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education Personal Finance

Do you need personal loans?

Note: This article is meant for people with a steady source of regular income and a salaried bank account. Also the person is able to save more than 20-30% of his salary.
The top five reasons why Indians take a personal loan are:

  1. Medical emergency,
  2. Travel,
  3. Wedding,
  4. Investment (esp. stock market and speculative property investments),
  5. Helping a relatives and family.

And debt consolidation: Some people also use it to refinance their Credit Card dues or loans from informal sources. But in that case, one would realize sooner if not later that it was an expensive decision.
Most personal loans have 3 clauses –

  1. A regular EMI for the entire duration of the loan 6-24 months
  2. Processing fee from 2-4%
  3. Restrictions on prepayment. I.e. one cannot prepay in the first 3-6 months and not more than 50% of the loan balance outstanding in one payment.

These Terms and conditions often don’t match with the optimal debt repayment schedule for the individual. Hence given a choice, I always discourage people from taking a personal loan.
Alternatives
1. Bank overdraft: This is the easiest and the cheapest option for short term credit. If you have a salaried account, then just ask your bank and they would be more than willing to give you a generous 1-2L line of credit which you can repay at ease. Charges like account opening charges, commitment fee (0.25-0.5% of the line of credit) may look like a lot, but due to flexibility in repayment, the overall interest expense is much lower.
2. Credit Card: If you search the archives of enagar, you will find reference to an older article which tells you how one can draw money equal to the credit limit (which is higher than the cash limit) for 50 days at a cost of 3% (paid upfront) and 1.8% for subsequent months.
3. CrowdSourcing: Why do to an institution in the first place. Go online, dial a friend and fund yourself. P2P loans are cheaper, faster and simpler than most bank loans.

Categories
education Personal Finance

How to prevent pre-payment penalty on home loans

Most home loans in India have a covenant that restricts the number of times a person can make a pre-payment (usually 4 times a year) and the minimum amount. Also some of the banks charge a prepayment penalty. However if you read the fine print, most banks are relatively more flexible when it comes to changing the EMI (Equated Monthly Installment) amount.
Using this loophole, one can minimize the pre-payment penalty/charges by calling the bank one month to increase the EMI and revert it back to the old levels next month. Chances are that you would be able to stretch a little and continue paying that higher EMI for a few extra months. Hence reducing your interest expenses.
When it comes to debt, don’t ignore any processing charges, penalties or fines. It might put you in a debt trap.
For example
A 1M (10Lakh) INR loan for 15 years period at 8.75% has an EMI of 9,800/-
If you prepay 1EMI (9,800 on the first day), it will save you from paying about 3.5 EMIs 15 years later which is a net saving on 24,500/- in interest expense alone.
Please note that this calculation assumes that you would continue to pay the same EMI even though now your loan outstanding is (10Lakhs – 9,800/-)