Factors to consider while deciding between personal loan and gold loan

For Indian families, gold is one of the most popular and safest means of investing and saving money for future. Due to this attachment, gold loans have gradually become a good alternative to personal loans for Indians. But personal loans also have their share of advantages and this is why  it often becomes difficult for people to decide which will be more useful for them at the time of need. If you are having the same confusion, go through these factors to decide whether you want to go for personal loan or gold loan: 

Eligibility Criteria

You can apply for a gold loan only if you have gold in form of coins or ornaments. You just have to pledge for the loan against the gold that you are mortgaging. On contrary, you will be eligible for getting personal loan if you are a salaried employee with a minimum net monthly income of Rs.15000. However, this criterion may vary. Read more about personal loan eligibility to take personal loan at low interest rates

Loan Amount

Whether it is loan for gold or personal loan, the amount differs for both. In case of personal loan, you can start from a minimum of 15,000 and can go up to a maximum of 15,00,000 based on your requirements. However, in case of gold loans, you have to pledge an amount which is 10-15% lesser than the value of the gold that you are mortgaging. 

Credit Check Requirement

Personal loan being an unsecured loan needs proper credit check before its approval. If there is any discrepancy or the CIBIL credit score is low, there are high chances that your application will get rejected. On the other hand, gold loans being highly secured don’t need any credit checks and your bad credit score will no way affect its approval.

Process of Approval

In case of personal loans, you will get to know your eligibility status instantly, but the complex paperwork might take up to 24 to 48 hours or sometimes more. To complete the formalities you need to provide ID, residence, income and work proof. Conversely, the approval process for gold loan is quite simple and the paperwork is minimal requiring only ID and residence proof. You might expect to get the amount within couple of hours.

Mortgaging Requirement

If you have gold in your home, then converting that into gold loan is a really cool option. As you are mortgaging your gold, there is no requirement for a guarantor. But if you want to get a loan without any security deposit then personal loan is the right one to go for. You just need to state the purpose and verify your income proof for its approval.

Credit Limitations

While applying for personal loan and loan for gold you need to check out the credit limitations for each of them and then choose the right one based on your credit requirement. Since gold prices are not stable, how much loan you will get entirely depends on the current gold rate. Moreover, you will only get a loan amount of up to 75% of the total value of your mortgaged gold. But there is no such criteria for personal loans. If you are eligible bank will credit any amount that falls within the range that it is offering to the applicants.

Rate of Interest

Gold loans score higher than the personal loans in terms of interest rate as the latter comes with a high amount of interest that often ranges between 14%-20% or higher. But for gold loans, the rate of interest is limited up to 12%-15% based on the value of gold. You can even negotiate  interest rate when your gold is hallmarked or the value is more.

Repayment Options

The repayment options for personal loan and loan for gold are different. While in gold loans, you have the flexibility to pay the interest during your tenure and principal amount at the end, personal loans require strict on time EMI payments including principal amount and interest. Also, personal loans come with a repayment tenure of 1-5 years whereas gold loans are offered for a tenure of 1 year.

Charges & Penalties

Be it loan for gold or personal loan, you must know about the charges and penalties in advance. Personal loans come with processing fees and prepayment penalties for foreclosures. Though it varies from one bank to another, the prepayment penalty generally ranges between 1%-2% of the principal amount that is outstanding. In case of gold loans, you

can anytime pay the amount during your loan tenure without  paying any extra charges.

So, keep in mind these factors while choosing between personal loan or gold loan. Since both the loans have their own pros and cons, it is up to your convenience which one to choose and which not. Think wisely and consider the best option for yourself.

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Fixed Vs Reducing Balance Loan EMIs

Getting a loan is very easy these days. Banks offer different types of loans such as Personal Loan, Home Loan, and Car Loan to help you meet your diversified individual requirements. Not only getting a loan is easy, paying it back is also equally affordable. You can pay off your principal as well as interest component on the principal with the help of equated monthly installments (EMIs). When you apply for a loan and your loan application is approved, your bank may apply two methods of calculating interest payable on the principal amount; they either charge fixed rate method or a reducing balance method to calculate interest.  Fixed rate and reducing balance rate are two common types interest rates charged on your loans.

Know about fixed and reducing balance interest rates

In fixed or flat rates, banks calculate interest keeping the outstanding amount fixed throughout the whole loan tenure. This method is normally used to calculate interest payable on personal loans. Interest is calculated on the full amount of the loan for the entire tenure without taking into account the fact that the monthly EMIs gradually reduce the principal amount of the loan.

But in reducing balance method, interest rate is calculated based on the reduced outstanding loan amount. Instead of charging a fixed and equal amount of interest  every year or month, the reducing balance method charges interest on the remaining balance of your loan. Normally, banks use this method of calculation to calculate interest payable on property loans. After every EMI payment you make, your original loan amount gets reduced and interest for the next month is calculated only on the reduced outstanding amount. So, your principal loan amount will not be static in this method. It gradually decreases. In reducing balance method, your EMIs will include interest payable for the outstanding loan amount for the month along with repayment towards the principal amount. You can calculate reducing balance monthly loan EMIs by using an EMI Calculator and putting the following information in it -  the rate of Interest, loan amount, loan tenure and whether you choose annual, monthly or daily reducing balance for the calculation. Once, you put all these details, the calculator will instantly reveal the amount of monthly EMIs.

Difference between fixed and reducing balance methods of interest calculation

The two methods of interest calculation, fixed rate and reducing balance rate, function differently. Mentioned below are some of the difference between both:

• In the fixed rate method, banks calculate interest on your monthly EMIs keeping the outstanding amount fixed throughout the entire tenure of your loan. But, in the reducing balance method, the interest rate on your monthly EMIs is calculated based on the reduced  principal  loan amount.
• It is easy to calculate flat interest rate compared to reducing balance interest rate.
• With the reducing balance method, you will pay less interest than you would pay with a fixed rate scheme.
• The reducing balance method is a better idea than flat rate method, if your monthly income is expected to fall down.

Which method of interest calculation should I choose for loan EMIs?

No matter, which method you choose to pay interest on your loans, it is important you know about these two methods of deducting interest on loans. Also, you should have a clear idea about which method your bank is using to calculate interest on your loan. Normally, banks offer very attractive interest rates on fixed rate loans. But, don’t always look at the interest rate part of your loan. You should also consider the method of calculating interest on it. Many borrowers don’t prefer to go for flat rate loan EMIs because even if you pay off your loan, your interest amount does not reduce. But, in case of a reducing balance interest rate loan EMI scheme, your interest amount goes down as you make payment towards your principal amount. But, the only problem you may face with the reducing balance method is that you may end up paying higher payments in the initial period of loan repayment.

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Follow These Rules While Taking a Loan

Do you have a job that you think spays you well but, you realise that it is not enough as there a lot of things that you can’t afford to buy? Well, it is a story of all our lives. This is where the banks and financial institutions benefit from and offer us loans to help us meet our ends. But, do these banks really help us or just helping themselves?

If you have taken a home loan, car loan or a personal loan, the EMI of all these loans can’t be more than 50% of your income. The loan to income ratio is the total EMI divided by the net monthly income multiplied by 100. The comfortable loan to income ratio is 20-25% anything above it is to be dealt with caution. Follow these rules and help yourself from being enslaved by debt.

Borrow money that you can repay:

Don’t live beyond your means. Take a loan that can be easily repaid. Keep in mind that your car loan EMI should not exceed 15% of your net monthly income. Your personal loan EMI should not exceed 10% of your net monthly income. If your EMI is higher, you will not be able to save a dime for his retirement or to educate your child. Don’t accumulate a negative net worth.

Take loans for a short term:

Most financial institutions offer a maximum tenure of 30 years to pay the home loan. It may seem tempting to opt for it as you will be paying lower EMI. But, you don’t realise that the interest outgo is too high. If in 10 years you would be paying 57% interest on the borrowed amount, in 20 years it will shoot up to 128%. It is best that you take a short term loan that you can afford. But at times you have to take the longer term as you may not have enough income to pay off the loan in a short period of time. The best option here is to increase the EMI amount each year as your income increases.

Make the payments on time:

If it is your EMIs or a credit card bill, don’t miss the payment dates. Missing a payment will affect your credit score and hamper your chances of getting credit in the future. Prioritize your dues and never miss your credit card payment days as then you will be paying a hefty interest on the unpaid amount. If you don’t have enough money to pay the entire credit card bill, then pay the minimum and pay off the bill at the earliest. 

Don’t borrow to spend or invest:

Never use borrowed money for investment. The safe investments will not match the rate of interest you will be paying for your loan. The investments that offer higher returns are too volatile. Don’t take for discretionary spending like for travel etc. Don’t take a personal loan to buy an expensive watch or high-end bags. If you wish to go on a travel or buy an expensive shoe or a bag or a watch, start saving for it. 

Take insurance for big loans:

If you have taken a huge loan, then you might as well consider taking a term plan for the same amount to ensure that your family will not have to be burdened with the loan in the event you die due to unavoidable circumstances. Banks will offer a reducing cover plan but a regular term plan is better way to cover the liability.

Shop for better rates:

Keep your eyes open for changes in the interest rates and take into consideration the prepayment charges and penalty charges if any. Also look out for the switching charges. Compare the rates with various banks and then take a call on which financial institution that you must choose.

Read the fine print and understand it:

Loan documents are lengthy, but they are supposed to be read. Read the term and conditions so that you are not in for a surprise. Look for clauses and if there is anything that you do not understand, get it clarified.

Consolidate loans:

If you have too many loans running, consolidate as much as you can and replace them with cheaper loans, unsecured personal loan with charges up to 20% can be replaced with loan against life insurance policy. Loan against Property can be used to repay other outstanding loans. Prepay costly loans at the earliest, don’t keep them running to avoid tax. You are still incurring an expense even if it is saving you tax.

Don’t compromise on your retirement to avoid taking a loan:

You will not want to burden your child with education loan and hence compromise on building your retirement funds. Don’t risk your retirement just so you can educate your child. Make use of the various scholarships and loans.

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Tailormade Loans in the Market

Life has become an expensive affair, and credit lenders have found ways to lend you money for just about anything you need. No longer are loans available only for the purpose of education, a house or a car. Loans are available in all forms for a wide range of purposes. One of the most important life events are weddings that can cost quite a bit. Medical costs have also skyrocketed, and planned medical expenses can be met with the help of loans. With advancements in technology and the world of medicine, cosmetic surgery, implants, hair, body and skin treatments have become popular. Technology has also turned the world towards consumerism with television sets, computers, laptops, home theaters, gaming consoles running into thousands and lakhs of rupees. Usually when the purpose of the loan is specified, the interest rate comes down significantly compared to a personal loan which is given for unspecified purposes. Let’s take a look at some of the unconventional loans available in the market. 

Weddings
Indian weddings can stretch over many days and can cost much more than what’s saved up for the event. There are a few banks and NBFCs that offer loans to meet these expenses. These loans usually range between Rs.10 lakhs and Rs.50 lakhs, sometimes this can be much more given the borrower’s status and assets. Interest might range between 11% to 17% p.a. based on your credit history and your customer profile. Repayment periods can stretch up to 7 years. Some of the lenders include State Bank of India, Axis Bank, Central Bank, Tata Capital and Bajaj Finserv. 

Medicals
If you have planned medical expenses you can probably get a loan sanctioned easily. For emergency medical costs, you can also avail of loans but with slimmer chances. Lenders like Tata Capital provide loans for cosmetic procedures, ENT, bariatric surgery, ophthalmology and infertility treatment. Loans are available with quantums of Rs.1 lakh to Rs.3 lakh at 13% to 17% p.a. Arogya Finance also provides loans for emergencies and pre planned medical procedures. Arogya Finance offers a cashless card which can be used to cover 75% of the medical expenses. The card comes with a pre-approved limit of Rs.2 lakh. Expenditure on the card will attract interest of 12% to 15% p.a. Explore more details here Personal Loan for Medical Emergency

Consumer Durables
There’s always something better in the market. Consumer durables are dynamic and always advancing as new technology comes into play. Buying appliances and electronic items with the help of a loan is not uncommon now. There are a loans in the market offering 0% interest on selected brands. So consumers can buy what they desire in easy instalments without feeling the burden. Loans are available from NBFCs that include Bajaj Finserv, Capital First and Tata Capital. Interest rates range between 0% to 22% p.a. Depending on your credit profile, you may not incur any processing charges or other fees.

Online Shopping
Loans similar to consumer durable loans are available for online shoppers. There are no processing charges or other fees, and the tenures range between 3 months to 12 months. Bajaj Finserv has tied up with Flipkart to offer 0% interest loans on select brands. SBI customers may also qualify for instant loans on Flipkart with a minimum quantum of Rs.5,000.

Security Deposit for Rented Homes
With the real estate rates escalating in major cities, it’s not always easy to pay the high security deposits that are required by the landlords. An NBFC called Loan Tap offers customers a loan facility that enables them to secure the rented home they desire by providing a scheme to pay the security deposit.

Gold
In India, gold is a coveted metal that many desire to have. Gold is deep-rooted in Indian religion, mythology and society. A number of banks offer schemes for customers to purchase gold in easy instalments. There are also special offers for women borrowers.

The banking world is no longer the same as it was for decades. The banking world is revolutionizing with technological advancements and digitization. Loans are easily available online. The lengthy detailed processes associated with banks has been reduced significantly. And now loans are tailored to suit the needs of individual customers. Gone are the days of saving up to buy what you need or what you want. Loans are available to get it now instead of waiting.

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RBI Repo Rate: The Good, the Bad, and the Ugly

With the release of the minutes of the meeting held on December 6th and December 7th delivered by the Reserve Bank of India throws light on a couple of interesting insights into the decision  made by the Monetary Policy Committee (MPC) to not change the repo rate. It was a unanimous decision made by the 6 member team of the MPC which decided to keep the repo rate which comes under the Liquidity Adjustment Facility (LAF) unchanged which currently stands at 6.25%. Following this, the reverse repo rate also saw a dip in numbers which came down to 5.75%. This move is said to promote the reduction of lending rates by banks which provide loans for housing, personal loans, corporate borrowers, and car loans. With the announcement made by Prime Minister Narendra Modi to get rid of higher denomination notes or specific banknotes (SBN), banks saw an influx of demonetised notes flooding their vaults. This created a lot of liquidity. This, coupled with the recent cut in repo rates that amounts to 175 bps could cause a significant chance for the inflation rate to exceed the threshold in March 2017. Apart from showing concerns about inflation, the main theme was the lack of transferral of the repo rate cuts to the credit market.

Ignoring the transfer repo rates

With liquidity available at their disposal, banks are being quite hesitant in lending out money to various sectors. Banks have begun to cultivate the habit of asking for reduction in repo rates while transmitting none of the repo rate cuts which has been previously offered. Raghuram Rajan, the 23rd Governor of the Reserve Bank of India, pointed out in a statement made on the 9th of August, 2016, that this was beginning to be a subject of concern. Repo rates are rates imposed on the money that has been lent out to a bank from the RBI.

MCLR of banks to see changes

Loans such as home loans, personal loans, farm loans, etc., that have been applied for and taken after the 1st of April, 2016, are associated with the marginal cost of funds based lending rate (MCLR) while those prior to this date are associated to the bank’s base rate. Loans applied before the 1st of April, 2016, have the option change to MCLR rates. 

Uncharted roads ahead

Recognizing the lack in transfer of incentives by banks, the Government and the RBI have taken up the initiative to provide better incentives to banks which would promote the transmission of these incentives. Banks are now being expected to become more proactive in slashing lending rates rather than asking for more cuts in repo rates. But, with the sudden withdrawal of SBN’s, all plans made by banks have now been thrown into a fix.

With no sight of the horizon, a lot of questions go unanswered when it comes to cutting repo rates. A ‘wait and watch’ policy is being followed at the moment as any decision to cut repo rates further have currently been put on hold.

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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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