Use Balance Transfer to Trim your Loan EMI

Do you possess a loan whose EMI has been going on for ages? Have you been too occupied earning money only to pay it all in loan installments? Have you given up on finding a way out for this vicious EMI circle? Then you surely need to go through the remaining article to know how to get out of this terrible cycle.

Balance transfer is an effective tool to make you pay smaller EMIs and hence save money.

What is balance transfer?

Balance transfer is the process of paying off one loan by availing another loan at a cheaper rate and thereby saving money on installments. This works best when people struggle with huge EMIs due to high interest rates.

Example: Ashok had been paying off a monthly EMI of Rs18000 for a personal loan that he had acquired a year back. One Saturday evening, he got a call from his bank’s competitor that he could consolidate his existing personal loan by taking personal finance from them at a cheaper rate of interest. The rates that they were offering would made his EMI come down by at least Rs2000 per month. Ashok visited the bank branch and found out more about it and ultimately decided to go for balance transfer. This made him save Rs.24,000 per year on his yearly instalment amount.

In case of home loans, balance transfer may play an even more vital role. This is because although the rates for home loans are lower than those for personal loans but the loan tenure is way higher than a personal loan. This means that greater benefits can be reaped even if there is a slight change in the interest rate.

Advantages of availing Balance Transfer

Here is a list of advantage of availing balance transfer facility for home loans, personal loans, and car loans or even for credit cards.

-       You can take advantage of prevailing low rates at any point of your loan cycle if you apply for balance transfer

-       Balance Transfer lowers your interest rate thereby reducing your monthly EMI

-       Banks are eager to offer balance transfer loans on original loans of rival banks, hence better rates can be availed

-       Attractive facility to make the most of market conditions. So go for balance transfer when the prevailing rates are low.

Points to watch out for balance transfer

While balance transfer sounds like a really easy and convenient way of reducing the loan installment, there are several points to watch out for before going for it.

-       Call up and ask your existing loan provider, in most cases banks are ready to match the rate the rival bank is offering for balance transfer.Would you like to check your EMI how much you will pay for the rest of months check through Bankbazaar’s EMI Calculator.

-       Check to be doubly sure that the new offer will certainly reduce your loan installment without increasing the loan tenure

-       Check for any processing fee that the other bank is charging for giving you a new loan. In case this fees is too high then you should look for other loan providers

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Best Tax Benefits on Pre EMI

If you’re considering a home loan, you probably already know that you’ll be repaying it in the form of Equated Monthly Instalments (EMIs). There are two ways of paying off EMIs, Pre-EMI and Full-EMI. 

Pre-EMI options make sense if:

-      The home you’re investing in is still under construction.

-      You wish to sell the flat/house/villa as soon as the construction is completed and is up for possession.

-      You want to save on taxes by investing in an under-construction project.

-      You treat flat/house/villa as an investment, which can be flipped* for a profit.

*Flipped: invested in at a lower amount and sold at a greater amount, allowing for appreciation over time and additions at the investor’s own expense.

How does pre-EMI work, how is it different from regular EMI payments?

Regular EMIs are a monthly amount that’s calculated by Loan Calculator based on the amount of loan, tenure, rate of interest and mode of calculation of the interest. This amount should be paid by you without fail to the bank or lender, once a month.

Pre-EMIs are slightly different. Here, you take the loan when the building is under construction. The EMIs are calculated in much the same way, but aren’t paid directly by you. Every month, and depending on the stages of completion, the bank pays the builder directly. The only amount that you are liable to pay (directly) is the interest on the amount the bank has paid to the builder.

The loan repayments to the bank (EMIs) will start once the bank has disbursed the total loan amount to the builder.

Best Tax Benefits of Pre-EMI Payments:

1. If you take a home loan with pre-EMI payments, you can be eligible for tax deductions and benefits after the project (flats/houses/villas/etc.) is completed and deemed ready for possession.
2.  The tax deduction is applicable only on the amount of interest paid and not on any principal payments.
3. The total amount is deductible in five equal instalments, starting from the year in which you obtain possession.
4. The maximum deductible amount is Rs.1,50,000.
5. Deduction is under Section 24 of the Income Tax Act, 1961.
6. Any principal paid during this time will not be eligible for tax deduction under any section.
7. Under Section 80C, deductions are available for capital repayment after the construction is completed.
8. If the loan has been taken in the time period between 1^st April 2013 and 31^st March 2014, a deduction can be claimed up to the amount of Rs.2,50,000 for interest paid on the home loan**

**This deduction is a special exemption limit only applicable to first time home buyers and not for those with existing home loans/past home loans. This limit is applicable only for this year (2015), for homes ranging between Rs.25,00,000 and Rs.40,00,000.

 

Other Benefits of Pre-EMI :

-    The scheme is profitable if the construction work is delayed, which happens more often than not in India.

-      Highly profitable and lucrative if you view your flat/home/villa as an investment and sell it after the construction is completed.

-      Any money saved under this plan can be re-invested, the returns from which can be used to repay a chunk of the initial loan.

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New Gold Loan Might be a Game Changer

A new loan in the market is turning heads and could set a new trend in loans against gold in the market. Kerala Fashion Jewellery (KFJ) has introduced an innovative scheme called the GL Plus loan. The way this loan works could help solve a few problems that the jewellers have been facing. At the same time, customers stand to benefit from this scheme.

What happened earlier

A couple of years back, the Central Government levied restrictions on gold imports. This led to a shortage of gold supply in India. Jewellers resorted to providing incentives to their customers to trade in their gold for cash. They even offered rates higher than the prevailing rate for customers to bring in their old gold. Incentives of Rs.50 to Rs.100 on each gram were offered.

What’s happening now

Earier in 2016, the Government had proposed to levy excise duty on non-silver jewellery. This led to a nationwide strike by the jewellers. The strike was eventually called off and the Government was forced to reconsider its plans. Currently, many of the restrictions have been lifted in comparison to three years ago. But jewellers still face a number of woes as the domestic market price of gold stands at 2.5% to 3% lower than the prices in the global markets. This means importing gold is more expensive than selling the gold in the country. This gap indicates trouble for jewellers who source their gold from importing banks who in turn buy their gold at higher rates of the London Bullion Market Association (LBMA).

What’s next

The new interest-free gold loan offered by the Chennai-based jewellery could change the current situation. The GL Plus loan is a product of Gold Concepts, a consultancy company with a mission to help jewellers grow their businesses and help the common man invest wisely in gold. If this initiative works well, other jewellers may climb on board. With this scheme, both the jewellery and the customer stand to benefit.

How it works

A customer can pledge their gold and get a loan worth 70% of the gold pledged. For example, if you pledge 10 grams of gold, your loan will be sanctioned for the value of 7 grams. Every month you will have to repay about 0.58 grams. The loan will be available in tenures of 12, 24, 36, 48 or 60 months. Here’s the catch, when you repay your loan, you will be repaying it at the rate of gold in that month. If the rates are lower, your instalment will be low and you stand to benefit. But on the flipside, you also stand to lose if the rates are high, but that’s the risk you have to bear. Once you have repaid your loan, you can redeem your gold in the form of new jewellery from KFJ. Your old jewellery will no longer be available as it will be melted and used to make new jewellery. This may not please some people, but another good catch here is that there are no wastage or making charges on the new jewellery. If you pre-close the loan, then there will be wastage and making charges levied.

How the jeweller benefits

As a jeweller, you will get a better supply of gold for your business. The monthly installments paid by the loan borrower also adds to the working capital. Though the loan is interest-free, there is a processing fee applicable. The value of the loan is determined after removing any stones and the gold is weighed. Melting charges for loss of gold while melting will also be applicable to the customer.

If jewellers source their gold from banks, they get a credit term of 6 months with an interest rate of 3% to 4%. Banks require a guarantee and a mandatory deposit to be maintained. This is usually 30% of the gold sourced. This leads to an increase in the cost of sourcing gold. If the rates in the domestic market fall lower than the bank rate, jewellers face a loss. On the other hand, if jewellers source their gold from customers through gold loans, they don’t need to keep a safety deposit from the pledged gold. The whole amount of gold pledged can be used. Furthermore, they don’t have to pay any interest to the customer.

According to reports on gold supply, the domestic market is facing a world of trouble in meeting demand. Gold sourced from mine production and old gold amounts to 10% of the domestic market supply. The rest of the gold is sourced through imports. This new scheme could give recycled old gold a boost in the market.

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