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tips4me.com - opting for finance

opting for finance

EMI’S YOU SHOULD AVOID! 

 - by Rachel Fernandes


The availability of easy bank loans has no doubt increased the purchasing power of individuals today. Everything right from your TV, fridge, home, car etc. can be picked up on EMI's. However, this EMI trend has landed many in severe debts. To ensure that you don't land in such a situation ever, you must decide on taking a loan sensibly and should avoid it when you can. Here are some bad EMI's that should be avoided at all costs.

High Interest car loans
Do not take high interest car loans where you will find the EMI so high that you face a problem paying these monthly instalments. Instead, opt for lower interest car loans over a longer period of time, so that they are easier to pay back.

Loans for holidays
As a rule, never ever holiday on money you don't have! While planning the holiday, it may seem like a good idea to just avail of a loan and take off, however a better option is to save up and then plan a budgeted vacation. This way you are not burdened with EMI later.

Personal loans
Many banks provide personal loans, where no collateral is required to be given. But personal loans always have a higher interest rate and this can make it difficult to pay the EMI. Also personal loans generally have a lot of hidden clauses. Hence avoid these unless extremely necessary.

Credit card for online purchases
When you make purchases on the internet, you are often charged higher rates, convenience fees and several other surcharges like delivery charge, shipping charge etc. These will only add to your monthly EMI on your credit card. Instead, if you make a purchase offline, you can avoid all these surcharges and balance you EMI too.

Unsecured money loans
Many people take unsecured loans from money lenders that generally have extremely high interest rates, and are even higher than bank's interest rates. These not only make the user dish out high EMI but often lead to plenty of fraudulent credit loans.

The bottom line is, weigh the pros and cons sufficiently, before you opt for a loan. Taking an informed decision is the best!

 

HOME LOANS AND YOU!

 - by Rachel Fernandes


If you are earning well, various financial institutions will be hounding you for home loans, each shouting about lower interest rates, great customer relationship policies and what not. But as a home loan will eat up a major chunk of your salary, you must take this decision only after sufficient deliberation. Here are some aspects you must weigh properly, before you take the plunge.

1. Signing the agreement
First and foremost, read the agreement carefully. It's long, tedious and the home loan companies may even ask you to sign a blank loan document to speed up the processing while the details can be filled in later and sent back to you by post. Avoid it. Read the document thoroughly before signing on the dotted line.

2. Fixed and floating rates
Most home loan companies offer floating rate loans as the default option. That is, the interest rate on your loan will move up or down with each revision in the benchmark rate of the home finance company. Every percentage point increase in the interest rate could see your loan amount increase by a few lakh rupees. For a fixed rate loan, you need to specifically ask for it when applying. The interest rate charged on a fixed rate loan may be 0.5-1 percentage points higher than that on a floating rate loan but usually works out well in the long run.

3. Faults
A 'fault' for a layman means a non-payment of an EMI during the loan tenure. However your bank has a different meaning for this term. The home loan agreement of few banks defines fault as a case when the borrower expires or the borrower is divorced or the borrower is involved in any civil litigation or criminal offence. Therefore, you must be clear what your lender means by the term 'fault' and not pay for what you don't expect.

4. Tax benefits
Tax benefit is a lucrative option for those opting for housing finance or home loans as they can claim a certain portion of the interest and principal that they pay towards the loan installments for reducing tax liability. These tax benefits are available both on principal and interest components of a loan. Tax deductions can be claimed on housing loan interest payments, subject to an upper limit of Rs. 150,000 a financial year. So, decide on the tenure of your loan accordingly.

5. Pre-payment options
Banks may also levy a pre-payment penalty, at a fixed percentage of the outstanding loan amount, in case you decide to repay your loan ahead of schedule. Some may restrict the number of pre-payments you can make during the tenure of the loan or allow you to pre-pay only a certain proportion of the loan each year. So, be aware of any such clauses.

 

REPAYING STUDENT LOANS EASILY


Studying at a university abroad is an investment you make towards your career. But this education does not come cheap and many students need to opt for student loans to pay their way through college. Repaying these loans can be a real task, especially if you haven’t planned your finances well in advance. These tips will make sure you get debt-free as soon as possible.

Do your own research: Not all loans are the same. Some offer benefits that will leave you with more cash n hand for books and supplies, while others do not. When applying for a loan, therefore, keep all these differences in mind so that you are clear about what you can expect.

Stay organized: A lack of organization in your paperwork can cause you to miss payments and end up paying much more in the long run. Saving every piece of paper – letters from your student loan officer, promissory notes, addresses and numbers of your lenders, and even summaries of phone conversations – will ensure you know exactly what’s expected of you when your payment time comes along.

Be Frugal: Living on a small budget when you’re a student will enable you to live a much more comfortable life once you graduate. Do this by repaying credit card bills in full, as soon as possible; by setting a small budget for yourself and following it to the T; and by exploring working opportunities while studying.
 

THE FINE PRINT IN LOAN DOCUMENTS


If you are taking a loan, do read and understand the small prints in the loans offered by the organizations. Look for conditions relating to prepayment of loan, interest and penal interest on delayed payments and so on. Often there will be charges for the prepayment of loan, which may be substantial. The interest and penal interest on delayed payments are higher than the normal rate of interest. This is a paradox, you’ve to pay additionally, whether you are paying in advance or in arrears. Ask for any rebate on prompt payment of instalments for repayment of loans.

While Calculating EMI…
Even if you like the sound of the interest rate, examine the EMI (Equated Monthly Installment) for the repayment tenure. Ultimately the effective interest rate depends on the reducing balance method used; i.e. the rate at which your payments are computed. Every time you make a payment, the interest you pay is calculated on balance outstanding principal.

The reducing balance can be of 4 types:

• Daily reduction: The principal is reduced every day as if you were making repayment of the principal on a daily basis.

• Monthly reduction: In this system the principal on which you pay interest reduces every month.

• Quarterly reduction: On a quarterly basis.

• Annual Reduction: The principal is reduced at the end of the year.

The more frequently the rate is calculated, the better the deal. Going by this principle, a daily reducing balance calculation is better than a monthly, which in turn is better than a quarterly and so on.

Processing Charge
On application, you will have to pay a certain charge on the amount applied for, which is calculated on the amount of loan applied for and NOT on the amount ultimately actually sanctioned! This charge varies with the lender and may be a fixed amount irrespective of the amount applied for or may be a percentage of the loan applied for. This amount, paid upfront, effectively reduces the money you get. Look for the lowest fees lenders.

Check For A Prepayment penalty
Try to locate a lender who doesn't charge a prepayment penalty because:

1) In case your financial condition improves you can get rid of your debt earlier.

2) If the interest rates fall, you can opt to replace the higher cost loan with a lower cost one.

3) While giving you the option of pre-payment, you will have to pay the entire outstanding principal; there is no flexibility offered. Therefore there is no possibility of paying a part of your loan when you have a surplus as banks do not allow it.
 

BORROWING WHEN INTEREST RATES ARE FALLING


You never know what could be the interest rate in thefuture. If it is rising, you are better off borrowing at the lower rate today.But what if the interest rate is going to fall substantially in the future? InIndia, for instance, between 1996 and 1999, loan interest rates fell by 4 percent which brought down the cost of borrowing roughly by one-fourth the level ofwhat was three years before. Since it is not possible for you to predict thefuture check before borrowing whether your scheme gives you the freedom toforeclose, and if yes, then at what cost. This way, if in the future interestrates fall substantially, you can always approach another finance company,borrow at a lower rate of interest, and pay off the loan that bears a higherinterest burden.
 


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