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Keep a firm grip on debt

Keep a firm grip on debt

07 Jan 2014
Outlook Money

Edition: Page 42 - 45

 

Given that most of list are not going to walk into a builder's office or a car dealership for an all-cash deal, our dream homes would require financing. Of course, shopping for a loan is not as much fun as shopping for the vehicle or the house itself— but, no doubt, it's equally important. And, the question that bothers most when it comes to big ticket purchases, such as a house or a car, is the interest rate and the monthly outgo for servicing the loan.

After a bad year in 2012, in terms of high inflation and sticky interest rates along with an overall economic slowdown, 2013 saw prospective home and carbuy-ers lining up their big ticketdreams in anticipation of affordable loans. But, on the contrary', banks not only kept them guessing throughout the year in spite of the Reserve Bank of India cutting key policy rates—the repo rate thrice and die cash reserve tatio (CRR) once, by 0.25 per cent each—between January and April 2013, but as soon as RBI's focus shifted to rein in the ffeefalling rupee by increasing die repo rate, lending rates too gradually edged up. Therefore, your 2013 dreams may have remained unfulfilled. But this New Year, if you are planningto give shape to these unfulfilled dreams, here's what you can expect Lower EMIs in late H2 2014.

Interest rates will remain considerably high with the lowest home loan rates at 10.5 per cent and auto loans at 11 per cent as you welcome 2014. Says Rakesh Makkar, president and chief distribution officer, Dewan Housing Finance [DHFL): "Controlling inflation remains the priority for the government and the Reserve Bank of India. It is presumed that interest rates will remain firm in the first half of 2014." So, lending rates may cool only in the later part of 2014.Says Sunita Sharma, managing director and CEO, LIC Housing Finance: "In the medium-term to overmuch of 2014, we expect a more benign rate environ-ment in the light of a possible de-escalation of food prices due to a good monsoon." Says A. Surendran, head, retail and international banking. Federal Bank: "Lending rates will see a downward fall with a strengthening economy in H2 2014." Faster loan disbursal.

Lenders are gearing up to provide online loan approvals in 2014 with faster turnaround time. Says Sanjay Patel, managing director and CEO, Equifax India: "From a technology standpoint, real-time connectivity and response from the Equifax credit bureau has been enabled. As part of our technology we are configured to connect to the lender's loan origination systems and process applications 24x7 on a real-lime basis." Insta loan facility, in fact, has already taken off with consumer durable loans. Says Arun Thukral, managing director, C1BIL: "Finance companies and banks are checking creditworthiness of consumers who are seeking to buy televisions, computers and other electronic products on EMIs to provide them instant financing." However, will this facility be extended to home and auto loans? Says M.S. Raghavan, chairman and managing director, IDBI Bank: "The younger generation is tech-sawy and they don't have the time to visit various credit grantors.

They are the single-most important driver of the markets. {And, to cater to their needs) online loan applications wrould be a reality in 2014." State Bank of Bikaner and Jaipur has started offering online home loan approvals in 20 minutes and auto loan approvals in 10 minutes. We might see other players offering such services. Says Arun Kaul, chairman and managing director, UCO Bank: "The applicant can track the application status online. We are in the process of integrating the system of accepting online applications with our automated loan appraisal system. This will shorten the turn-around-time (TAT) significantly." Once the systems are in place lenders will be able to offer cheaper loans as the sourcing cost will come down. Reduce floating rate home loan burden.

Existing floating rate home loan borrowers pay higher interests compared to what the same lender offers to its new borrowers. Says Makkar: "You may have picked up the home loan at a slightly higher rate and there may be an option where another lender is lending you at a low-er rate of interest. Just move your mortgage loan to the lower interest one." You may also ask the same lender to switch your home loan to the lower interest rate being offered to new borrowers, but you might have to pay a switching fee to get the new rate. Therefore, calculate the net benefits and {inly then decide whether you would like to stick to your existing lender or get your home loan refinanced. Floating rate home loans do not have prepayment penalty even in case of refinance, so the only cost you would incur is the processing fee of the new lender. Some lenders, such as the State Bank of India, are charging nominal fees for refinancing options. Use fixed rate home loans to your benefit.

Those who had paid a shade more than the mid-2013 floating home loan rate and opted for a fixed rate loan will now he billing pretty as floating rate loans are way above what it was. In the initial years home loan borrowers usually stretch their finances to the maximum and that leaves them with little bandwidth to cope with substantial rate hikes and rising EMls. Therefore, lenders have started offering limited period fixed rate loans, say of 2-3 years, where borrowers have the liberty to opt for another fixed period at a new rare or switch to a floating rare loan. SaysSharma: "A fixed rate home loan insulates the borrower from all possihle interest rate volatilities."

Good bargain on auto loans. Unlike home loans, auto loan rates will remain at the current levels. Says Rishi Mehra, co-founder, Deal4loans, a loan comparison website: "Auto loan rates should stay stable with schemes from auto lending firms." Many car manufacturers have their own financing arms that will keep the rates low to push sales and, as a consequence, competition will force banks not to increase their lending rates. Says Surendran: "With most financiers trying to tap into quality retail loan customers, it would not be surprising to find good load of auto loan offers in Q4 FY14.

The horrower can scout among financiers and decide the one with best rates and fast delivery." Since 2013 was bad in terms of a decline in car sales, freebies and comperitive finance schemes will be on offer in the first quarter of 2014 to clear the inventories. Says Mehra: "If you are getting your car on the shelf, negotiate for more bargains."

Overseas fee escalation. Students who took an education loan in early 2013 to study abroad may witness a shortfall for the next installment of fees with the rupee plummeting from 54 to a dollar in April 2013 to around 62 per dollar now. This is so because banks extend education loans in rupee terms with a cap of Rs20 lakh for funding overseas education.

Says Surendran: "As educa-tion loan amount is sanctioned based on the foreign currency required for the course and other expenses, the loans in Indian rupee are sanctioned at the prevailing rates. A major rupee fall unserdes this matrix." On taking remedial actions, Raghavan says: "The lenders are expected to factor in such inflated costs due to the rupee fall and may review their product norms to accommodate them. However, iflenders are not willing to provide additional funding, the borrower can take prompt steps to avoid default in payment of fees." Leverage your good credit score. Due to the economicslowdown for the last four years, banks are expected to register highest loan defaults in FY14 with gross non-performing assets (NPA) of 4.2-4.4 per cent, says ICRA. Therefore, good credit history would be key to gel a loan in 2014.

Says Kaul: "For those with good credit his-tory, we are exploring the possibility of offering some incentives." Apart from ensuring faster processing, a good credit history will bring other benefits. Says Patel: "As the lending system is becoming more cautious and is implementing high-end analytics and rules to segregate good credit from bad, individuals with higher scores may get belter interest rates." On how to bargain for a better deal, Thukral says: "Mention thati you have a high credit score and healthy credit report. Request them to give you the best possible terms and conditions and loan-processing timelines based on your credit score.

Consider die most optimal option." Manage your credit score right. In the last couple of years stagnant salaries and job losses have been witnessed across industries due to the prevailing economic condition. This is expected to continue for the better part of 2014. Therefore, itwould be prudent to take proactive steps to ensure your income risk does not affect your credit history adversely. Says Makkar: "Home-loan-linked insurance plans are one of the best options in times of emergencies." If you think you may find it difficult to service your loan, men take corrective steps in advance. Says Mehra: "If one stops paying EMls, me charges for nonpayment are high. Increasing the tenure or applying for a break in EMI payments are other options." You must also first pay offall your high-cost loans, such as personal loan and credit card dues. Says Thukral: "If you have high credit card outstanding, check for an option to convert this outstanding into loan EMIs." Says Makkar: "You can borrow against securities, such as National Savings Certificate, life insurance policies, shares, mutual funds, gold and fixed deposits.

It also translates into a cheaper rate compared to a personal loan." Approaching the lender in advance can help. Says Kaul; "In case of difficulties in servicing a loan, one may approach the bank for restructuring of die loan so that he or she gets some breathing time." However, in the worst case, says Mohan Jayaraman, managing director, Experian: "If you let your lender know about your change in circumstances, they can help. They do not want the expense and bother of chasing you for repayments or, in extreme cases, taking you to court. They would much rather find a way of helping you out."So, don't let your guard off just yet and play it right to give shape to your big-ticket dreams in 2014.

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