The things are different today. The interest rates have reduced considerably making them quite affordable. The process also has become more customer-friendly. Tax advantages to certain loans such as home loans have made then quite attractive. Consumerism has increased making us wanting to enjoy things today rather than wait for months/years to save sufficient amount to buy things of our choice. Therefore, today we don’t think twice before committing ourselves to indebtedness.

Yes, no doubt, the loan scenario is quite promising today. But we need to be careful.

Not all loans are good. Loans which finance the consumption are bad. Unsecured loans – such as credit cards, personal loans – are usually very expensive and must be shunned at all costs. Loans which strain our finances must be curtailed.

Loans that build assets are worth a look. While, the competitive environment may have made availing a loan affordable and simple, it does have a drawback. In their eagerness to get the business, the banks may not always tell the full story. Therefore, it is for us delve deep into any loan offer and make the right choice.

1. Firstly, one should do a detailed market survey of the various options. Who are the major lenders in the business? What are the interest rates that they offer? What are the other costs and charges that they levy? What terms and conditions are likely to affect us? Preparing a comparative chart would be very useful.

2. Interest is the most critical of all the costs that you pay. Hence, needless to say that one should go for the cheapest option. But beware of the jargon. Don’t be misled by banking terminology. For example flat interest rates may appear to be cheaper but are in fact the most expensive – a 8% flat rate would work out to an effective cost of around 15%. Therefore, choose a daily or monthly reducing balance option rather than a half-yearly or annual reducing option. This will mean lower effective cost for the same stated interest rate.

3. Another concept – Advance EMIs – misleads many borrowers. Using this concept the lenders are able to quote lower interest rates. But the effective interest that the borrowing ends up paying works out much higher. Therefore, it would be prudent to go in for a plain vanilla loan rather than exotic variations. Interest-free loans or other such offers are too good to be true and thus should be viewed with suspicion.

4. Apart from interest there will be other costs such as administrative fees, processing charges etc. Work out as to how much these other costs add up to. These costs could make your loan more expensive even though the interest rate may be lower.

5. Sometimes the EMIs may work out more than what you can afford on a monthly basis. This can be reduced by increasing the loan tenure (or of course by reducing the loan amount) and make it convenient for you to avail the loan. But keep in mind that the total quantum of interest you pay over the loan tenure will be higher.

6. Make sure that all verbal discussions or offers are supported by relevant papers. Do not go by anyone’s words. What ultimately matters is the written word.

7. Do not give any false information. Sometimes you may be coaxed into declaring something which is not the truth. Desist from any falsification. This amounts to fraud and could land you in serious trouble.

8. Ideally, one should ask for zero penalty/fees for a pre-payment option. If this is not possible, then lower the better. This is more relevant to a longer-term loan like home loan which runs for 10-15 years. During such a long period circumstances could arise necessitating you to prepay the loan – interest rates may become too steep; your income may have increased substantially leaving you with lot of spare cash; tax structures may have changed making the loan unviable; etc.

9. Recheck all terms and conditions before you finally sign the documents. Ensure that interest rate, loan amount, tenure etc. are what was agreed upon.

10. Do not sign any blank documents or leave any blank spaces in the loan documents. Even if you have to spend a few hours to fill-up the form in full, do so. Do not leave anything for the lender or his agent to fill-up.

Remember that there is no free lunch. In this age of information overload, alluring advertisements and unbridled consumerism, it is easy to get bedazzled and baffled. Therefore, it calls for our ingenuity and intelligence not to be deceived and make the best possible loan choice.

8 reasons why your loan might be rejected!

Remember it is not a wise thing to keep applying for a loan without any rhyme or reason. If your loan application gets rejected, this is also recorded in your CIBIL record. So weigh the pros and cons before you apply for a loan simultaneously to different banks. Wait till you receive an offer before you apply to another bank. This will give you a chance to rectify errors or update your credit record in case there is an issue with it before you approach another lender.

When you apply for a loan, banks judge your ability to repay the loan on various counts including your age, income, job stability and primarily based on your credit report - which is a reflection of your true credit worth. Here are some reasons you need to watch out for and guard yourself against to obtain a loan without any hassles.

#1 Your residential address is on the defaulter list!

If you live under the same roof as someone who has slipped up on a loan payment or credit card dues and hence been reported to CIBIL, then the probability of your loan application to be rejected is likely to be high. The reason being your residential address will find a match with the one on the defaulters list.

#2 Poor track record of credit card or loan repayments

You have been accumulating credit card dues over the years resulting in a huge pending payment, which is well past the due date. Or it could be that you have slipped up on a few EMIs. In these instances, your name would have been reported to CIBIL. When a bank looks up your credit card or loan repayment track record – it would have a strong reason to reject your loan. Also, telephone bills and insurance premiums are likely to join this list, so do keep a strict vigil on all your bill and credit repayments.

#3Too many previous loans and too little income

If you are juggling too many loans already, then your income minus the ongoing credit repayments is what will be considered as your real income. If another loan is likely to cause a severe strain on this income or make it unlikely for you to be able to repay effectively, then your loan will be rejected.

#4Loan guarantor to someone who didn’t pay up!

When you sign the dotted line to be someone’s loan guarantor do exercise a lot of caution. You must make sure the applicant you are vouching for has the ability to repay the loan without hassles. Unless and until you have strong reasons to believe so, do not rush to sign for them as if they fail to repay for any reason you will be accountable to repay the loan on their behalf. In such circumstances, where you have been unable to repay their loan, you will be reported to CIBIL and this will reflect in a bad credit report.

# 5Co-applicant has a poor CIBIL record

It is important for all the loan applicants to have a good credit repayment record. If you have a clean record but your co-applicant has a credit card issue reported for instance, then your loan application may not be considered.

#6You are a compulsive impulsive job hopper

Banks place a lot of importance on job stability and certain banks even insist that an applicant needs to be employed with a particular concern for three years or more to be eligible for a home loan. Also, in instances where a reputed company’s future appears unstable, the bank can reserve its right to provide a loan to the applicant from that company.

# 7 You want a joint loan with your sister or friends

Though some banks might consider providing a joint loan to brothers who are co-applicants, banks as a rule do not provide loans to sisters or a brother and sister or friends, who wish to be co-applicants. However, you can choose to opt for your parents as co-applicants for the loan.

# 8 Your loan application has been rejected before!

Here are some pointers to be prepared for your loan before you apply for it:

a. Gauge your repayment ability. Calculate your net worth and evaluate if you are ready for a loan commitment.

b. Get a copy of your credit report from CIBIL and other bureaus, where your records can be found. Analyse them and figure out if there are any concerns in the report, which needs to be addressed. For instance if you have paid all your credit card dues but this is not reflected in your CIBIL record, then you need to approach the bank in question and get proof for the repayment. You will then need to submit the proof to CIBIL and get the information updated.

c. Ensure you have back up funds to pay your EMI for a bunch of months, for emergencies like a job loss etc.

d. Make as much down payment as possible and prepare well ahead to close the loan as quickly as you can, to continue a good repayment track record. Moreover closing off a debt when possible, will free up your resources for other uses or even for a new loan if the need arises.

Want a loan? Make sure you know your credit score!

Updating the credit report will be an ongoing process – lenders send updated data regarding an account to the agencies. It depends on how may credit accounts and individual has and when there is a change in the credit data. The moment there is a change in the credit data, it will reflect in the credit score.

Equifax will be yet another addition to the credit information space with the receipt of its license from the RBI. The two other players already operating in this space include CIBIL (the first one to enter this space in 2004) and Experian Credit Information Co. that got its license very recently. High Mark credit Information services is another company that is in the pipe-line awaiting RBI approval.

Should you be concerned about these events?

Earlier, lenders had to rely on their own assessment (internal) of a customer before giving any loans or even credit cards. But gradually the situation changed with the availability of individual credit information through CIBIL. Lenders fetched details on your credit worthiness from CIBIL. So whether you will get your home loan, personal loan, auto loan, credit cards or not and at what interest will be determined by your credit score. CIBIL, which has been operating in this space for a fairly long time, already has a large database of customers with their credit scores. Lending institutions dip into this database for assessing your creditworthiness. Be ready to accept the fact that your credit scores will determine your loan sanction. This makes it essential for you to monitor your credit score now that it is available from CIBIL, which earlier was not the case.

Elsewhere in the world if you have been rejected a loan on account of a low credit score then you have the option of approaching select lenders who specialise in lending to borrowers who have recently ome out of a bad credit situation. But in India, it doesn’t exist. So it becomes all the more critical for you to monitor your score to ensure that your loan does not get rejected on the grounds of a poor credit score.

What does a score look like and what is a good score?

A credit score is generally a three digit number within the range of 300 and 900. Higher the score the better it is. This score will reflect information from several lenders and across various loans.

What information does a credit report contain?

The report contains basic details of the consumer (name, id etc.), personal details (date of birth, passport number etc.), location details (address), details of bank accounts such as auto loans, home loans, personal loans and credit card (overdue accounts, highest amount of credit sanctioned in case of credit card, overdue amounts - oldest, latest, last payment, account ownership, closure, sanctioned credit in case of credit cards and other cards, number of times credit report requested by the creditor along with the name, enquiry purpose, date and amount).

Will my credit score with the multiple agencies be the same?

As the source of information for each credit agency may not be the same, scores are bound to differ. All the lenders may not report to all the agencies. Besides, as competition in this space increases, each player will want to launch innovative products and new ways of capturing information which may affect the credit score.

Should I access my score from one agency only?

In countries such as US where individual credit scores have been in existence for long, experience from market information suggests that credit report of one agency may differ completely from the other. Besides, there may be errors in the report of any single credit agency which you will spot only if you access your credit report from all the agencies. In the US, evidence suggests that 25% of the credit reports contain errors that are serious enough to cause denial of credit. In order to ensure your financial soundness, and also protect yourself from any credit reporting errors, it seems logical to access your credit report/score from all the agencies.

What should I do if the score is incorrect?

Sandeep applied for a home loan from ABC bank. The bank rejected his loan application on the grounds that his credit report mentioned that he has a long overdue outstanding amount on a credit card. This took Sandeep by surprise as the issue was amicably settled with the bank post which he stopped using the credit card. He got the bank to acknowledge the same and he subsequently informed CIBIL, presenting the acknowledgement from the bank as proof for his claim. CIBIL then verified and incorporated the updated, correct info in his credit report and he was granted a loan.

Errors are bound to happen due to incorrect reporting by lenders or due to human errors.

You need to report the error to CIBIL with valid proof and if you are not satisfied with the action you can lodge a complaint with the banking ombudsman’s grievance cell, who will take up the issue and evaluate it from a neutral stand.

How often does my credit score get updated?

What makes this system fool proof for lenders?

Mr. Rajat has taken a home loan from ABC bank and has been paying his EMIs in a timely manner. Simultaneously, he has taken an auto loan from XYZ bank and has defaulted on the last few payments. Mr Rajat now applies for a personal loan from ABC bank assuming that since he has paid his home loan EMIs with the bank in a timely manner, he will be granted a personal loan without any trouble.

However, what he was not aware is that ABC bank obtains a credit score from CIBIL ( CIBIL has varied sources of information from which it collates credit data and then arrives at a credit score) where he shows up as a defaulter with another bank. This could either result in a rejection of his personal loan request or the bank might charge him a high rate of interest.

Is there any benefit of a good score to me as a consumer?

The most significant advantage of a good credit score is that you can use it to negotiate with the bank for a more favourable interest rate.

What is Base Rate System for Banks?

Introduction

In the recent newspapers, it is most likely to read a news talking about the base rate system for the banks. Every banks announcing the base rates for lending loans. What is that?. I will explain the use of base rates and how it will impact the banks and borrowers. It is one of the reforms on banking system by RBI to reduce the lending risk for banks.

Say Bye to Prime Lending Rate (PLR)

Before setting the base rate system, banks used another rate system called Prime Lending Rate (PLR) to set their lending rates. The problem with this system is, banks manipulated this PLR to lower level to offer discounted lending rates for the borrowers. It may cause the loss for the banks if they offer loan with much cheaper price. The real intention of the RBI is to make the banking system much stronger after the global financial crisis.

The banks meet huge loss because of the default loans. The main reason is, when banks offer loans with cheaper price to lure the customers, most of the customers without adequate financial support too get the loans. It will end in default (can not repay the loans). Base rate system provides more transparency on setting the rates. Each bank use some criteria to set their base rates.

What is Base Rate System?

As I have mentioned Base Rate System is for the banks to set a level of minimum interest rates charged while giving out the loans. This Base Rate System has many advantages over the older method of Prime Lending Rate (PLR). One advantage is, in the Prime Lending Rate (PLR), one could sanction the loan for lower price for the preferred customer or the corporate bodies and retail customers may have to pay more for the same type of loans. In the base rate system, there will not be much variance on the loans.

However, the base rate system will not be applicable for the following type of loans:

Agricultural Loans
Loans given to own employees
Loans against deposit
Export Credit

Base rate system is arrived at taking into the account, the cost of deposits and cost of keeping aside cash to meet CLR and SLR. It is convenient for the banks to adjust the lending rates after the changes on policy rates by the RBI.

Transparency on Base Rate System

Another advantage of base rate system is transparency on calculation method to arrive the base rates. Every bank has to declare to the public how they have calculated the base rates. Fro example, SBI has calculated the base rate by taking into account of past six month deposits.

Excerpt from RBI’s Circular on Base Rate System:

Base Rate shall include all those elements of the lending rates that are common across all categories of borrowers. While each bank may decide its own Base Rate, some of the criteria that could go into the determination of the Base Rate are: (i) cost of deposits; (ii) adjustment for the negative carry in respect of CRR and SLR; (iii) unallocatable overhead cost for banks such as aggregate employee compensation relating to administrative functions in corporate office, directors’ and auditors’ fees, legal and premises expenses, depreciation, cost of printing and stationery, expenses incurred on communication and advertising, IT spending, and cost incurred towards deposit insurance; and (iv) profit margin.

Base Rates for Banks

The following table presents the base rates announced for some of the leading banks.

Get Rid Of Bad Debt - Read more

No money for EMIs? Tips to negotiate with the bank

LAYOFFS have been the dreaded word of this year. Many employees were asked to leave without any notice. The rude shock, however, is to wake up to your piling debts (home loan, pending credit card payments, personal loans, car loans) and no source of income to pay up. Many had to tap into their savings for everyday survival.

In such situations, there are several credit counseling centers to help find a solution for your dilemma. They are governed by a model scheme for Financial Literacy and Credit Counseling Centers (FLCC), put in place by the RBI.

What do credit counseling centers do?
These centers help you restructure your finance to help you survive this sudden reversal of finances. Though these centers have been initiated by banks, they are intended to provide neutral counseling free of charge. So, they act as an intermediary between the banks and the individuals in distress.

What are the steps a counseling center undertakes?
Step 1: Check your credit status
Before a counseling center takes up your case, they first determine if you are indeed mired in steep debt without a solution in sight. A credit counseling center establishes this fact even before they start providing the counseling. They track down the entire financial history of the individual with the essential supporting documents that testify this plight. A person's credit history is also a good record of his financial transactions.

Step 2: Advice you
After the center has established that you are indeed short of funds and they can vouch for a dead end in your repayment status, they take up your case. The counselors are usually retired bank employees who sit with you to find a solution. They advice you on how to approach a bank and what to take to the negotiation table. Banks can, sometimes, be co-operative and agree to wait till the individual finds another job. Some banks also agree to a waiver of interest in dire cases. They also accept whatever payments are possible and write off the debt.

What are the restructuring options they suggest?
The first step is to put the entire financial history of the individual on paper. His net worth is calculated based on the assets he owns, the investments he has made and his current list of debt liabilities incurred. Then an analysis is undertaken to bring existing costs down using the most suitable method that is viable.

Here are some suggestions for debt restructuring:
1. Possibility of liquidating some of the assets to pay off the debts like credit card dues, which will keep gaining interest over a period of time.
2. Possibility of making part payments towards the loans to bring down the interest cost.
3. Converting a heavy credit card payment into a personal loan. . Hence, such a move can at least bring down the cost of interest of the debt if it is not possible to completely remove the debt from the picture.
4. There is an option of taking a loan against securities like Public Provident fund, if he has been employed for more than five years, or other securities like a gold, jewelry, art, life insurance policy etc.
5. Loan Against Property (LAP) is also a good option, where loan is taken against the value of the property.
6. The center counsels individuals regarding avoiding such financial trouble in future and asserts the need for savings and budgeting. These centers also advise the individual on the evaluation of various products offered by banks and insurance companies

CLICK HERE- FOR UPDATED LOAN RATES FROM VARIOUS BANKS