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Loan trap and easy solutions

Mohan, who is working for a Chennai head quartered company is struggling to meet the monthly expenses.Although his gross income is pretty decent, without the support of Credit card his month never ends.

His debt trap started when he completed buying a property based on his future earnings. Already he had few personal loan just before buying the property he took personal loan to fund the initial payment.

To complete interior decoration for the new house he used credit cards that hit him so badly.

He is not alone several of the highly paid employees who borrow not only for creating wealth such as buying house but they all indulge in EMI culture for going to exotic location for holidays.

loan

On the other hand low income and self employed business people keep borrowing to meet the basic requirement.

But what people broadly miss is, they never understand the importance of necessity and luxury.

Buying a car for going to office may be necessity if you are a high paid executive, but borrowing for high end car may be luxury.

Taking education loan for children to college fees is necessity, but borrowing heavily and sending children to overseas education is luxury.

Is borrowing is a prohibitive bad word.Not so,without borrowing several of the middle income families could have never bought home and other life style product such as fridge,two wheeler,car and television.

But it is very important to know how to balance both and it is always better to restrict the total EMIs to less than 50-60 per cent of the net income.This will also help one to build wealth for the future.

Are you keen to know what are the pitfalls in loans such as credit card personal,car,jewel, and other loans and how to overcome the same read on......

Credit card:


Often people use credit card for purchases ,but at times they will not settle the entire balance in the same billing cycle.If you roll over the loan it is the most expensive loan in any organized lending.The monthly interest is as high as 3 per cent.If you repay only minimum of 5 per cent of the outstanding payable you are surely in debt trap- be cautious.

Solution:

If you are not sure of closing the outstanding in near future better stop using the credit card for future buying.
The best way to get out of this mess is to convert the outstanding card loan into personal loan. Depending upon your earnings the interest rate varies from 12 per cent to as high as 20 per cent. Still it is far lower than paying 30-36 per cent interest in credit card. But beware that pre –closure of loans will attract charges based on the terms and condition of the lender.

Personal loan:

The common mistake people will do is that they expect some family expenses such as marriage and take personal loan. Since it is unsecured loan the interest cost will always be higher. But if you have good credit score you can get better interest rate. Gopal is self employed and was planning for some project and thought better to avail loan keep the money ready to grab the business. The project was delayed for few months and finally he never got the business.But unfortunately he was paying interest for few months and paid pre –closure penalty too.

Since most of the personal loans are being a short term loan mostly they are offered as fixed loan.As per the rules only for floating interest rate there will be no pre –closure penalty but for personal loan it is as high as 4 per cent.Few lenders reduces the pre –closure charge after 12- 18 months. Don’t anticipate future expenses and borrow and keep money in the bank.If you take pre-approval, in 1-2 ays loan can be disbursed.Such things will keep your liability low and at times you can manage th the available money.

Solutions:

Before you approach a bank for a personal loan, weigh any other option that you may have to raise the money, like monetizing your financial assets such as shares, bonds, loan against insurance policies, Small saving schemes or premature closing of your fixed deposits. If you have no such options approach bank where you have account. Based on your past trac  record they may offer better interest rate and some flexibility. Although the nationalized bank will not disburse the loans as fast as private banks, but If you are okay with spending time approach the nationalized bank for better interest rates and flexibility in pre-closure.
 In several cases individual hesitate to pre close fearing the charges.Suppose you take loan of Rs 3 lakh for 3 years at interest of 18 per cent.After paying for one year you have got bonus and wish to close the loan. There will a charge of 4 % of the outstanding of Rs 2.09 lakh and the pre closure charge will be Rs 8360.By closing the loan you will save interest component of Rs 62, 100.So, when you get money nothing wrong in closing loan when you have extra cash.

Thandal loan:

Most of the business people prefer to borrow in the morning and pay in the evening and in cases it happens on weekly and monthly basis.It appears to be very small but it will have serious repercussion.Years back one of the well known producer was on a trap with speed finance. Before going for such a loan, self employed should think several times and it is always better to buy through the regulated mechanism.

Solutions:

Several micro finance company and small banks have come and they have limit on the lending rate and they are now regulated. So, small self employed should approach them for loans rather than taking Thandal loan.In most cases micro finance charges interest are less than 26 per cent interest and the recovery mechanism is far better to the regular Thandal lender. Now few small banks have started offering 2 year loan at 22 per cent with no pre-closure.There is a ceiling on the maximum loan amount and one can repay it weekly fortnightly and monthly. More over they also take insurance for the outstanding loan.The family of the borrower is protected.

Consumer loan:

Luxury goods have now come part of our life.With change in life style and both husband and wife going for employment convenience forced them to buy consumer durables on loan or on Zero interest or equated EMI. What consumer has to look into while buying the same. First let us know how it works and why someone offers such schemes in first place. Normally every business has sales target and they wish to reach the same.When the interest and inflations are high individual’s are left with low surplus. They will not spend and they may  tend to postpone buying the same.To push consumer to buy manufacture will try for promotions. In this case manufacturers give better discount dealers and in turn he will pass the same to consumer. 

Assume manufacture increase the dealer margin from 10-15 per cent the dealer to improve his business willing to share the 3-5 per cent with consumer. It is normally routed through manufacturers own finance arm on whole EMI or they tie-up with NBFC. So,he offers 6,10 or 12 EMI to the consumer. So, no one losses money in this. But we have to look out for the certain points here. The normal practice is to collect one time processing fees less than Rs 1000 and also EMI card fees of Rs 400-500.With this card second time consumer need not give proof for buying the goods.

If you have cash during offer periods bargain for discount from the dealers to extend the discount offered for EMI option for you too, from MRP(maximum retail price) But there are certain dealers, they will not be part of the manufacturer offers and they try to collect interest from the consumers.So,next time when you plan to take consumer durables on EMI if your dealer charges an interest, go to the main dealer to buy the goods. You will save interest cost.

Chit fund:

Often we find that small business people and those working in unorganized sectors prefers to save or bid chit to meet their needs.In the first few months due to high demand to bid, discount goes as high as 30 per cent with regulated chit fund companies. Will such high discount help the borrower to make profits from their business is based on the profit margin?Why still people prefer this route compared to regular banking route.

In India 40-50 percent of the business happens outside of the GDP account. They will not maintain proper records and they don’t pay income tax for their business. Such business people will not get business or personal loans from regulated banks and NBFC, hence they prefer chit. Since they don’t pay tax they are okay with the high bid price.

Car Loan:

The appetite for new cars increased rapidly in the past 10 years.Most of the cars in India are bought by availing loan. Since it is easily available it tempt people to borrow one level above their needs.For instance someone will buy Rs 4 lakh car in full cash deals, he is willing to go for next level because loans are available at ease. While the interest rate among the bank and other leading institutions are almost in equally footing, car manufacturers at time offer far lower interest to bank and NBFC.But the catch is that only for select model where they wish to increase the sale. Few points have to be kept in mind while availing the loans. 

1 Check whether is there any pre- closure penalty.

2. Processing fees. Mostly banks will have lower charge compared to NBFC.

3.Looking for longer duration of loan, banks are better option.

4.If you are replacing the car with same brand first approach the company offered loan for better rates.Due to loyalty they tend to offer better rates and it also charges lower interest based on the profile of the borrower. Whereas in bank,interest rates are same for all customers.

In terms of missing EMI any month, everyone charges penalty equally. Since 2014 as per RBI diktat no one should charge you pre-closure penalty for floating rate loan .

So, based on the model,tenure and brand you can decide where to take a loan to buy your dream car.

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