25 or 80-20 scheme, the borrower takes a loan and the developer agrees to pay interest till possession or a specified period, say, three years, whichever is earlier. Generally, the developer is paid based on the stage of construction. However, in some cases, there are accelerated disbursements – for instance, when the completion stage is only 60 per cent, 80 per cent of the loan gets disbursed. Since the developer is bearing the interest burden, the borrower may not be too concerned. However, the loan is taken in the name of the buyer, so, if the developer defaults, any delay or default will appear in the Cibil report of the buyer for no fault of his. Further, the buyer will be forced to pay interest once the specified period expires even though the property is still under construction.
The situation becomes even more precarious if the buyer intends to exit the project midway – many developers charge prohibitively high transfer fees ranging from 2-5 per cent of the completed project value, which effectively increases the exit fee percentage in the case of an under-construction property. For example, if someone had purchased a property at Rs 5,000 per sq ft with a 3 per cent exit fee and he exits the project when it is 50 per cent complete, he ends up paying an exit fee of Rs 150 per sq ft (3 per cent of Rs 5,000) on an investment of Rs 2,500 (or 50 per cent of the total cost), amounting to an effective exit fee of 6 per cent.
Further, where accelerated disbursements have been made, it becomes virtually impossible to exit till construction reaches the level of funding. In many cases, buyers are forced to exit at a loss to relieve the burden of the home loan. Hence, the immediate past track record of the developer, management ethos of the promoters and the stage of completion of the project need to be considered before opting for such schemes.
Unconditional right to amend terms and conditions: Few agreements have an open-ended draconian clause which gives the lenders sweeping rights at their discretion, to amend, recall, suspend or terminate the home loan agreement irrespective of whether the borrower had complied with the provisions of the home loan agreement or not. Such lopsided agreements are extremely unjust to the borrower and puts him entirely at the mercy of the lender at all times.
Setting off other balances: Some loan agreements provide for an unconditional right to set off home loan dues against balances in all other accounts of the borrower, including fixed deposit accounts. So in the event of a strain in repayment of EMIs, the banker has the right to dig into to your savings account, recurring deposit or fixed deposit balances to service your EMI without your consent.
Prior approval for any further leverage: Most lending institutions provide that the borrower shall not obtain any further loan or guarantee any further liability without their prior approval. This makes it mandatory for a borrower to approach the lender for a No Objection Certificate (NOC) for any future borrowing.
Prohibition on leaving India: Most of the loan agreements prohibit the borrower from leaving India on long stays for the purpose of employment or business overseas without fully repaying the home loan. Where there is a practical need to leave India, it is advisable to inform your banker and obtain an NOC.
Onus of clear and marketable title: Assuring yourself that your property has a clear and marketable legal title is important. However, few buyers take independent legal opinion on the title of the property as they feel that the home finance institution funding the property would have done their due diligence. While all lending institutions do their legal due diligence, a lot of weightage is given to the profile of the borrower and the institution’s relationship with the developer. For a banker, the loan is given to the borrower and the property is only a security for the loan in the event of default. Most agreements provide that the onus of verifying the legal title is entirely on the borrower and not the lending institution.
Every borrower provides a personal guarantee to the banker for repayment of loan, signs a demand promissory note and provides post-dated cheques for the loan value. There have been instances where serious legal issues have been ignored by bankers for various reasons.
The writer is co-founder, MeetUrPro
Source : http://goo.gl/1RPvul
By Uma Shashikant | 30 Mar, 2015, 08.10AM IST | Economic Times
A common crib against the younger generation has to do with the habit of borrowing. Now pause to consider the most prized asset in the portfolio of the complaining elder. It is likely to be a house, bought, of course, with a housing loan. Without a home loan, most of us would not be able to own property. However, many of us also overdo it when it comes to banishing loans from our lives.
A borrower takes money not from the lender, but from his future income. The risk comes from the unknown future and the change the loan can make in it. A boastful zero-loaner is likely to have a stable income and routine savings which fuel such righteousness. For the rest, borrowing may be unavoidable.
Loans differ based on the need they serve. A loan that is taken to tackle a liquidity crunch is a mere arrangement. When a company borrows from the bank to pay salaries, it is meeting an immediate need for cash, which will flow in once the sales are realised. A hand loan from a friend to contribute to a farewell party is an arrangement of trust, to return that money with the next ATM withdrawal. A loan that is taken for buying a house or any other long-term asset is a charge on future income and is a funding contract. A lender agrees to fund the asset on your behalf and structures a repayment from you keeping the asset as collateral. A loan taken to punt on the future value of a commodity or index is a leveraged speculative position. It can turn either way. So, find out and understand what your need is before taking a loan.
Habitual hand loan borrowers typically lose friends and contacts. Research on the psychology of borrowers points out that they may actually develop a ‘blind spot’ over time, pushing the memories of loan to the background. While lenders resent the loan made to a friend as repayment gets delayed, the borrower either convinces himself that it is not his fault, or feels a sense of relief that the lender will no longer chase him for repayment. People are known to recall what they lent much more than what they borrowed.
Always see hand loans as liquidity arrangements. They come without interest and are based on trust. The faster you repay these loans, the better it is. If you find yourself taking too many hand loans and struggling to repay them, you may not have a liquidity problem, but inadequacy of income. Your spending needs habitually exceed what you earn and unless you find ways to augment your income, you may find yourself in a debt trap, with no friends to bail you out.
Loans to buy assets are long-term formal contracts. Borrowers own the asset even as they repay. The lender is also secure as the asset can be repossessed and sold in the event of a default. In the case of a home loan, borrowers typically pitch in with a substantial amount of their own. This reduces the probability of default even further. That is why providing a loan against property is good business. However, property loans have, over time, turned into speculative bets on housing prices. Thus, asset-based lending has turned into leverage that risk multiplies.
The sub-prime defaults that led to the global financial crisis of 2008 originated with loans that were enabling home ownership, but were sold and bought with the assumption that housing prices would continue to rise.
Consider one of the popular structures, the interest-only loan. The borrower takes a loan to buy property, but pays only interest for the first three years. This makes the loan look inexpensive and affordable to the simple borrower. It is attractively designed for the speculator, who could sell off in three years to repay the loan. The simple borrowers underestimate the repayment burden in later years. They are driven by overconfidence that simply extrapolates the present. If the borrower fails to see the loss of jobs and income, the speculators assume that the prices will only move up. There is an auto feedback cycle in play when assets are funded with borrowing.
Housing prices respond to demand; demand moves up when loans are easy to get; and loans are more and more viable as the asset values go up. An asset bubble is created and leveraged funds push up asset prices. The collateral damage is huge when asset prices fall. The borrower defaults since the asset he bought with the loan has lost value; the lender gets wiped out when he is unable to resell the asset in a falling market to cover the value of the unpaid loan. A leveraged position runs the risk that asset prices may turn unexpectedly, creating a chain of defaults.
The loan to avoid is speculative leverage. One feels smart while borrowing on the margin and betting on the stock market. Few rounds of winning also boost confidence, but one unexpected correction is enough to wipe off a good chunk of capital. Without the emotional intelligence to manage the capital carefully and take losses on the chin, leveraged speculation can be ruinous.
However, not all borrowing is harmful. If the borrowing creates an asset, the asset meets a need or is useful, and if the repayment is well within the stable income of the borrower, there is no problem. Not all loans need to meet the rigid conditionality of creating an economically valuable asset, such as a home or a business. Simple loans for an expensive gift, a holiday or a car, are also fine as long as they do not stretch the repayment capability of the borrower. Such loans have to be evaluated for the opportunity cost since a higher EMI means a lower SIP. Loans, by definition, are restrictive as they are a fixed charge on the future income. Keeping such ‘low value’ loans to less than 20% of the post-tax income is a good thumb rule. Asking if the routine saving is at least equal to the EMI is also a good check.
Between a high stake bet and the perilous hand loan that kills relationships, is a wide space of responsible borrowing that can help build assets, enjoy the perks of a steady income and indulge in some instant gratification. There is no need to be too hung up about borrowing.
The author is Managing Director, Centre for Investment Education and Learning
Source : http://goo.gl/481Sdw
Sangita Mehta, ET Bureau | Mar 12, 2015, 11.23AM IST | Times of India
SBI’s home-loan book rose 13.2% year-over-year to about Rs 1.56 lakh crore as of February 2015. Top-up loans totalled Rs 4,800 crore.
MUMBAI: State Bank of India is offering a bonanza to its existing home loan customers. They can take personal, or top-up, loans at the same rate that they are paying on home loans under a limited-period offer from the nation’s top lender.
In effect, an existing borrower can take a personal loan at 10.15%, provided he had been paying his home loan EMIs on time. For women, this will be even cheaper at 10.10%. The rates imply a 0.35-0.40 percentage point cut in the top-up loan rates that SBI has been charging. It charges 13.50-18.50% on personal loans to other customers.
A senior SBI official, who did not want to be named, said the rate on top-up loans was lowered to boost the bank’s loan book. “Also it is a safe bet for the bank to attract their existing customers with good track record to borrow from them rather than approaching its rival banks.”
The rate reduction comes at a time when RBI has signalled a softer interest rate regime by cutting policy rates twice – both by a quarter percentage point – in 2015. Despite the signal from the central bank and a nudge from the finance ministry, banks have mostly stayed away from cutting rates, citing subdued demand for loans and arguing that a reduction would hurt their bottom lines in the final quarter. Most banks have pegged their base rate – the rate below which they don’t lend – in the range of 10% to 10.25%.
To attract customers, SBI has also waived off the processing fee, but at the same time said the reduction was valid only for a limited period. The bank plans to charge its existing home-loan borrowers 10.5% for top-up loans from next fiscal year. A woman home-loan borrower can take up to Rs 50 lakh at 10.10%.The tenure of the top-up loan will be linked to the customer’s outstanding tenure of the home loan. Top-up loans between Rs 50 lakh and Rs 2 crore will cost 10.75%. For Rs 2 crore to Rs 5 crore, the rate will be 11.25%. Analysts say the move will help SBI achieve its loan growth targets.
The bank has lowered its credit growth target to 11% for this fiscal year through March from the originally planned 14%.
“Even 11% (growth in credit) is also a stretch,” chairman Arundhati Bhattacharya had said while announcing third-quarter results.The bank’s advances portfolio rose just 2% in the first nine months of this fiscal year.
SBI’s home-loan book rose 13.2% year-over-year to about Rs 1.56 lakh crore as of February 2015. Top-up loans totalled Rs 4,800 crore.
Source : http://goo.gl/jUdmz4
Now a never before opportunity to consolidate your outstanding high cost debt like Personal Loan, Credit Card, LAP, LAS & Auto Loans. You can Balance Transfer your existing Home Loan from any financial institution to SBI and still avail of Top-up / Home Equity to pay-off liabilities up to Rs.50 lakhs at Home Loan Rate of 10.15% before 31st March 2015. Call +919322286765.
By consolidating borrowings, the total EMI burden and interest cost can be reduced
Rahul Soota | January 24, 2015 Last Updated at 20:53 IST | Business Standard
With the Reserve Bank of India cutting the repo rate by 25 basis points last week, borrowers would be happy that the rate cut season is beginning. While most banks haven’t still signalled base rate cuts, it is only a matter of time before they do so.
In such a situation, a potential borrower is likely to get good opportunities. For one, if you have taken a home loan recently, if the banks cut rates significantly, there could be a case for reducing your home loan burden by re-negotiating with the bank or shifting lenders. But if there are only a couple of years remaining for the closure of the home loan, it makes little sense to re-negotiate or shift because you would be paying mostly the principal amount.
Interest rate cuts also throw up other opportunities. For example, you could take a top-up loan – home or personal – at a lower rate. But there are certain things that you should be wary about before taking such loans. A few tips to ease the process.
Consolidation: Many of us have several loans at the same time. These include home loan, auto loan, personal loan, credit card dues and so on. And only the home loan payout gives some tax benefit, the rest are a drain on the finances.
If you already have a property through a home loan and have paid the equated monthly instalment for a few years, taking a top-up could be a good way to leverage the property’s value and reduce the other loans. Non-banking financial institution HDFC offers a top-up loan 12 months after the final disbursement of the property has been made. The rate is 10.15 per cent to 10.50 per cent and the tenure up to 15 years. In case you want the loan while the existing home loan is still on, you can use the loan against property option. In this situation, the rate is higher at 12 per cent to 12.75 per cent.
When you are considering an additional loan of, say, Rs 25 lakh, it is worth prepaying some of your smaller loans like personal loan and consolidating your borrowing against your property. This has a couple of benefits. Home loans or loans against property are long-tenure loans of 15-20 years, so the EMI per lakh of borrowing is the lowest compared to an auto or personal loan, which is of 4-5 year duration. Also, banks consider loans secured against property to be a safer bet and offer the lowest interest rate for such loans compared to other types of loans. So, consolidating your borrowings against your property, assuming the LTV permits, is a sensible option as the aggregate EMI burden as well as the overall interest cost can be minimized.
Eligibility: Banks use the instalment to income ratio (IIR) as a barometer of your ability to borrow. So, the aggregate of existing and prospective EMIs on the loan application under consideration needs to be within a pre-defined level of your current income. Depending on the banks’ internal credit policy, this could vary between 40 per cent and 65 per cent for most lenders. Borrowing against a property introduces the additional element of LTV, as described above. So, these two criteria hold the key to determining the loan amount you can borrow. As you shop for a home loan top up, you might need to consider switching your loan to a bank whose policies allow you to borrow the amount that you need. Here again consolidating your personal and/or auto loan will help improve your eligible loan amount. The bank will prepay these loans on your behalf, out of the top up amount sanctioned.
Interest rate: It is normal for existing borrowers to pay slightly higher interest rates than new borrowers. When you are considering a top up loan, it is a good time to shop for a better deal on your rate of interest. Lenders have special schemes running from time to time and you could take this opportunity to switch to such a bank, assuming you are getting the desired loan amount. You can also bargain with your existing bank to renegotiate the existing interest rate downwards, as they would probably like to retain a client who has been repaying the loan in a timely fashion.
As you will notice in table 2, the power of interest rate, higher tenor, consolidation of loans and your loan advisor’s search for the best deal, allow you to borrow the additional amount of Rs 25 lakh, for a minor change in your aggregate EMI by Rs 507 only.
Paperwork: If you are availing a top up from the same bank where your home loan is currently running, you will need to put together your latest KYC documents, income documents, bank statements and details of other existing facilities. In case you decide to switch to another bank, you will need additional documents, including a foreclosure letter stating current home loan outstanding and list of property documents in custody of your existing bank (LOD). Both these need to be provided by your current lender. Banks normally take 10-15 days to process such requests. They will use the interim period to convince you not to move your loan elsewhere. The foreclosure letter is valid only till your next EMI is paid, as the loan outstanding changes with each monthly repayment. So, you ideally need to make the switch over in the same calendar month as the date of the foreclosure letter.
Conclusion: It is not possible for borrowers to be aware of all the eligibility criteria or prevailing offers from multiple banks. You are probably best served if you avail the services of a loan advisory service. They will not only offer you multiple options, but also help with all your paperwork. Such loan distributors do not charge clients for their services, as the banks pay them for loans referred. You get unbiased advice and the services of a specialist, which should help navigate the entire process seamlessly.
The writer is co-promoter and executive director of mymoneymantra
Purba Das | Jan 9, 2015, 02.43 PM | Business Insider
Loans are an indispensable part of our lives. As we climb up the ladder, we realize that we are involuntarily tied-up with our banks in form of loans and EMIs. Be it our dream house or the latest car, loans seems to be the easiest way of funding our aspirations. However, it comes as a rude shock if our loan application is rejected by our bank that we have been so loyal to. But ever realized why does this happen?
“Many people simply apply for loan without giving a second thought to how the lender might actually perceive their loan application. The CIBIL Report has been widely used by loan providers to evaluate loan applications for over a decade now. However, only recently have people begun to realize, how crucial it is to be aware of and maintain their credit history,” says Harshala Chandorkar, senior vice president of consumer services and communication, CIBIL.
She further adds that an applicant, before applying for a loan, must evaluate his capacity to repay the loan. “How many other loan payments do you have, and what impact do these payments have on your monthly income? Is your income sufficient to cover your contractual obligations, as well as those other day-to-day expenses?” notes Chandorkar.
Chandorkar also advises that along with one’s own affordability, an applicant must also look at different banks for a better understanding of the different terms and conditions of the loans. “Check for the terms they are being offered and what suits you the best. While the interest rate is important, it may not vary too much between the banks but the customer service, Internet banking facilities and more may vary extensively. These are the things you have to live with for rest of the tenure of your loan.
Similarly, an applicant before applying for a loan should also have a clear understanding of the interest rate being offered on the loan. “For instance what is the base rate and what is the mark up on same to arrive at the lending rate. Have a clear understanding on the interest rate calculation. It will affect your EMIs directly. Also, understand the loan tenure. We tend to go for the longest tenure as the EMIs look more affordable. While this is true, it also means that you end up paying more interest,” she says.
It is important to remember that a bank always looks for both CIBIL report as well as CIBIL TransUnion Score before clearing a loan application. Harshala Chandorkar tells us some common mistakes that you must avoid lest it hampers your credit score:
Late payments or defaults in the recent past
The individual’s payment history has a significant impact on the CIBIL Transunion Score. Hence, if the individual has missed payments on any of his or her existing loans, over the last couple of years, the score is likely to be negatively affected because it indicates that the individual is having trouble servicing his or her existing obligations.
High utilization of credit limits
While the balances on the individual’s loans will only reduce over time as payments are made, he or she must be diligent about making timely payments on credit cards. While increased spending on the individual’s credit cards may not necessarily negatively affect his or her Score, an increase in the current balance on the card over time is an indication of an increased repayment burden and may negatively impact the Score.
Higher percentage of credit cards or personal loans
While a higher concentration of home loans or auto loans (commonly known as Secured Loans) are likely to be more favorable for the CIBIL Transunion Score, a large number of unsecured loans can do the reverse. Although unsecured loans offer easy access to finance, it’s also by far the most expensive forms of credit. More the number of unsecured loans with high utilization, larger are the payments resulting from its high rate of interest.
Being credit hungry
If the individual has made many applications for loans, or have recently been sanctioned new credit facilities, a Credit Institution is likely to view the individual’s application with caution. This “Credit Hungry” behaviour indicates that debt burden is likely to, or has increased and the individual is less capable of honoring any additional debt, which is likely to negatively impact his CIBIL TransUnion Score.
Source : http://goo.gl/Cz2YZj
Sanket Dhanorkar | Dec 29, 2014, 06.10AM IST | Times of India
Borrowers typically have horror stories to tell about loan tenures that have been extended till retirement, credit cards charging astronomical amounts and harassment by lenders due to missed EMIs. If you also find it difficult to repay your loans, here are some strategies that can help you manage your debt situation without stressing your wallet.
Repay high interest loans first
As a first step, make a list of all outstanding loans and then identify the ones that need to be tackled first. Ideally, start by repaying the costliest loan, such as credit cards and personal loans. Pay the maximum amount you can afford against the high-cost loan without jeopardising the repayment of the other loans. Once you have cleared the costly debt, move to the next one. Also known as the ‘debt avalanche’, this strategy minimises the total interest paid on all loans. But this repayment should not be at the cost of the regular EMIs on other loans. Those must continue as well.
While prioritising repayments, also consider the tax benefits on some loans. For instance, the interest paid on an education loan is fully tax deductible. If you factor in the tax benefits in the 30% tax slab, an education loan that charges 12% effectively costs 8.5%. Similarly, tax benefits bring down the actual cost of a home loan.
Increase repayments with rise in income
One simple way to repay your loans faster is to bump up the EMI with every rise in your income. Assuming that a borrower gets an 8% raise, he can easily increase his EMIs by 5%. The EMI for a 20-year home loan of `20 lakh at 11% rate of interest comes to `20,644. The borrower should increase it by around `1,000 every year. Don’t underestimate the impact of this modest increase. Even a 5% increase in EMI ends the 20-year loan in just 12 years (see table). It helps the borrower save almost `12 lakh in interest.
|Repay more as income rises|
|Even a small 5% increase in the EMI every year can reduce the home loan tenure by about 8 years|
|Amount : 20lacs||Term : 20 years||Rate : 11%|
|Year||EMI (Rs)||Remaining Tenure|
|1||20644||20 years||The borrower can reduce his tenure by 8 years vy increasing the EMI by 5% per year|
|2||21676||16 years 5 months|
|3||22760||12 years 11 months|
|4||23898||10 years 10 months||If the EMI is increased by 10% the tenure will be reduced by 10 years|
|6||26347||7 years 5 months|
|7||27665||6 years||Even a minute 2% increase in EMI can reduce tenure by nearly 5 years|
|8||29048||4 years 8 months|
|9||30500||3 years 6 months|
|10||32025||2 years 4 months||If the home loan interest rates come down then the reduction in tenure will be much more|
|11||33627||1 year 3 months|
Use windfall gains to repay costly debt
Received a fat bonus? Do not splurge on the lastest smart phone or newest plasma TV. Use the money to pay down your debt aggressively. Windfall gains, such as income tax refunds, maturity proceeds from life insurance policies and bonds, should be used to pay costly loans like credit card debt or personal loans. However, the lender may levy a prepayment penalty of up to 2% of the outstanding loan amount. While the RBI does not allow banks to levy a prepayment penalty on housing loans with floating rate interest, many banks do so for fixed rate home loans. Lending institutions normally do not charge any prepayment penalty if the amount paid does not exceed 25% of the outstanding loan at the beginning of the year.
Convert card dues to EMIs
Credit cards are convenient and give you interes- free credit for up to 50 days. However, they can also burn a hole in your wallet if you are a reckless spender. If you regularly roll over the credit card dues, you shell out 3-3.6% interest on the outstanding balance. In a year, this adds up to a hefty 36-44%. If you have run up a huge credit card bill and are unable to pay it at one go, ask the credit card company to convert your dues into EMIs. Most companies are willing to let customers pay down large balances in 6-12 EMIs. If the sum is big, they may even extend it to 24 months. However, if you miss even a single EMI, the rate will increase to the regular rate of interest your credit card charges. You can also take a personal loan. These are costly but will still be cheaper than the 36-44% you pay on the credit card rollover.
Use investments to repay debt
If your debt situation becomes bad, you can use your existing investments to make it better. You can borrow against your life insurance policy or from the PPF to pay off your loans. The PPF allows the investor to take a loan against the balance from the third financial year of investment, and the same is to be repaid within three years. The maximum loan one can take is up to 25% of the balance at the end of the previous year. The rate of interest charged on the loan is 2% more than the prevailing PPF interest rate. However, one should withdraw from one’s PPF or Provident Fund accounts to pay off debts only in extreme situations. These are long-term investments which should ideally be kept untouched to ensure that compounding works its magic.
Consolidate or refinance
If you have multiple loans, consider taking a secured loan against an asset to repay them. Loans taken against property are much cheaper and can replace costly loans. You can choose a tenure that is comfortable and an EMI that is affordable. Interest rates are likely to change soon. Keep track of what is the going rate in the home loan market. If you can get a better rate, have your loan refinanced. This will involve a one-time cost, which is typically around 1-2% of the outstanding loan, with a cap ranging between `25,000 and `50,000 depending on the bank. The gain from this refinancing should be higher compared to the charges you pay. As a rule, if the prevailing rate of interest payable on your home loan is 1% more than the interest rate on offer in the market, you should consider refinancing your home loan. Beware of loan agents asking you to shift your floating rate loan to a fixed rate one at this point. With rates expected to climb down, you may lose out if you switch to a fixed rate loan at this stage.
Make lifestyle changes
It is often the little things that go a long way in keeping your finances in fine fettle. While so far we have discussed different ways in which you could reduce your loan burden, you may also need to make some lifestyle adjustments to accommodate your loan repayments and ensure you have enough money to pay higher EMIs. A lifestyle change is needed until all debts are repaid. This means cutting down on luxuries and unwanted spending. Go slow on movie shows, dining out and weekend getaways. Keep the credit card locked up when you go to the mall and try to make purchases with cash.
In extreme cases, you could also get your credit card company to lower your spending limit. Most importantly, cut down on taking fresh loans unless these are taken to prepay existing, costlier loans. Automatically debit your repayment dues to your bank account. In this way, you eliminate the possibility of missing the payment by mistake. Remember, paying after the due date attracts late fee and impacts your credit score negatively.
Lastly, do not feel shy to cry out for help. If you are unable to figure out a way out of your debt hole, approach a debt counselling centre, which offer free advice. These are actively engaged in helping borrowers facing problems with their loans.
Source : http://goo.gl/8hB0ez
Rajiv Raj | Nov 18, 2014, 04.43 PM | BusinessInsider.in
Let’s admit, we Indians hate personal loans. Before you demonise it with a set of Dracula teeth and evil horns, think again. Personal loan is not always a bad option and comes with some benefits too. In this article, we debunk myths or say misconceptions that you have about personal loans, and suggest how a personal loan can be beneficial:
Save money: Before you jump to conclusion that it does not help in saving money, let me first clear the air. In some cases it does help. Consider a situation: You badly need funds and are considering a credit card withdrawal or looking to swipe your credit cards still doubtful if you will able to pay up the entire amount in the coming billing cycle. In this situation, check with your bank if you are eligible for a personal loan as some banks offer pre-approved personal loans to their good customers. Credit cards and personal loans are both unsecured loans and comparatively easy to avail – however, personal loans are way cheaper. You will pay at least 36 per cent on your credit card as compared to 14-16 per cent on a personal loan. Also, Indian economy is witnessing risk-based lending. To put it in simple words, if you have a higher CIBIL credit score, you stand a chance to get loans at a lower interest rate CIBIL stand a better chance to negotiate better credit terms and conditions. Many banks and credit institutions offer added benefits like waiver in processing fee and speedier access to credit for consumers with a CIBIL score above 750 (ranges between 300-900).
Break the debt cycle: Have you ever paid the minimum amount due on your credit card bill thinking that you will pay off the remaining amount next month entirely and find that you are still carrying the debt months after that? If you take a close look at your statements and calculate the amount you paid as interest on this amount and compare it with the amount you would have had to pay as interest on the personal loan, which can be availed by doing a balance transfer of your credit, the latter would have worked out cheaper. Credit card dues attract an interest rate of 36 – 48 per cent, where as if you do a balance transfer of your credit, which will be treated as a personal loan against credit card, you stand to get it at the rate of 18 per cent interest per annum – little more expensive then taking a fresh personal loan, but still cheaper. This repayment can be made in EMIs, which is an added benefit. So, be a smart person, avail a balance transfer on your credit card to a personal loan to break high interest choking cycle and become debt-free.
Boost your CIBIL score: Your CIBIL score is calculated on the basis of many factors such as regular bill payments, credit usage, number of enquiries, age and a good credit mix. We always advice our customers have a good mix of credit. So, if you have only credit card and just because you take a personal loan, your score won’t dip. In fact, if you take a personal loan and repay it on time, it will improve your CIBIL score.
Source : http://goo.gl/QxQVR3
K. C. GOPAKUMAR | July 14, 2014 11:55 IST | THE HINDU
A consumer forum here has held that collection of foreclosure charges from housing loan borrowers amounts not only to deficiency in service but also unfair trade practice.
The Ernakulam Consumer Disputes Redressal Forum headed by its president, A. Rajesh, made the ruling while directing Federal Bank to refund the foreclosure charges collected from Biju Joseph of Kakkanad, a borrower.
The forum said the Committee on Customer Service in Banks had opined that foreclosure charge levied by banks on prepayment of home loans was seen as a restrictive practice, deterring borrowers from switching over to cheaper available source. The committee was of the view that levying of foreclosure charges amounted to restrictive practice on the part of banks. The Reserve Bank, through a circular in 2012, had asked banks not to charge foreclosure charges/prepayment penalties on home loans on floating interest rate basis with immediate effect.
Need for uniformity
Though many banks had in the recent past voluntarily abolished prepayment penalties on floating rate home loans, there was a need to ensure uniformity across the banking system, the circular said.
According to the complainant, while executing the loan agreement, the bank had specifically stated that it would not charge any amount at the time of foreclosure of loan account. However, the bank had vehemently argued that it was entitled to levy prepayment charges.
The forum pointed out that the person taking loan had no other go but to sign on the dotted line.
The levying of pre-closure charges contending that it was a condition in the agreement was not at all justifiable, it said. The above condition in the loan agreement “cannot be said to be with the consent of the complainant.”
Source : http://goo.gl/s7Qbjq
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
K. Ramalingam | Updated On: August 05, 2013 11:52 (IST) | NDTV Profit
In spite of steady, regular income there are so many individuals who live paycheck to paycheck, carry their credit card outstanding, and fail to save anything for life after retirement. If you are one of them, now is the right time to take action to come out and stay out of debt.
It is not only possible but also very much achievable.
Discussed below are a few easy steps you can use to get out of debt:
1. Make a list of all your debts
You need to take a good look at all your loans. It could be credit card dues, personal loan, car loan, housing loan, education loan, loan from FD, loan from insurance policies, loan from your employer, hand loan, and so on. For each and every loan you need to note down basic details like how much you owe, the current interest rate, EMI amount, number of months (tenure) etc.
2. Negotiate for lower interest rates
If you could negotiate the interest rate and bring it down, you can come out of debt faster. Most of the credit card companies come forward for negotiation if you show interest in repaying. They need not run after you to collect the debt. They will be happy to negotiate as this will, in fact, reduce their expenses. Balance transfer offers from credit cards are also a good way to reduce your interest rate.
3. Refinancing and consolidation
Replacing a loan with another is known as refinancing. Getting a refinance should reduce your interest rate and bring down the time you are in debt. But people more often go for a refinancing option that provides them with lower EMIs, increasing, however, the time they stay in debt.
4. Categorise your debt
A house loan can increase your net worth over a period of time. This kind of loan gives you tax benefit also. For a businessman, car loan provides some tax benefit. Each one of your debts needs to be categorised based on such factors. This will help us in comparing different loans.
5. Prioritise your debts
After sorting out various loans, you can comfortably prioritise them. This will be based on the interest rates and tax benefits. At times paying off a small loan first can give you a lot of motivation to get out of your overall debt.
6. Creating and executing a debt payoff plan
You need to create a debt payoff plan with different scenarios, so that you can find out how some more savings or a different repayment order will help you to get out of debt faster. When creating a plan, you need to choose one which is comfortable to your attitude. Otherwise, you may not be able to execute it properly.
7. Keep yourself from taking fresh loans
You need to make a vow that you will not be adding any fresh loans until you come out of all your debts completely. Think, for a moment, how you will feel when you become debt free as this will give you a lot of positive energy to come out and stay out of debt.
8. Postpone buying major assets
Buying property or any other major asset needs to be postponed until you get rid of your debt. With your new ownership comes the new – probably large – and unpredictable expense. This can make you deviate from your debt payoff plan and, at times, make you bear unpleasant and uncontrollable consequences.
9. Stop using your credit card
When it comes to using credit cards, there are broadly two kinds of people: 1) who use credit cards responsibly; and 2) who don’t. Poeple of the responsible kind repay their credit card dues in full on receiving the bill. The other kind, however, would pay the minimum due amount and carry forward the remaining sum.
If you belong to the second group, you need to stop using credit cards – at least – temporarily. Take out and put your credit cards in a locker. You can start using them again once your financial situation and buying habits improve.
10. Change your spending habits
Being in debt obviously means that you have been living beyond your means. The solution is very simple: spend less and you will get out of all your debt soon. You need to change your spending habits. If you buy things you don’t need, you soon end up selling things that you do need. Don’t save what is left after spending; instead, spend what is left after saving.
11. Involve your family members
You need to inform all your family members and dependents about your debt status. This way, you will be able to take decisions with much more clarity. Moreover, if your family members know about your debt, they will also change their spending habits and support you in getting out of debt faster.
Consider the example of a postage stamp. The usefulness of a postage stamp lies in the fact that it sticks to one thing till it reaches its destination. Similarly, you need to stick to your debt pay off plan till you get out of it.
K. Ramalingam is a certified financial planner and the founder and director of Holistic Investment Planners. The opinions expressed here are the personal opinions of the author. NDTV is not responsible for the accuracy, completeness, suitability or validity of any information given here. All information is provided on an as-is basis. The information, facts or opinions appearing on the blog do not reflect the views of NDTV and NDTV does not assume any responsibility or liability for the same.
Source : http://goo.gl/hsmKSL
ArthaYantra.com | Updated On: July 16, 2013 14:10 (IST) | NDTV Profit
Loans are important part of modern day personal finance. Most of us rely on loans for funding our higher education, new car or home etc. Though loans boost our purchasing power, over reliance on debt often leads to financial stress. One important question that advisors often face from individuals is: “When should I close my loan?” Exit strategy from the existing debts plays an important role in minimizing the interest burden on the individuals. Prioritizing loan repayments ensures that the loans get cleared in a systematic way to boost the available monthly surplus. The loan repayments should be prioritized in the following order:
Priority 1: Personal loans
Personal loans top the priority list when it comes to paying off existing debt. Personal loans are unsecured loans which are advanced on the basis of the borrower’s credit history and ability to repay the loan from the available income sources. Being an unsecured loan, Personal loans are often offered at a higher interest rate. Higher interest rate necessarily means higher EMI payments. Though the repayment charges for personal loans are also on a higher side, it is always advisable to close this high interest debt once an individual has enough surpluses.
Priority 2: Unproductive loans
The loan instruments like gold loans, loan against property, loan against fixed deposits and insurance policies, loan against PF and auto loan do not attract any tax benefits. Such loans should be paid off based on the interest burden. The interest rate on gold loans and loan against property are dependent on margin between pledged value and loan amount. If an individual opts for 50 per cent of the value of the gold as loan then he or she is expected to get a better rate compared to opting for 80 – 90 per cent of the value as loan. These loans hold a lesser interest rate compared to personal loans. Loans against fixed deposits, insurance and PF attract lower interest rate than the gold loans and loans against property.
Priority 3: Educational loan
The increasing educational expenses have aided in the increased demand for educational loans. Educational loans should be given second least priority before closing off the existing debts. The reason behind it would be the tax savings one can enjoy on the educational loans. One can claim tax benefit on the interest payments being towards educational loan availed from approved institutions. So essentially the interest payments can be offset by the tax benefit and hence one is advised to pay off educational debt only after paying off other debts.
Priority 4: Home loan
Home loans are the most common form of debt among the Indians. One can avail tax benefits on both principal repayment and interest payments on the home loan. This tax advantage makes the home loan the last debt an individual should pay off. The exit strategy for home loan also differs based on the tenure and type of house. Generally in the initial years, majority of the EMI payments account for interest payments and during the last few years of loan tenure they account for principal repayments. It is advisable to consider prepayment during the first half of the loan tenure. If an individual has two existing home loans, only interest payments on second home loan, which is not self-occupied, are tax deductible. However, there is no cap on this deduction. So considering the tax benefits associated with them, home loans should be paid off after servicing all the other existing debts.
Though the above mentioned priority list give an outline of debt servicing, sometimes you may find an investment which pays you higher interest rate than the interest rate being paid on the existing debt. As with any financial decision, make sure you analyze the pros and cons of whether to opt for an investment or to pay off the existing loan. Exiting a loan is an important decision that should be made using the merit based reasoning (ROI, opportunity cost) than emotional reasoning (debt free life).
ArthaYantra.com provides personal financial advice online.
Disclaimer: The opinions expressed in this article are the personal opinions of the author. NDTV Profit is not responsible for the accuracy, completeness, suitability, or validity of any information on this article.
Source : http://goo.gl/DhSID
By Nitin Vyakaranam, Founder & CEO, ArthaYantra.com| Jun 03, 2013, 12.49 PM IST| moneycontrol.com|
Every enquiry for a credit card or loan will be updated in CIBIL records. Whenever a request is placed by the individual for a credit card or loan, the financial institutions contacts CIBIL to assess the credit worthiness of the individual.
CIBIL score is gaining its prominence among financial institutions as a source to understand credit worthiness of a customer. Let’s understand how CIBIL actually works: CIBIL (Credit Information Bureau of India Limited) acts like an information data base of customers of different banks. If one has credit card or loan against their name, the respective lending authority will update the same to CIBIL. CIBIL maintains analyzes the record of how efficiently the payments were made. Every enquiry for a credit card or loan will be updated in CIBIL records. Whenever a request is placed by the individual for a credit card or loan, the financial institutions contacts CIBIL to assess the credit worthiness of the individual.
Factors which Influence your CIBIL Score:
1. Payment History: The payment history of an individual represents the financial state of an individual. As per CIBIL’s assessment, if the payments are made as per the schedule and in the given time lines, it is considered as a positive sign. Late payments or defaults on the loans and credit cards indicate the financial troubles of the individual.
2. Usage of credit limits: This factor is highly pertinent to credit card usage. It is considered as a negative sign if an individual consistently consumes 80-90 percent of the card limit. Increase in the current balance of the credit card over a time period is a sign of increased repayment burden.
3. Number of loans and credit cards: Home loans and car loans are considered as secured loans and credit cards and personal loans are considered as unsecured loans. While higher number of secured loans impacts the CIBIL score positively, higher number of unsecured loans impacts it negatively.
4. Credit Hungry: Repeated applications for credit cards or loans signify the credit hungriness of an individual. Every enquiry made for any form of credit is reported to CIBIL. The lenders maintain caution in case of such individuals who are repeatedly trying for some or other form credit.
How to Interpret your CIBIL Score
CIBIL Score can be broadly classified into three categories:
1. NA or NH
The individuals who are categorized under this section :
Do not have a credit history.
Do not have sufficient credit history to rate them.
Do not have any credit activity in the past two years prior to enquiry.
The individuals who fall in this category typically have no credit history and may have add-on credit cards. Even for the individuals who have cleared all their loans or not used their credit cards in the past two years, NA or NH rating is assigned. These scores do not signify any negative credit worthiness of any individual. However, some of the lenders have a credit policy which restrains them from providing loans to individuals under this category.
2. Risk grading Index : 1-5
This risk grading index is used for individuals who have a credit history of less than 6 months. The chances of loan approval and better interest rates are directly proportional to the risk index score. The risk grading scale ranges from 1 to 5. The risk grade of 1 and 2 signifies a high risk, 3 stands for medium risk, 4 and 5 stand for low risk. So higher index score is considered good in the terms of lender’s perspective.
3. CIBIL Score: 300-900
For the individuals who have a credit history of over 6 months, the CIBIL score ranges from 300 900. The score denotes the credit worthiness of an individual. This is how the lenders read the credit score: ”Higher the credit score, lower the chances of credit default by individual”. Majority of the new loans are issued to the individuals with a CIBIL score greater than 700. CIBIL score not only governs the loan approval, it also governs the interest rate on the loan. Higher CIBIL score can help individuals fetch best interest rates on their loans.
Call +919322286765 for FREE consultation
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
Call +919322286765 for FREE consultation
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