Ra Ma. Palaniappan's Blog

Struggling with Juggling?

Most people take a new loan to repay their existing loan(s). It may sound like a good idea as it gives a temporary relief. However, it is not the right solution for a long run. It is definitely not a wise idea to juggle between loans. There are various reasons behind saying that it is not smart to take out a loan to pay off debt.

1. Debt still exists

Taking another loan to repay an existing loan means that you are not getting rid of the debt, but only the lender. The debt is getting transferred from one lender to another. The name of the lender changes, however the effect remains the same. You continue to owe money to someone; you continue to pay EMI and you continue to pay interest — all of these are not ideal.

2. Becomes a habit

Once you start taking a loan to repay another loan, it gives lot of courage to handle loans. Slowly, it becomes a habit to take loan after loan. You will never hesitate to take a loan to handle your crisis situations or even a normal situation. This habit will lead you to a vicious circle wherein one problem leading to another problem

If taking another loan to repay my existing loan is not smart, then what should I do to solve my debt problems?

The next natural question might be – If taking another loan to repay my existing loan is not smart, then what should I do to solve my debt problems? If you have multiple debts and struggling to manage the repayment within your income, then consider following the below steps.

1. Write down all your debts:

Take a piece of paper and write down all your debts. Include even the smallest loans that you may have. Capture all the details about the loan like loan amount, number of total EMIs, interest rate, number of EMIs paid and outstanding, principal amount outstanding, type of loan (personal loan, credit card etc.,).

2. Evaluate your EMIs

By completing step 1 above, you now have a complete picture about all the debts that you have. This will also show you the exact amount required every month to pay all of your EMIs.

3. Act

Bash your total EMI with your total monthly income and see if it is enough to repay all your EMIs plus meet your monthly essential expenses. If it is, then well and good. You are in a better position. All you have to do is to continue to pay your EMIs and not take any further loan. Over a period of time, you would have paid all of your debts and become debt free.

If in case you do not have enough income to meet your EMI plus monthly expenses, then you have a real challenge. You need to find out ways to increase your income so that you bridge the gap. That may not happen immediately, so the problem exists.

Debt Consolidation loans helps one to stop struggling with juggling between multiple loans

In such scenarios of multiple loans, and you are struggling to repay them with your income as it is not enough, do not juggle between the loans. There might be always a confusion about which loan to repay first? Rather go for a debt consolidation loan. This type of loan gives you refinancing option to combine all of your unsecured loans into a single EMI. The advantage is that you need not remember multiple due dates and be stressed throughout the month. You need to remember only one due date and spend the rest of your time & energy in focusing on your work. More time and focus on your work or business will help to increase your income. Increase in income levels would, in turn, help you to close the loans quicker and become debt free sooner.

Before taking a debt consolidation loan:

Ensure that the interest rates for the debt consolidation loan is lower than your existing loans. Only then your new EMI will be lesser than the existing EMI and you will get some relief. Else, there is no point in going for a consolidation loan. Be clear with this.Be determined to adhere to the new loan schedule without defaulting. Only then you would be able to clear off your debts and avoid the defaulter label.Check if the lender has pre-payment options without any charges. This will allow you to prepay your loan as and when you have excess cash in hand without paying any additional charges. Prepaying is one wonderful way to close the loans faster and become debt free at the earliest.

After taking a debt consolidation loan:

Ensure regular repayments till you pay off your debt. Only then you would become debt freeDo not take advantage of the little freedom that you may get and start impulsive spending for things that you do not need. Get more clarity around your wants and needs.Do not take new loans once you obtain a debt consolidation loan. Buying new loans during the repayment time will push you back to the vicious circle of debt.

Over a period of time, you would have paid all the EMIs and you will start leading a Zero EMI life. The smartness lies in leading a life without loans and not in juggling the loans. Good luck!

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Facts about Fixed Deposit

One of my colleagues recently asked for a suggestion. He sold some of his stock holdings to buy a land in his native place. Due to the COVID-19 situation, he was not able to proceed with registering the land. Now, he wants to know the best way to park money for four to six months.

Fixed Deposit (FD) in a bank is the best option. There are reasons why it is considered as the best option for this requirement. Please see the advantages of FD

Advantages of FD:



1. Ease of opening

When I was working in a bank, the depositor must visit the bank to open a deposit unlike today. The depositor will be given lot of respect. They will be served with beverages and the branch manager will even step of his/her cabin to greet the depositor. In my native place, the bank manager will visit the depositor home to collect the deposit amount.  Now-a-days, deposits can be opened online with a click. You do not need to visit a bank branch. Most of the banks offers online options to open a FD. Though the mode of opening changed, the ease of opening remains the same

2. Flexible Tenure

FDs are available for very short term to short term to mid-term. There are multiple options ranging from seven days to several years.

3. High Liquidity

FD can be liquidated as soon as the deposit matures. The option to close the deposit even before the maturity period is also available. You can withdraw money, whenever you need, by pre-closing the FD. The only exception is the FD that has 5 years locking period. They are called Tax Saving Deposits and cannot be withdrawn before the maturity date. If you need high liquidity, then you must not put your money in the 5-year locking period FD

So, considering the advantages of Fixed Deposit, I suggested my colleague to open a FD. It is a safe option and comes with zero risk as far as his deposit with a bank is limited to INR 5 lakhs. I asked him to deposit the amount in two to three banks if the amount exceeds INR 5 lakhs. He had INR16 lakhs in hand and was not sure about why he must go to different banks rather than depositing the entire money in one bank. I will explain this in the disadvantages section.

Disadvantages of FD:



1. Risk Factor:

Deposit Insurance and Credit Guarantee Corporation (DICGC) secure FD maturity amount up to INR 5 lakhs only if in case of bank closure or any mishaps. Amount over this limit is subject to risk. Please note that INR 5 lakhs coverage includes the interest as well, so restrict your deposit amount in a bank within this limit, after considering/calculating the interest amount as well. Your deposit amount plus the interest must be below INR 5 lakhs. This is one of the disadvantages of FD.

2. Low Interest Rates:

FD rates are currently very low due to the Covid-19 situation. Also, the rates would be much lower than the inflation rate most of the times, irrespective of Covid-19. Even for long term deposits wherein your money will be locked for a certain period of time, the interest rates are not attractive.

3. Penalty for pre-closure:

Bank will reduce the rate of interest if you close the deposit before the maturity date. Pre-closure is seen as a contract breach and the penalty will be lesser rate of interest.

In a nutshell, Fixed Deposit is a safe option with guaranteed returns for short term investments. You can park your emergency funds corpus into a Fixed Deposit so that it is safe and also grows. FD offers slightly higher interest rates for senior citizens. FD is a very popular investment tool among the senior citizens. However, if you are young and need high returns you might stay away from FD.

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Which loan to repay first?

Recently, during a Q&A session, one person from the audience asked me ‘I have many loans to repay and have some surplus cash. What should I do with the surplus cash? Can I use the surplus cash for repaying my loans?’

Here is my view.

When you have many loans, I always suggest repaying the high interest loans first. It will reduce your interest outflow to a great extent. For example, you have a personal loan, a credit card outstanding, a car loan and a housing loan. The personal loan interest is 14% per annum, credit card interest is 48% per annum, car loan and housing loan interests are somewhere between 8-10%. The costliest debt is the credit card one and knock it off first so that you save on the interest outflow.

Having said that, debt also brings lot of emotions. It is stressful to deal with many loans and keep track of their due dates. During those stressful times, forget the high cost loan. Check for your smallest loan and repay it, though it is not the costliest one. For example, the personal loan outstanding is INR 5000, credit card – INR 75000, housing loan – INR 15 lacs and car loan – INR 35000. Paying off the smallest debt (personal loan in this case), will give you a sense of achievement and a huge relief. It will also give you the confidence that you can close off the remaining debts.

Closing the costliest loan is the intelligent way whereas closing the smallest loan is the psychological way.

You can choose any, depending on your situation. But, never take another loan for repaying your existing loans.

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Why Educational Loans are Good?

I advocate debt free life. Still, I strongly support taking educational loans.

Spending towards education is not an expense, it is an investment. It will educate the child and expand the mind. He or she can take right steps towards life, career etc., People take Educational loans for high-value professional courses. The returns are also equally lucrative for such courses. The child will get an employment opportunity with the education gained. Needless to say that employment will pay him or her for lifetime. Education uplifts not only the individual, but also the entire family and the generations to come.

I took an education loan for INR63000 for my MBA course in ICFAI University. My MBA in International Business gave me a competitive edge while looking for a job. I got a opportunity to work with Standard Chartered Bank. It opened the door of opportunities and steady income. That was a huge leap for a first generation graduate like me.

In India, no margin money or security required for educational loans up to 4 lakhs. Third party guarantee is required for loans above 4 lakhs and up to 7.5 lakh, A collateral is required for loans above 7.5 lakh.

Having said that, it is very important to repay the loan promptly. Bank lends you the public money. The banks allow the student to start repayment once the course is over. Some banks allow additional 3 months to 6 months of grace period to start the repayment. In my opinion, this is a good debt. Find a guide on educational loans here.

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3 Months EMI Moratorium during COVID-19

Reserve Bank of India (RBI) Governor Shaktikanta Das, on March 27th, in his 32-minute-long press conference made lot of announcements including repo rate cut, loan re-payment relief, EMI Moratorium and much more.

The announcement about 3 months EMI moratorium became a popular topic of discussion.

What did RBI say about it and what does it mean to us?

The CRUX:

1) RBI permitted all banking institutions to offer 3-month moratorium (holiday period) on all loan repayments. Please note that it is only a permission. It is your banker, who needs to approve this 3-month holiday period for your EMI. Once done, I assume that the banks will send a communication to its customers, confirming the 3 months holiday period. In a nutshell, the moratorium implementation lies with the banks.

2) RBI has suggested that the repayment schedule and all successive EMI due dates together with the loan tenure, should be adjusted by 3 months’ time across the board. Your loan tenure will get extended by 3 months to compensate for this holiday period. For example, if your loan is going to end by December 2020, then it will now end by March 2021.

Credit Cards:

There are lot of debates on whether this moratorium is applicable for credit card dues or not. Now, RBI clarified Moratorium can be extended to credit card payments as well. Again, the implementation lies with the banks.

Moratorium Period:

The 3 months moratorium period is from March to May. Many would have paid the March EMIs by now and so the moratorium will be effective only for 2 months and not 3 months. RBI can consider revising this period to start from April, so that everyone gets a 3-months holiday period.

Coverage:

The moratorium is applicable for all term loans like personal loans, home loans, auto loans, educational loans etc. Also, the home appliance loans taken for purchasing ACs, fridge, mobile phones will also be covered.

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Insurance Premium Concession during COVID-19

Government has taken various measures to tackle the COVID-19 situation. The situation has an adverse impact towards the economic situation of many.

Insurance Regulatory and Development Authority of India (IRDAI), on March 23rd, made an important announcement regarding Insurance Premium. IRDAI has asked insurance companies to allow additional 30 days of grace period for payment of premiums for life insurance policies if desired by the policyholders.

During this extension period, the policy holder will continue to get the coverage/benefits of the policy. Because, the policy will not move to ‘unpaid status’. However, the policy holders must re-confirm with their insurance companies that the policy will not move to unpaid status.

Life Insurance Corporation of India (LIC) announced 30 days of grace period for the insurance premium(s) that are due in March and April 2020. This is over and above the existing grace period for your policy. i.e., this is an extension of grace period. Relaxation allowed until 22nd April for the premiums with the grace period expiring after 22nd March.

However, if you want to pay your Insurance Premium during this lock down period, you can use the Unified Payment Interface (UPI) apps. Some of the insurance companies websites also has the facility to accept premium renewal payments.

Contact your Insurance company to know more details about the concession during COVID-19 situation.

Reference Links:

Economic Times – IRDAI allows extra time

LIC gives 30 days extra time

Related:

Concession given by RBI

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How to reduce your housing loan?

Do you have a housing loan? Are you desperate to reduce your interest burden? Do you want to repay your loan faster?

Check if your housing loan is under floating rate of interest?  If yes, then ask your banker/lender, to reduce the interest rate to the current rate. Because, the bank interest rates came down recently during the COVID-19 situation.

Though the banks say it is floating rate of interest, they seldom reduce the rates on their own. It needs a request from the borrower to reduce the interest. Many borrowers are not aware of this fact. They will continue to pay their existing higher interest rates.

So, please approach your bank and check the latest interest rates if you have signed up for a floating rate of interest. When approached, most of the banks/lenders will tell you the procedure to be followed. You may have to submit a requisition letter, for most of the banks. Once done, the Bank will reduce the interest rates. By doing so, your EMI amount will come down or the number of EMIs (loan tenure) will get reduced.

I did this, regularly, with LIC Housing Finance Limited (LICHFL). They always obliged to reduce the interest rate. It helped me to finish my housing loan faster.

Click here if you want to learn about Educational Loans

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When to build your emergency fund

All of us know that we need to build an emergency fund so that we do not suffer during tough times. But seldom we create such funds. Robin Sharma in his book 5 AM Club says, ‘No idea works until you do the work’. 

Wishing to have an emergency fund and not acting up on it or or not taking steps towards building it, will not yield the desired results. A wish will remain a wish, without action.

As a measure to get ready for recession, job losses or any other unforeseen situations, start building such fund NOW. Else, you may fall into a debt trap. You may take loans to manage your expenses when your regular income stops. 

Treat this as savings for future. Many people have a mindset that savings is an expense. No, it is not. Savings is not an expense, but a necessity.

Also, you must look at ways to reduce your housing loan, which primarily eats up 60 to 70 percent of your income. This will help you to free up some space and save more to build an emergency fund.

It is not that hard; believe me you can do it over a period.

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