Tuesday, 30 August 2016

All you should know about loan classification

Classification of Loans
 Loan is no more a facility that only a small group of people avail of; they have become much more common now and aid a great deal in financial inclusion.  Loans are taken for various personal and commercial purposes. There are education loans, home loans, business loans, seed capital loan, loan against property and so on. However do you know that loans can be classified into various categories based on different factors? They can be differentiated on the basis of their duration, purpose, collateral backing, repayment status and so on. Here we discuss few such classifications.
Secured and Unsecured Loans:
Secured and unsecured loans maybe distinguished on the basis whether any collateral is attached with the loan or not. Secured loans are those loans which are given against a pledged asset like home loan (against the property for it is taken), car loan, loan against gold, loan against deposits. While unsecured loans have no collateral against them, examples of such loans include education loan, personal loan and credit card borrowing. Secured loans are safer for the lender as the lender as an asset as a safety net if the borrower defaults. This makes them less expensive when compared to unsecured loans. Interest rates for unsecured loans are higher.
Commercial and Non-Commercial Loans:
When a loan is given to a non-individual or a legal entity for business purposes then it is known as a commercial loan. These loans are given for purposes like buying machinery, inventory or equipment. Non-commercial loans are given to individuals; these are loans like car, home, personal etc. For commercial loans the creditworthiness of the organization is assessed while for a non-commercial loan the credit rating of the individual is important.
Demand Loan and Term Loans:
This loan classification is based on the loan tenure. There are term loans and then there are demand loans. In case of demand loans the lender can ask the borrower to return at any time, as the name specifies; on demand. These loans are generally taken for working capital requirements like buying raw material or paying short term liabilities etc. Term loans are for a fixed period, there can be short term loans (less than a year), medium term (one to three years) and long term loans (more than three years).
Priority Sector Lending:
As the name specifies these are advances for specific sectors which require focus or special attention owing to various reasons. Banks may not find it lucrative to lend to these sectors but the government would like to encourage lending to these sectors as these sectors may be important for the economy and the overall development and prosperity of the country. Agricultural loans, loans to Small and Medium Enterprises (SMEs) fall in this category. Loans to such sectors may be given at special interest rates or under special terms.
Classification of Loans as per their Repayment Status:
This is a classification of loans that you can find in your Credit Report and is based on the
repayment status of your loan.
  • STD is for Standard; these are loans for which the payment is made within a 90 day period.
  • NPA are Non Performing Asset and is used for those loans that have been overdue beyond a period 90 days.
  • SUB denotes Sub Standard Account; NPA for over a year are put in this category.
  • SMA denotes Special Mention Account. This category that is used to report a standard account falling to the sub standard category.
  • Doubtful is a loan that has been in the SUB status for more than one year.
  • Loss; an account which is uncollected and is confirmed as a loss.
Irrespective of how a loan is classified; the basic rules for them remains the same. The must be taken with utmost care and should be repayment in full without any delays or defaults.

Monday, 22 August 2016

Fixed Rate Home Loans V/s Variable Rate Home Loans

When it comes to buying a residential property, you ought to use home loan facility. Irrespective of surplus cash in your hand, you should always make use of credit for buying a house. You should never exhaust all the savings in hand for purchasing a home. Availing a home loan is not only a cheaper credit option but it also offers a lot of tax saving benefits. But as you decide to get a home loan, you should clearly know which type of loan you should apply for- a fixed rate home loan or a variable rate loan.

How fixed rate home loans are different from variable rate home loans?
In the simplest words, fixed interest home loans can be defined as home loans with fixed rate of interest for entire amortization period. While the variable rate home loans are the ones where rate of interest is not fixed, but changes as per the market conditions throughout the term of loan.
Thus, if you choose to go for a fixed interest rate home loan, your monthly installment for entire duration would be same, irrespective of market conditions. While the payout would keep fluctuating in case of variable or floating interest home loan.

So, what you should expect when you go for a fixed or a variable interest component?

1.       First things first, with fixed monthly installments you can easily calculate your monthly expenses and make a budget. Thus it is always easier to manage a fixed loan EMI, as compared to a variable interest EMI. In case of variable interest loan, you would need to calculate your EMI every month and this is the most inconvenient factor regarding the changing interest rates. You can use online home loan emi calculator to know about your monthly installments.

2.       Sometimes interest hike may cost you thousands of rupees in a single month and affect your budget. However, when rate of interest is fixed irrespective of market conditions, you pay the same amount, despite the increase or decrease in the base rate. This certainty factor goes in favour of fixed rates.

3.       Usually the rate of fixed interest is higher by 1 to 2.5 % as compared to floating interest rates. Banks charge higher interest rate to cover up the risk of rising interest rates in future. Hence you tend to pay higher rate of interest if you go for a fixed interest loan.

4.       Again, when home loan interest rates fall, you ought to lose the benefits of falling rates if you go for fixed rate. Your EMI will remain high despite the change in market conditions.        
When you should go for a fixed rate home loan?

1.       As home loan is a long term commitment it is viable to have a fixed rate of interest so that you have a kind of certainty pertaining to your expenses. Particularly when monthly installment is less than 40 % of your income, it is considered fairly easier to manage the loan repayment. So as a credit responsible person, you can lock your EMI by going for a fixed rate. By doing so, you need not worry about hike in monthly expenses due to change in interest rate.

2.       Next, when you are comfortable paying your current loan, you can also enjoy other credit requirements with a little planning in the near future. Repaying your loan is the most important factor to improve CIBIL score.

3.       Another good option is to go for an initial 3-4 years fixed loan that is convertible to floating rate thereafter. However you should always check out the fee for switching between the rates from the bank.

4.       This might be a common sense, however it is an important aspect that needs to be considered when you choose the type of loan component. When interest rates are already low and are expected to rise in the near future, go for fixed rate.

5.       For long duration loans, fixed rates are generally a preferred choice.

When you should go for a variable loan?

1.       If you plan to prepay the loan you should opt for floating rate loan. For, fixed rates are higher and if you choose to close the account in a short period you would certainly save on the interest. Also, your loan would not see many cycles of rate fluctuations so you need not bank on fixed rate and pay for certainty factor unnecessarily.

2.       Next, if you are really good at managing your funds, you can certainly choose floating rate as fixed rates are always higher than the current floating rate being offered. You can always save from 1 to 2 per cent on interest rates every month. Also, interest rate would not jump to 2-3 per cent in a day. You will get time to switch the rate type by paying the fee. Next, rate will keep on fluctuating so it is not going to remain higher than fixed rate for entire tenure.

So the decision to opt for the fixed or variable interest rate should primarily be based on your budget and current market situation. Hope the points discussed above helps you take an informed decision.

Thursday, 18 August 2016

Get Benefits from Fixed rate Home Loans

Purchasing a house is probably the biggest financial decision people take in their lives.  No doubt it requires a lot of time and research to zero down on a choice. Once this is done comes the next complex aspect of deciding on the kind of home loan to go for. A home loan is a long term liability that will impact you for 20 to 30 years. It requires careful planning and budgeting so that you are able to honour your loan commitments without any financial stress. There are two options that banks offer. Fixed rate and floating rate. As the name suggests, in the fixed rate option a pre-specified bank interest rate is charged throughout the loan tenure. In the early part of the loan a majority of EMI amount is used to service the interest and principal is served in the later part of the tenure. In case of floating rate the bank interest rate is tied to a reference rate which changes with the economic environment of the country. As bank interest rate is the most important aspect of the house loan it is a tough decision to choose between the two. Each option has its own pros and cons and you should choose one that suits your requirements.
Here is how you can benefit from a fixed rate house loan.
Fixed instalments
You pay a fixed amount of EMI every month throughout the tenure of the loan no matter what the market condition is. This fixed repayment schedule brings a sense of clarity that helps you in budgeting well. People who have doubts about whether they will be able to afford the monthly payment if there is a steep rise in the interest rate should definitely opt for the safer option of fixed rate house loan. It gives you peace of mind as you need not keep a watch on where the interest rates are heading. While floating home loan interest rate would change with market dynamics and disturb your finances.
Read the loan agreement carefully and check whether the fixed rate is fixed only for a specific period or for the entire tenure of the loan. If it is fixed for only a certain period say 5 years, then you will enjoy a constant EMI only for that period. From the 6th year onwards it will automatically convert to a floating rate, where EMIs will fluctuate based on the prevailing bank interest rates. 
A shield from market fluctuations 
Fixed rates shield you from the interest rate fluctuations due to changes in the economic environment. If interest rates are relatively low at the time of taking the house loan and you are expecting an increase in the future, taking a fixed rate home loan is beneficial as you can lock in your loan at that rate. Even if interest rates climb to higher levels you have nothing to worry about.
A disadvantage with fixed interest rate is that it is usually 1-2% higher than the floating interest rate.  Also if the bank interest rate drops in the future you will not get any benefit of these reduced rates as you have to pay a fixed amount every time. 
The decision to choose between fixed and floating rate depends upon various economic factors. Fixed rates are a good option if the interest rates are low and economic conditions indicate a rise in the interest rate in future. If rates are high currently and likely to come down, it is best to go for floating bank interest rate as it opens the possibility of lower payments in the future when rates drop.
You should also factor in your risk taking ability while making a choice. If you want stability in the instalment amount every month fixed rate house loan is a good option. If you are ready to take the risk of fluctuating EMI amount to make sure you get the benefit of lower rates in future you can go for floating rates.
If you are opting for a shorter duration house loan or planning to prepay it within 5-7 years, then you may not go for the higher fixed rate. That’s because for shorter durations the interest outflows are less and fluctuations in the interest rate will not have much effect on the loan as a whole.
If the current interest rates seem low, if certainty and security play a prominent role in your financial life, if you are taking the loan for a long period of time then fixed rate house loan is a good solution. 

Thursday, 11 August 2016

Can credit scores really be improved

Credit score is a three-digit numeric that depicts one’s creditworthiness. The score, which ranges from 300 to 900, plays a crucial role in the loan application process. Recent studies have shown that borrowers with a score of 700 and above are more likely to get their credit card or loan application approved from banks and other financial institutions. If your score is low, financial institutions may flat out reject your application. Thus, it is very essential to maintain a score of at least 750 before approaching banks for credit. If you are struggling with a poor score, do not worry! There are a number of ways to improve credit score fast. Here is a look at how to boost your credit score.

The first and the foremost way on how to boost your credit score is making sure to make repayments on time. If you have availed a loan then ensure that your instalments and interest on loan are paid back on time. By making timely repayments, your score builds up. Paying off all your credit card dues is one of the ways to improve credit score fast. Outstanding dues can bring down your score considerably. Create a plan that will allow you to clear off your credit balances prior to the due date. Financial institutions look for good financial behaviour from their clients, and the sooner you put them into practice, the better. Also, make sure to keep a track of your spending habits as excessive spending can lead you into a debt trap and thus cause your score much harm.

Maintaining a healthy mix of secured and unsecured loans is also one of the solutions to how to boost your credit score. If you have too many unsecured loans, it will hurt your CIBIL score. It has been seen that consumers with a healthy credit mix have high scores. Adding variety to your credit mix is one of the definite ways to improve credit score fast, but make sure to use them wisely and repay back on time. If you fail to make repayments then there is no point to having the perfect credit mix. It is also very essential that you do not portray a credit hungry behaviour. Avoid sending out too many loan applications (personal loan, auto loan) etc. as this will cause all the financial institutions to make inquiries at the same time. When multiple credit inquiries are made, your score will take a major beating.

Request your credit card issuer for a credit limit increase. Raising the limit can help lower your credit utilization rate. This is among the ways to improve credit score fast. However, this will only work if you do not raise your spending habits accordingly. Some card issuers in the market will allow you to request for a credit line increase without a credit inquiry. Keep a check on your credit utilization ratio and always strive to maintain a low credit utilization rate. Also, refrain from closing old credit cards that have been used responsibly. If the card has evidences of good repayment history, do not dispose it. Repayment patterns have a big impact on your CIBIL score and lenders take that into consideration when deciding whether or not to approve loans.

Make sure to check your credit report at least two or three times a year. By doing so you can spot errors, if any, and report it to the credit bureau. Some of the errors that can pop up include debts listed that do not belong to you, inaccurate payment history etc. Once the error is rectified, the correct score will be reflected. This is one of the ways on how to boost your credit score. Keep in mind that inaccuracies in the credit report can cause your CIBIL score to drop.

You can also consider getting in touch with reliable credit advisory companies. They will counsel and guide you on how to boost your credit score, avoid bankruptcy etc. Knowledge about the different ways to improve credit score fast is very essential as it can help avail loans at competitive rates. The credit advisor can also help you in effective financial planning and financial discipline. Getting a consultation from a credit advisor will not harm your score in any way, so you have nothing to worry.

Wednesday, 3 August 2016

Tips for Paying of the Student Loan Faster

A student loan usually is the first borrowing that an individual might make. It is important that one is extremely responsible about repaying their student loan dues on time as this creates your first credit trail. It also makes sense to try and repay an education as soon as possible as in the early phase post employment the responsibilities are considerably lesser so repaying a bigger chunk is not likely to dent the monthly budget boat. So here are a few ideas that can help you in repaying your student loan faster.

The Moratorium Period is Important
Usually banks do not ask students to start repaying their dues immediately after they start a job, there is moratorium period ranging from six months to one year. This moratorium period should be used wisely and one should make the best of this duration and this is the first step one could take to paying of their dues earlier than scheduled. This time could be used to collect a lump sum amount which could come in handy to make partial pre-payment or pre-payment EMIs. Either of the options could ease your burden in the months to come. Obviously the cost of pre-payment must be considered before utilizing this option. One can also consider the option paying interest during the course of the study period; this will also help in reducing the EMI burden.
  1. Pay More the Minimum Amount:
    While not paying your dues at all or delaying them could put you on CIBIL defaulters list but, paying more than the minimum amount could help you clear your dues early. Obviously the first thing is not to miss an payment at all and whenever possible pay extra i.e. more than the minimum amount due.  Work your monthly budget and see if you can afford to pay some extra amount every month or once in a while, make paying your education loan your priority. If one gets a bonus then a part could be used to repay the loan and so on.
  2. Keep an Eye on the Interest Rate:
Though education loans are not exorbitant like personal loans, their interest rate is still linked to the base rate. So it is possible that when you borrowed initially the rates were higher and now they have softened. If such is the case then one could consider the option of a loan balance transfer. Balance transfer is the option where a borrower transfers the unpaid amount of the loan from a bank which is charging a higher interest to bank that is charging lower interest in the current scenario. A balance transfer makes sense only if the saving made by making the loan transfer outweighs the expenditure that will be incurred in doing so.  You can use a Loan EMI calculator to calculate the actual saving that you will make when you switch a loan to a lower interest rate. Making a balance transfer in the early years is beneficial and do consider all charges before opting for balance transfer.
  1. Don’t Wait For the Dream Job.
Banks usually give you some time to get a job so that you can start you monthly payments. Often once one finishes their course they may not get the desired job, so one may be tempted to wait for the right offer to come along before one accepts it. Remember the later you start the longer it takes you to repay the loan plus the additional interest burden. So do not delay taking up a job inordinately waiting for the “dream job” and start with something good so that you can grab the right offer once it presents itself.
So if you are student who is about to taken a loan or has already done so then make sure you follow the above to make an early payment of your loan. While early payment is an option, timely payments are not. So whether you choose to repay early or not do remember to pay on time.

Thursday, 28 July 2016

What are the pros and cons of CIBIL score calculation

Your CIBIL score is a mirror to your credit health. For, the credit score calculation by CIBIL is totally based on history of your loans and repayments. The high score indicates high credit worthiness while the low score manifests low worthiness to pay back the loan.

The Maths behind CIBIL score calculation is primarily based on 5 factors:

1.      Repayment of loans: This single factor accounts for 35 % of credit score points. When you pay your utility bills, loan EMIs, credit card balance and other outstanding dues on time consistently month on month, it creates a very positive credit history. ‘No late payment’ appears in your credit report. It makes you credit worthy for future lenders.

2.      Credit utilization: Besides the repayment discipline, you also need to show that you are not credit hungry. It is important to not exhaust whole of your credit limit every month. When you use less than 50 % of credit facility available on your card you appear financially stable and this adds up to 30% points to score. Ideally you should use 20 %-30% of the limit. The best practice is to get rid of even the lowest of the credit balance every month before the due date.

3.      Mix of loans: The right mix of secured and unsecured loans is another factor that helps CIBIL gauge your credit score. If you have more unsecured loans and cards you are more risky to lend credit and this affects your score by 10 percent.

4.      Age of loans: The age of loans affects the score by 15 percent. For example, if you have availed education loan, car loan and personal loan, all in the last few months you tend to appear short of cash. Your loan to income ratio would show that you cannot re-pay more credit and thus the credit score will be low too.

5.      Enquiries: Too many bank queries in a short span also show that you have big credit appetite. So you should not make credit enquires to various channels in the same time. This accounts for 10 per cent of score.

The Pros of CIBIL Score Calculation

1.      The CIBIL score clearly reports about an individual’s credit creditworthiness. So, both the banks as well as customers gain with this knowledge. Based on the score bank gets to know about your repayment capabilities and you know about credit availability. A person with low score can either look for loans for bad credit score or work to improve the history before applying for new loan. Thus the score calculation basically brings transparency between the lender and the borrower.

2.      When you have a good score, you get potential power to negotiate and can easily rope in low interest personal loans, auto loans and credit cards. You can also vie for better card deals and loan offers.

3.      With high score, banks are confident about your repayment capabilities. So credit score calculation also leads to faster loan sanctions and saves time and effort of both the parties.

4.      As you tend to pay your loan and card balance on time to boost your score, you basically start practicing good financial discipline. This habit helps you build very good score in the long run and keeps financial troubles away in the future as well. With good score, credit is always available to you at your doorstep.

The Cons of credit score calculation
1.      To err is human, and error in the CIBIL score calculation is the only cons to the consumer. As every individual is too dependent on the score for approval of loan or credit card application, a single dispute or fault can hamper their credit prospects for future.

2.      It takes a long time to build the score and even longer to mend it. There is a provision of raising a dispute with CIBIL for any kind of technical error, misreporting or faulty information on your report. But it takes at least 15-30 days to get the correction done.

3.      Another drawback of CIBIL score calculation is when your score purges because of a third party default whom you signed as guarantor to. Herein, without being at fault you suffer low credit availability because of low score.

4.      With availability of credit report online, any fraudster can claim your report and enjoy credit on your name stealing your credit details. So it becomes all the more important to keep your confident documents safe from other people.

All in all credit score calculation, is a vital tool to access your credit power. However you need to be cautious to not let anyone ploy this tool against you.

Thursday, 21 July 2016

Six things about Home Loan Tax incentives you didn't know

Irrespective of how much one earns one is always on the lookout of legitimate ways to save tax and this is true not only in our country but worldwide barring a few countries that have do not levy any income tax on their population. So if you have a home loan, there are numerous options available to you under the IT act that can help you save tax. There might be a few things about these sections that you might not be aware of; the discussion below focuses on six such aspects.

1.       The New Budget Allows You to Save Extra 50000!
As per the new provisions announced in the current budget additional rebate of Rs. 50000/annum on interest is available subject to certain conditions. This deduction is available for loans sanctioned in the coming financial year provided the value of the house is less than Rs. 50, 00,000 and the house loan amount does not exceed Rs. 35, 00,000. Thus first time buyers can now claim a total deduction on interest up to Rs. 250,000; this is Rs. 200,000 under section 24(b) and the additional 50,000 under section 80EE.
2.       Deduction on Interest is Available on Accrual Basis:
Interest calculation can be done either on paid basis or accrual basis. Paid means when it is actually paid while accrual is when it is due whether paid or not. Deduction on interest allowed u/s 24 is available on accrual basis; this means even if the borrower has missed paying one or more EMIs he/she can still claim the full deduction for the entire financial year as the interest was due, even if it were not paid on the said date. While not paying on time could put you on the loan defaulter list, it will not impact your tax deduction.
3.       You Need to be a Co-Borrower and a Co-owner as well to Claim Tax Deductions:
A joint home loan offers many benefits; enhanced loan eligibility and bigger tax break are two major ones. However if all applicants need to claim tax benefits then they need to be co-borrowers and well as co-owners. If only one person is paying the EMI then the other person despite being a co-owner cannot claim tax benefit. Similarly if the person sharing the EMI burden is not a co-owner then also he/she is not eligible to claim the tax benefits. The EMI sharing ratio decides the proportion in which tax deduction is available to the co-borrowers.
4.       Deduction Can Be Reversed!
If the property for which deduction under Section 80C towards principal repayment is claimed is sold before five years then the entire deduction claimed under the said section is reversed. This reversed amount is then added to the income for the year in which the property is sold. The silver lining here is that the rule does not apply to the deductions claimed for interest payment and generally in the initial years the EMIs bear a bigger interest component which is not reversed.
5.       Loans from Individuals also Eligible for Tax Breaks:
If for some reason like a low CIBIL Rating or lack of documentation one chooses to borrow from friends or relatives rather than the organized financial sector, then also tax deduction is available. Deduction u/s 24 towards interest repayment can be claimed provided the loan is taken for the purchase or construction of a house or a property. The interest rates applicable should be reasonable and a legal certificate needs to be provided by the lender to claim the deduction. The benefit allowed for tax deduction under the sections 80C and 80EE is not available if the borrower chooses to borrow from an individual.
6.       Other Charges are also Tax Deductible:
Apart from the principal repayment and interest other charges paid during the loan process can also be claimed for tax purpose. Thus charges like processing fee can also be claimed under Section 24 which also allows for claiming deduction for the interest paid on the loan. This is so because the processing which is paid for the service provided by the bank when processing the loan is treated as interest as per the definition in the IT Act.

The tax laws keep getting updated so it is important to keep yourself up to speed on them. Hopefully the above aspects can help you save a more tax on your house loan payments.