A Guide to Smart Borrowing
Every time there is talk about a fall in interest rates, you hear protests from everywhere. Investors complain that they get lower returns on their deposits; and pensioners are unhappy because their interest income is insufficient to take care of their needs.
But one section of the community actually rejoices at the news of lower interest rate - the borrowers! It is not just the corporate sector which is the beneficiary of a lower interest regime; all of us are. In fact, it is the aggressive marketing of home loans that has led to the revival of the real estate sector. Today almost every bank is pushing car loans, home loans and personal loans aggressively. The more aggressive financial institutions sanction a credit limit even without your asking for one!
As you can see, borrowing is no more a bad word. There are plenty of options if you want a loan. The options are not only in terms of the number of lenders, but in terms of variety of products too.
When it comes to investments, all of us take that extra precaution. Every investor wants the best deal for the money he puts aside. Those who didn’t worry about the safety of their investments have paid a heavy price in the past. It would do a lot of good if you exercised caution at the time of borrowing too. Not only is it important to deal with approved agencies, you should also be smart when it comes to borrowing.
But one section of the community actually rejoices at the news of lower interest rate - the borrowers! It is not just the corporate sector which is the beneficiary of a lower interest regime; all of us are. In fact, it is the aggressive marketing of home loans that has led to the revival of the real estate sector. Today almost every bank is pushing car loans, home loans and personal loans aggressively. The more aggressive financial institutions sanction a credit limit even without your asking for one!
As you can see, borrowing is no more a bad word. There are plenty of options if you want a loan. The options are not only in terms of the number of lenders, but in terms of variety of products too.
When it comes to investments, all of us take that extra precaution. Every investor wants the best deal for the money he puts aside. Those who didn’t worry about the safety of their investments have paid a heavy price in the past. It would do a lot of good if you exercised caution at the time of borrowing too. Not only is it important to deal with approved agencies, you should also be smart when it comes to borrowing.
Browse for options: Even before you think of taking a loan, check out your financial status. If you have some savings/investments stacked away, it makes sense to use them to take care of your debt rather than opt for a fresh loan. For instance, there may be money lying in your PF/PPF account. You can get a loan against your balance in your PPF account at a much cheaper rate than a fresh loan, since you pay only 1 per cent interest per annum if you repay the loan within 36 months.
For instance, if the balance in your PPF account earns you an interest of 9 per cent, no interest will be paid on the amount. Instead you will be charged 1 per cent interest on the loan. Similar options are available for fixed deposits and recurring deposits, too. You can even obtain a loan against the premium you have paid against your insurance policy.
Check out your appetite: First, make an assesment of how much liability you can digest. Whether it is your credit card purchase or a home loan, make sure that you have enough in your bank account before signing on the dotted line. To start with, make sure to set aside 50 per cent of your earnings for your regular expenditure.
Even bankers, for instance, assume that a borrower can afford to put aside around 40 per cent of his earnings every month towards loan repayment. Even if your lender is willing to give you an amount beyond your repayment capabilities, it would be wise not to accept it. The failure to repay EMIs (equated monthly instalments) will only increase your liability further.
Shop around: A few years ago, not many lenders were around to give loans. Now the story is different. There are nationalised banks, private banks, foreign banks, finance companies, and what have you. It always makes sense to check out the rate of interest offered by various players. In case of products such as personal loans, the difference between the offerings by different players is often large. For instance, nationalised banks charge an interest of 14-15 per cent on a personal loan. For the same personal loan, the rate offered by foreign banks and private banks is much higher, at around 17-20 per cent.
Choose the right product: There is no doubt loan products are aplenty. But you need to choose the right product to minimise your liability. If you have a short-term debt, take a loan that can be repaid within a shorter period.
Take the case of car loans. If you are looking for finance for a mere six months, strike the best deal with your car financier. Many car finance companies provide loans even at zero per cent interest if the repayment period is six months. In such cases, it makes sense to opt for the facility since you are not incurring any interest.
Never take high-interest loans for large amounts. A personal loan might look sensible to repay credit card dues, but it wouldn’t be sensible to take this loan for constructing/renovating your home.
Read the fine print: When you borrow, interest is not the only component of your liability. Your borrowing has a few other components too. Lenders charge a processing fee; and in some cases, there is an administrative fee, too.
Besides these two fees, many institutions charge a pre-closure penalty that you have to pay if you wish to pay up the loan in advance. It is always advisable to opt for a loan that has no pre-closure penalty, because it gives you the option of clearing your liability well in advance. In addition, you will also have the option to shift your loan account from one borrower to another when there is no penalty on prepayment. More on.... http://freesticky.bravehost.com
For instance, if the balance in your PPF account earns you an interest of 9 per cent, no interest will be paid on the amount. Instead you will be charged 1 per cent interest on the loan. Similar options are available for fixed deposits and recurring deposits, too. You can even obtain a loan against the premium you have paid against your insurance policy.
Check out your appetite: First, make an assesment of how much liability you can digest. Whether it is your credit card purchase or a home loan, make sure that you have enough in your bank account before signing on the dotted line. To start with, make sure to set aside 50 per cent of your earnings for your regular expenditure.
Even bankers, for instance, assume that a borrower can afford to put aside around 40 per cent of his earnings every month towards loan repayment. Even if your lender is willing to give you an amount beyond your repayment capabilities, it would be wise not to accept it. The failure to repay EMIs (equated monthly instalments) will only increase your liability further.
Shop around: A few years ago, not many lenders were around to give loans. Now the story is different. There are nationalised banks, private banks, foreign banks, finance companies, and what have you. It always makes sense to check out the rate of interest offered by various players. In case of products such as personal loans, the difference between the offerings by different players is often large. For instance, nationalised banks charge an interest of 14-15 per cent on a personal loan. For the same personal loan, the rate offered by foreign banks and private banks is much higher, at around 17-20 per cent.
Choose the right product: There is no doubt loan products are aplenty. But you need to choose the right product to minimise your liability. If you have a short-term debt, take a loan that can be repaid within a shorter period.
Take the case of car loans. If you are looking for finance for a mere six months, strike the best deal with your car financier. Many car finance companies provide loans even at zero per cent interest if the repayment period is six months. In such cases, it makes sense to opt for the facility since you are not incurring any interest.
Never take high-interest loans for large amounts. A personal loan might look sensible to repay credit card dues, but it wouldn’t be sensible to take this loan for constructing/renovating your home.
Read the fine print: When you borrow, interest is not the only component of your liability. Your borrowing has a few other components too. Lenders charge a processing fee; and in some cases, there is an administrative fee, too.
Besides these two fees, many institutions charge a pre-closure penalty that you have to pay if you wish to pay up the loan in advance. It is always advisable to opt for a loan that has no pre-closure penalty, because it gives you the option of clearing your liability well in advance. In addition, you will also have the option to shift your loan account from one borrower to another when there is no penalty on prepayment. More on.... http://freesticky.bravehost.com
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