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Tata Capital > Blog

Credit Card or Festival Loans?

If you are young and want to purchase your first iPhone this festive season, the ideal advice would be to purchase it on cash without borrowing. But it’s not easy to find so much money in your bank account when you have many other expenses to take care off. So even though financial prudence suggests that you should rethink about this purchase, its possible that you might be tempted to buy it.

Now if you have finally decided to buy it, how should you do it?

The most convenient option is to pay for it using your credit card. Swipe and done – you own the latest iPhone that you can now flaunt in your office. But credit cards are very costly. At times, the annual borrowing rate turns out to be 45%! Just imagine the interest you will be paying on such high-cost loans.

But there is another option that can turn out to be much cheaper than credit card loans. It is the festival loan – a cheaper form of a personal loan.

Festival loans are generally specialized loans that are offered at lower rates or with processing fees than existing personal loan.
Generally these loans cost about 14-16% but come with a lower borrowing limit (generally less than Rs 1 lac). If you compare this with credit cards (@40% plus rate), these are much cheaper option.

Another disadvantage of buying though credit card is the limit on your card will be reduced to the extent of outstanding amount. So, if you already have a significant credit card outstanding and use your card actively, it is better to opt for a personal (festival) loan.

But inspite of being cheaper than credit cards, festival loans suffer from one small drawback – processing time. So while you can simply walk in a shop and swipe your credit card, opting for a festival loan might make you wait for a day or two before the loan is processed. But this is still fine when you compare the personal loan interest rates – which easily tilt the balance in favor of festival loans.

Home Loan Management for Smart People

One of the personal finance lessons that have been passed onto us from previous generations is to avoid loans. This advice is right in spirit but difficult to implement in current scenario. Just take a look at high property prices and you will know that for middle class people, it’s impossible to purchase a house without home loan.

And interestingly, the responsibilities don’t end after taking the loan. They only begin. There is no perfect way to manage your home loan. Every borrower is in a different financial situation that required difference approach.

But there are some good-to-know principles that can help in better management of home loans.

Once you have taken a loan, it’s a no brainer that you should be diligent about paying your EMIs on time. This will ensure that your credit score improves and you are not perceived as a defaulter.

When you get a loan approved, it’s possible that EMI is equal to 30% of your salary. But as years pass, your income increases. So the ratio of Emi/Salary decreases. You should make sure that you pay higher than initial EMI – as and when your income increases. This kind of pre-payment can reduce your interest amount substantially during your loan tenure.

Additional Read: How To Ensure Easy Repayment of Your Home Loan EMIs?

Most salaried people get some additional amount as an annual bonus or commission at least once a year. Do make sure that you use a part of this amount to prepay your loan to reduce the outstanding amount. This will help reduce your interest outgo.

Also, a longer tenure means a lower home loan EMI but higher interest cost. So if your income permits and your other expenses are under control, consider reducing your loan tenure by increasing the EMIs.

Additional Read: How to Reduce Home Loan EMI – Tips and Tricks

You can also consider transferring your existing home loan to other lenders that are offering lower home loan interest rates. But that should be done after considering other costs like processing fees, transfer charges, pre-closure fees, etc.

These are some ways in which you can better manage your home loan and save a lot of money.

Have a Home Loan? Need More Funds? Look No Further

Nobody can undermine the importance of owning a house. No matter what the advocates of renting-is-better-than-buying tell, fact is that buying a house gives a sense of ownership.

But houses are extremely costly. More so if you purchase them in larger cities. And since the prices are so how, one needs to take a home loan to purchase them. Once the loan is taken, a large chunk of your monthly salary will be going towards EMIs. This leaves very little money in your hand after you have taken care of other expenses too.

Now it’s possible that there is a sudden need of additional funds in your family. How will you take care of that if you don’t have any savings left (after using the money for downpayment)?

The first option is to take help of relatives. But that may or may not work. Next is to take a personal loan. But person loans are not cheap.
Luckily, there is another option – Top Up loan on home loan. The best part is that the home loan interest rates on additional borrowings are much lesser than those on personal loans. Tata Capital itself has a facility where home loan borrowers can avail top-up loans at competitive rates.

Now of you think that why will a lender lend to you when you already have a large loan, then you are not alone. That’s a common question.

The answer lies in understanding one simple fact. When you take a housing loan, it is approved according to your home loan eligibility. After some time and repayments, a part of the loan is already paid back. Your income too would have increased in the meantime. So your new loan eligibility would have gone up. So against the same collateral, you can avail a fresh (top-up) loan of an amount equal to the difference of current loan eligibility and existing outstanding loans.

This is the reason that if you need some additional funds and already have a home loan running, it’s better to take a top-up loan instead of a personal loan.

4 Factors that will affect your Home Loan Tenure Decision

Buying a home can be a very satisfying feeling. It gives you a sense of ownership and the bragging rights to tell others that you have arrived. But when you have to pay monthly EMIs for years, it can be honestly draining experiences for the borrower.

It is for this reason that it is important to give some serious thoughts to the loan tenure that you wants to take. There are 4 important factors that you should consider before finalizing the loan tenure:

1. Loan Amount:

Lenders generally offer longer tenure to help borrowers increase the home loan eligibility. The EMI should not be more than 40% of your take home pay. So for longer tenure, the EMI is lower which helps increase the eligibility on basis of EMI.

Additional Read: Planning to buy a home? Make sure to follow this Home Buying Guide

2. EMI:

As already mentioned, EMI too pays a big role in deciding your loan tenure. If you want to have a low home loan EMI, it will result in longer tenure. On the other hand if you are comfortable servicing a higher EMI, then you can chose to take a shorter tenure. Shorter tenure also helps in saving a lot of money in interest paid.

3. Borrower’s Age:

Lenders want to ensure that the loan is repaid back much before a person ceases to earn, i.e. retirement. Hence most lenders are unwilling to lend to old people unless they can prove a sustainable and reliable source of income.

4. Interest Rate:

This is fairly simple. If all other factors like loan amount, interest rate, etc. are constant, then lower interest rate means low er EMI. Or you can ask you lender to increase your EMI and shorten your loan tenure.

Additional Read: Top Factors Affecting Home Loan Interest Rates

So these are some important (but not all the factors) that can help you decide the home loan tenure. It’s always advisable to take a loan with shorter tenure if you can comfortably service a slightly higher EMI.

How To Get Your Personal Loan Rates Lowered?

Yes you read it correctly. You can do that if you are smart enough. And it’s perfectly legal to do it. No out-of-the-world tricks here.

How is it possible when the rate of interest on Personal Loans generally falls within the same range for all lenders?

The answer is that even though the broad range remains same, it’s possible to decrease the rates on case-to-case basis for lenders. Let’s see how you can do it:

Do not apply for a loan that is beyond your ability to repay with current income. If you do that, it will put your loan application at risk of being rejected. So always apply for a loan that you can comfortably repay with your income. Lenders too will see that since you can pay your EMIs easily with your income, the risk of default is low and hence, a case for rate reduction.

Lenders will check your credit score before they even process your loan application. So if you have already checked your credit score and found it to be good enough (>750), you can use this information to negotiate lower interest rates with your lender. But on the other hand, if you score is low, be ready to pay higher rates on your personal loan.

If you already have an existing relationship with your lender, it matters a lot. All financial institutions want to retain good customers. So if you already are a customer of one of their offerings, they will be more than happy to provide you with other products (personal loan in this case) too. It’s also possible that you might get some loyalty benefit in form of lower interest rate on your loan.

So these are some of the less-known factors that can help you get your personal loan rates reduced by the lender. If you are applying for a personal loan, make it a point to run through these factors to see if you can benefit.

Have an Old Home Loan at High Interest Rate? Switch to Tata Capital to Save Lacs

Many people who have taken a home loan few years back are facing a dilemma. The rates when they borrowed were high and hence, they are paying higher EMIs. Now with fall in interest rates, lenders are offering fresh home loan and transfer of old ones at lower rates.

So does it make sense to switch from an old home loan (at high interest rate) to one at lower rate?

The answer is yes. It makes sense. Even a small reduction in interest rate can save you a lot of money during the course of loan.

But remember that lower rates alone should not be considered before deciding to switch.

Make sure you check the foreclosure charges with your existing lender. That is not all. There are charges like processing fees, legal charges, stamp duties, valuation fee, etc. that the new lender might charge. So once you have taken these additional charges into account, only then can you decide whether to shift or not.

But if you do find reputed lenders like Tata Capital offering lower home loan interest rate on switching your old loans to them, it makes sense to do a deeper analysis. How should you approach if you wish to shift your loan?

First of all, submit an application to your existing lender for transfer of loan to Tata Capital. Once the existing lender issues the NOC, submit it with loan statement and complete application to Tata Capital for transfer of loan. The application will be processed and evaluated.
Once the loan is approved, the loan amount will be sanctioned for closure of loan account with existing lender. You will need to hand over the original property papers to Tata Capital.

As for your EMIs, you would now have to pay lower home loan EMIs as you have a loan at lower rate of interest. Or you can continue paying old EMIs and reduce the loan tenure (suggested approach).

How to Analyze the Festive Season Loans that are Offered to you?

If you are observant enough, you would have witnessed an increase in number of special unsecured loans being offered to you during festival season. Isn’t it?

This makes sense as generally; it’s during the festival season that people tend to spend more on things (that they were waiting to buy). So what should you do if you yourself are planning to take a small loan to make festival-related purchases?

The best thing to do is to carefully assess all the available loan offers. It’s possible that some of the loans might look better than others given the offers that are being publicized. But as a borrower, it’s your responsibility to dig deeper.

There can be loans that claim 0% interest or zero processing fee or something similar. You need to be aware that no lender will give you anything for free – least of it the money you are borrowing.

When the loan being offered comes at 0% interest rate, it almost always comes with some kind of processing fee. Like if you take a loan of Rs 20,000 with 0% interest and a processing fee of Rs 800, then the total cost for you will be Rs 20,800 that translates into 4% interest on one-time basis. So this is a far cry from the claimed 0% interest rate.

But it’s possible that some lenders might actually lend at 0% if the tenure is very short. Like if you purchase a laptop that costs Rs 30,000, then if you pay an EMI of Rs 10,000 for 3 months, then it is indeed zero-percent loan. But if the EMI is Rs 5400 for six months (which includes Rs 5000 as EMI and Rs 400 as processing fee), then the total cost comes to Rs 32,400. This means that the cost of loan was 8% for six months.

So as you see, you need to be careful about what is being claimed and what lenders are actually offering. Though RBI is now against misleading claims being made by lenders, it helps to be vigilant and understand the mathematics behind the personal loan offers.

Don’t Over-Borrow. Find the Right Home Loan Amount

When you are looking to buy a house, one of the major factors is the budget you have. This budget in turn depends on two things. First, your ability to bring in the required down payment and secondary, your ability to service the future monthly EMIs.

What is the right amount to borrow is a simple question. But it can have unique answer depending on person’s financial situation. Experts say that both under- as well as over-borrowing are dangerous. So how do you decide what is the right home loan amount?

Let’s look at some of the important factors.

Income Stability – If you have an income source that is stable and reliable, then you can a steady source of income or your job is stable then you may opt for higher Home Loan amount. But if you are not very sure about your future income level, then you should reduce the loan amount to the bare minimum. If it means that you will be paying more than 20% as down payment, then so be it.

Other EMIs – If you already have a few EMIs running (like care or personal loan), then its best to clear major ones first before going for a home loan. It is not easy to service 3-4 EMIs simultaneously. But if you don’t have a choice and will necessarily have to service 2-3 loans simultaneously, then take a home loan with long tenure to reduce your EMI outgoes initially. As and when your income increases, start prepaying the loans that have higher rate of interest first.

Increase Down-Payment – If you are planning to put in only 20% as down payment and have money parked in bank FDs, then this approach can be questioned. Bank FDs earn about 6% post taxes whereas loan requires you to pay 10-12%. So keeping the money in low-interest earning instruments when it can be used to decrease the amount for borrowing, doesn’t make sense. So if you think you are convinced, you can reduce your home loan amount by liquidating some low-interest earning assets and use to it increase your down payment. Get in touch with Tata Capital to avail a home loan at attractive home loan interest rates and explore a wide range of home financing solutions.

Hidden Home Loan Charges that you can easily Miss Out

If you are planning to avail financing for your house purchases, chances are that you are focusing on main factors like EMI, loan tenure and interest rate. But there are several other factors that can increase the cost or amount of loan.

But don’t confuse these factors with hidden costs associated with property (like PLC, cost of parking, etc.). The factors we will discuss are about home loan. Lets see which are these and how they impact your home loan:

Valuation Fees – When you submit you loan application, lenders carry out physical inspection of the property to ascertain that the lender is not over-lending. For carrying out this valuation exercise, lenders charge a valuation fee.

Legal Fees – like valuation fee, lenders might also hire external lawyers to validate the legal status of the property being borrower for. This legal cost is also recovered from customers. It might even be clubbed with valuation fee in certain cases.

Conversion Fees – Suppose you take a loan at 11% interest rate. But over time, the prevailing rates fall to 9.5%. If you want to switch to lower rates, then your lender might charge you 0.5% to 1% of the outstanding loan amount as conversion fee.

Fee for Loan Tenure Change – If you want to change your loan tenure which might impact your EMI (increase or decrease), then you need to pay fees to the lender for change in tenure.

Fee for Switching from Fixed to floating or Vice Versa – This is self explanatory. If you wish to shift from a fixed Home Loan to floating rate loan or vice versa, the lenders can charge upto 1% of outstanding loan amount as Switching fees.

Late Payment Charges – delay in EMI payment can result in lenders levying a Late Payment Charges.

These are some of the most important hidden charges that lenders might levy. This list is not exhaustive and there can be other charges too. But idea here is to make you aware that apart from EMI, tenure and interest rates, there are other things too that you need to pay attention while taking a home loan.

Does Pre-Paying a Personal Loan Make Sense?

Suppose that last year, you had taken a personal loan of Rs 2 lac for some personal reasons. Now luck has been very benevolent and you have made a cool profit of Rs 1 lac on trading some antique stuff you found in your ancestral house.

What is that you would want to do with this additional Rs 1 lac?

And we are not considering the option of splurging it on shopping, etc.

You already have a loan where your current outstanding is Rs 1.4 lacs. So does it make sense for you to prepay this loan or you are better off investing this money elsewhere?

The answer here should be driven more by mathematics and less by emotions.

Ideally, if you have surplus money that can be used to repay a loan or can be invested, it should be used for investment only if the expected returns are more than what you are paying on loan.

So if let’s say your current personal loan is charging you 15%, then you need to find an investment option that pays you more than that.
Savings account only gives you 4-6%. So that won’t do. Next are bank FDs that pay 5-7% after taxes. That won’t do either. Investing in stocks can be one option. But there is no guarantee that you will earn more than 15%. It’s quite possible that you might end up losing money as it often happens in stocks.

So with no good investment option available and if you don’t need the money for any other of your needs, it makes senses to pay off as much of your personal loan as possible. You will save a lot on your personal loan interest costs.

You may also chose to make a part payment of the personal loan and invest part of the remaining amount in some investment instrument. But before you take the plunge and prepay the loan, remember that some lenders have prepayment charges that should be considered too.

So don’t be in a hurry to deploy your new-found treasure. Take some time to think about it and then take a well-thought out decision.