Thursday, 29 October 2015

How much debt is beneficial?

Debt or loan is the financial instrument that enables you to meet your requirement on funding. It not only helps you acquire large cost assets but also facilitate getting investment for your own venture. Apart from these also help in managing your credit score that reflects your credit worthiness.  

Different people have voiced different opinions in this context. While some individuals find it reasonable to incur debts as long as you have sufficient resources to pay it back, others are of the opinion that they are unnecessary and prove to be a liability on your finances in the long run.

Although debts assist you in investing in large purchases when you have insufficient resources and plays a huge part in how you can improve your CIBIL score, it is essential to understand where to draw the line before the “beneficial debt” turns into a liability. There is a fine line between how much debt is beneficial to boost your credit health and the time till it is termed as being too much debt.

Lenders have set certain guidelines to specify how much debt one should have. It is advisable to have debts that do not exceed a certain percentage of your total income. You should also have sufficient funds to pay off your principal debts along with the interest.

You know you have crossed the “beneficial debt” line when you have to work overtime, miss out on payments or utilize your savings in order to cover your debts. This kind of debt, thus, proves to be non-beneficial to you and starts having an adverse effect on your credit score. Debt is an extremely powerful financial instrument as long as it is used responsibly. Imprudent usage of debt will reflect poor credit scores and cause a huge dent in your finances in the long run.

It is important to keep these simple points in mind before incurring additional debt:

1.       You should have sufficient incoming cash flow and savings to cover the settlement of your principal debts along with the interest.

2.       You should opt for further debts only when you are confident that you will receive a healthy return on investment (ROI). There is no point in investing in a project incurring more debts where the returns are not strong. It is essential to thoroughly research on the ROI value of the debts before you think of borrowing more than required.

3.       You need to closely examine if you are entitled to a suitable interest rate. Compute the overall cost to be paid in the long run. For instance, calculating if purchasing a house at a low rate of interest would be better than renting one. If you are unable to get competitive rates on interest, it is advisable to evaluate all your options. In case of a bad credit report, it is essential to reconstruct the credit score to a satisfactory figure and apply again.

If you meet these points of reference, the debt you are applying for is not considered as too much. However, if you are unable to satisfy one or more of these criteria, the debt is termed as too much.

Friday, 23 October 2015

Things to keep in mind before taking a car loan

Availing “Car loan” to buy your dream car is a good way to procure this asset that potentially provides you with both comfort and luxury.

The lending institutions extend up to 90% of the car’s cost as a loan and in some specific cases can even fund a higher amount. When applying for a car loan, one must take into account the following factors so that one is able to derive most benefit out of it.

1. Eligibility: A person would need to have certain level of disposable income to be able to have access to loan. Hence, you would need to check your current income and obligations (existing loan EMIs). Generally, any lending institution keeps a benchmark of 50% of current income for loan EMI service. Which means that if a person is earning say Rs 50,000 per month, his maximum EMI exposure can be a for up to Rs 25,000. This Rs 25,000 cap shall include all EMIs including the fresh loan applied for.

2. Credit Score: A person needs to be credit worthy for getting the loan approved. Therefore, it is advisable to check your CIBIL score (commonly known word for credit score) before applying for the loan. There are instances of errors as well, that shall lead to rejection of loan application. So checking on your latest credit bureau report becomes important. In general a score of 720 shall be fine for applying for a car loan, in case there are no impairments or  past repayment issues.

3. Interest rate: The rate of interest impacts the amount that you need to pay as installment. Interest rates many a time differs based on various factors like car model, duration of the loan, down-payment etc. A research on this at the dealership shall help in saving money over the loan term.

4. Down-payment: The down is an important part since in normal case, the loan does not get approved without the down payment being made by borrower from own funds. So you must check the cost of the car and have the required down payment available with you to invest in the car.

5. Other costs: Apart from the cost of car, there are certain other mandatory expenses like insurance, road tax and other charges. Before applying for a car loan it is advisable to take a note of all expenses that you would need to incur since the loan amount may or may not cover these expenses.

6. EMI repayment: One must take the loan to the extent of amount that he shall be able to service without any stress since any default on repayment will only lead to stress on the credit health and will result in decline of the credit score. O

7. Other charges: It is also important to have a complete clarity on other charges like processing fee since it would add to the actual cost of vehicle from purchaser’s perspective.

Checking the above shall help you in getting the best out of your car loan.

Wednesday, 14 October 2015

Can you get credit with bad or no credit score?

Bad credit score and no credit score are two very different aspects of credit reporting but unfortunately, the credit world treats both similarly. A bad credit score means the borrower has had a history of missing payment due dates and is not trustworthy to repay the loan. A bad credit history will remain on your credit report and continue to negatively affect your credit score even after you may have forgotten it. A no credit score on the other hand simply means that any knowledge of the person’s creditworthiness does not exist. It might as well be the case that the person is living within the means or has required financial back up to meet requirements and has not availed of any credit facility. Whatever may be the case creditors are wary of giving loans to both types of people. 
Getting credit with bad credit score
Getting a loan with bad credit history depends upon the severity of impairment. One still might be able to get loans in a few cases but the terms of lending could be unfavourable. For a person with bad credit history, the banks will typically charge higher interest rate, may demand larger percentage as down payment, may ask for a collateral or guarantor and may attach additional penalties for late payment of instalments. This effectively makes credit a far expensive proposition. In such cases, the borrower should first go to his or her bank (where he/she has an existing account). Your own bank may be able to offer the best credit, since they know you as a customer. The next you can check is, with your insurance company, again they know you as a customer. Next you should check for different offers from other credit companies, and evaluate all offers. Instead of just focussing on lower interest rates and monthly instalments, it is also very important to read the fine print. The terms of payment, the flexibility of interest rate, and hidden charges all can add up to substantial amounts. It is better to take a loan with shorter tenure instead of lower rates, because timely payments on it will quickly reflect positively on your credit report. A successfully closed loan is a definite boost to a bad credit report.
Getting credit with no credit score
It is easier than one with bad credit report, because you have a fresh slate to start with. If you are financially well sorted, the easiest way is to take a small secured loan with good down payment and make all the repayments on time. This will immediately start reflecting on your credit report. Next get a credit card. Don’t forget to check for hidden charges or confusing terms and conditions; you would not want to start off on the wrong foot. Keep monthly bills well within the credit limit and make payments before due date. This again reflects well on credit report. Within a few months, you will see that you have a decent credit history and credit score based on your good financial behaviour and are now eligible for more loans and credits.

Written by Team Credit Sudhaar