While the year 2008 was marked by frequent instances interest rate fluctuations followed by a lull and then stability- year 2009 seems to be all about increasing interest rates.

So, what is it that a home borrower should do? Should he latch himself to the transient safety of fixed interest rates or surf the highs and lows of a floating rate. This is the classic dilemma.

Before we jump to that, let’s see what these two interest rate types essentially are. A pure fixed interest rate is a rarity in the market today. This kind of interest rate remains fixed for the entire tenure. This is unlike the fixed interest rate that major home loan lenders offer today. If you take a look at the schemes offered by major players of the home loan market, the fixed interest rate is applicable for a preset period after which the current floating rate is applicable. In reality, these schemes are bringing out the true essence of the fixed rates. No fixed rate offered today is truly fixed.

The other popular loan interest type is the floating rate, one which gets changed based on the market conditions.

So what does one really do? The questions have come to haunt consumers back again. And, its not surprising. Most banks are engaged in cut-throat competition, especially evident in the last years. Be it the stimulus package loans or schemes like State Bank of India’s Happy Home scheme, there’s lots being done to promote the home loan sector. This sector, which otherwise is robust in growth, has suffered setbacks, recently. Banks have become cautious about lending to customers with a weak profile. And, loan consumers are wary of loans. The recession has of course changed their priorities.

But for those who take loans, floating IS the option.

For one, most of the new schemes offered by the banks are FIXED ONLY FOR A CERTAIN PERIOD. And, they are floating interest rate schemes.

Around December 2008, public sector banks announced the stimulus package for loans Loans up to Rs 20 lakh will now be available at 8.5-9.25 per cent a year for tenures up to 20 years. The offer was valid only for new loans up to June 30, 2009. This was around the time when the interest rates on these loans were an average of around 10 per cent for most PSU banks. This new offer was for ‘floating interest rates’.

Under the scheme, the interest rate on home loans up to Rs 5 lakh, for a maximum period of 20 years, will not exceed 8.5 per cent for the first five years. The margin for this segment has been reduced to 10 per cent, from the current 20-25 per cent. This means a borrower can get loans up to 90 per cent of the value of the house. The interest rate on loans up to Rs 20 lakh for a maximum period of 20 years has been fixed at 9.25 per cent and the margin has been reduced to 15 per cent.

For the first five years, if any bank introduced a home loan product at a lower rate, then the borrowers will be eligible for that rate. After the first five years, the interest rate will be reset from the date of the first EMI payment and borrowers have the option to go for fixed or floating rates.

The package does not apply to existing home loan borrowers and cannot be swapped with an existing loan.

The competition moved a notch higher with SBI’s Happy Home Scheme announced around January 2009, with home loans at a floating rate 8 per cent, fixed for the first year and floating thereafter. The good thing is that this offer was not restricted to a particular loan bracket. Again this is a scheme for floating rates.

While a rate increase seemed to be the order of the day, rate cuts by two major home loan market players came as a surprise.

Earlier this month, i.e. Juky 2009, SBI revised its home loan scheme for new customers . New borrowers would get loans at 8% for the first year and 9% for the second and third years. From the fourth year, the interest rate would be linked to the bank’s prime lending rate. This is also a unique floating rate loan with an element of fixed interest rate.

Another surprise was the HDFC Ltd. rate cut announced on July 21, 2009. the housing finance arm cut lending rates for new customers by 25-50 basis points. It restructured its loan baskets to create a new product where loans up to Rs 15 lakh are available at 8.75% as against 9.25% earlier.

As per the revised structure, loans between Rs 15 lakh and Rs 30 lakh are now available at 9% (against 9.25% earlier) and loans above Rs 30 lakh are priced at Rs 9.5% (9.75%). Following the reduction, the EMI on a Rs 1-lakh loan with a 20-year tenure will shrink to Rs 884.

However, HDFC’s prime lending rate (PLR) remains unchanged at 13.75%. so, the new rates are specifically for new borrowers not the existing ones. There will be no change in EMIs or cost of fund.

If one is to consider the cut, a 50-basis point reduction in the interest rate lowers EMI by around Rs 34 for a Rs 1-lakh loan.

In the present round of cuts, HDFC has reduced rates for new borrowers under its floating rate scheme by widening the spread between the PLR and loan rate.

So,if one looks carefully, there is a pattern. Most banks offer rate cuts for floating rate homes, whether old or new. And, the most recently introduced unique ‘fixed’ component coupled with a floating interest is an attractive innovation.

Besides the recent developments, floating rates are always a better option.

For one, these loans are at least 2% cheaper than a comparative tenure fixed rate housing loan.

Also, the floating interest rate borrowers community is significantly large. Keeping the numbers in mind, the government is likely to make any such policy decision that is likely to lead to a sudden or drastic increase in home loan rates of this interest rate type.

If opting for floating rate home loans, the consumer may benefit from the reducing interest rates as (not if) and when the interest rate cycle turns and commences on its downward journey. Even if the interest rates rise, in the interim as long as they do not rise above the 1.00% differential; you are still a net gainer.

Earlier in the discussion it was pointed out that there is nothing like a ‘pure’ fixed interest rate that is being offered by any lender in the Indian market. So, floating rate are the best bet.

A loan agreement is the document that lays out the terms and conditions of the lender. It also informs the lender of the borrower’s consent. It is very important to read what you sign for that very reason. Be informed before you agree.

The agreement could the last thing you want to read. The miniscule font size alone is a turn off. Add to that, too many asterisks, and more than ample number of sections. So, even if reading the document seems to be a mind-numbing task, you have to get it done. This document is legal and once you sign it, you are bound by its terms and conditions.

You must read the document. Because not only will it inform you, it has immense potential for amusement.

• If you have a dispute with the bank during the loan tenure, as a borrower, you cannot issue a stop-payment instruction with respect to post-dated cheques for as long as the ‘facility’ (loan) or any part of the dues is outstanding. In case such an instruction is issued, the bank can initiate criminal proceedings against you under the Negotiable Instruments Act (1881).

• If you, the loan borrower, do not understand English, a declaration in vernacular language needs to be executed and signed by you in the desired vernacular language. There is a special instruction in the agreement regarding the same.

• There is a special ‘Memorandum Regarding Signing’ for those who understand a vernacular language, for an illiterate, and for a blind person.

• According to the agreement, you cannot sell, exchange, partition, mortgage, charge, encumber, lease, or dispose the property till you have got ‘discharge’ from the bank in writing.

• You cannot hold the bank responsible for any delay in construction, giving possession of, completion of property by developer, promoter or society even if the bank has approved or sanctioned any facilities to such a person or entity.

• If you are a resident Indian, you cannot leave India for employment or business or stay long-term outside India without fully repaying the loan. You cannot stay out of India for any purpose for more than 60 days. There should not have been a change in the citizenship nor should you have made any earnings or income during this period from abroad.

• If you have taken a ‘home equity’ or a ‘top-up loan’ you cannot let out the property for use/occupation by another person without prior written permission from the bank.

• Oh yes, and this one is a personal favourite, see if it’s yours too - It is not clear whether banks are bound by law to notify you of changes in their policy. But, the agreement binds you to remain acquainted with a bank’s rules/terms and conditions affecting or relating to the loan taken.

And well, the borrower has to sign each page of an agreement at least once, as indicated. So say, in a 47-page agreement, you may have to sign up to 72 times.There’s an instruction on the agreement that says that all borrower(s) are requested to put complete signature(s) on the document, wherever crosses are marked i.e. an ‘X’. And, there are 21 such crosses in a 47-page agreement. (You may want to ask, why 72 signatures then?)

Budgeting for a car is as important as budgeting for any other activity. Here are some pointers that will come handy when you decide to buy a car, old or new.

The first step is to work out your expenses; and then the savings. Check how much you can save up for your car. When you buy a car, there are many costs that come along with it. Keep a margin in your calculations to meet costs such as fuel bills, insurance premiums, and servicing.

Set a budget and stick to it. Ignore all that the dealers or the finance company has to say. Especially, if they say that you can afford more. And, there is NOTHING such as a ‘zero per cent’ loan.

Assess whether you need a brand-new car or if an old machine will do as fine. Depreciation is a major chunk of the cost of owning a car. Even if your car is just a year old, there is a hefty amount to be lost should you sell it. This essentially means that you can buy an old car on the cheap. If old is as good as new, why empty your pockets? Remember, buying a car as an investment option may not really work. Registration costs, insurance, maintenance; such costs can’t be recovered if you were to sell the vehicle.

While it is advisable to buy a house on loan, a loan should be the last resort to buy a car. Save up on cash to buy the car. Car financing can be expensive. And, no tax benefit on the loan unless you lease it out. Buying a car outright can get you discounts.

If you are looking for a loan to finance your car purchase; shop for a loan first. While a housing loan lays emphasis on the actual property, buying a car via a loan lays primary emphasis on the finance options available. Arrange for the down payment. DO NOT go the personal loan or loan against security route to get the cash.

Once you have checked out your finance options, assess your car. New or old, ascertain the one you need. Assess the purpose - whether you want to rent it or use it for personal needs.

An important step of budgeting is to get an estimate of the price. Do your homework and set a target price. Use all the channels available. The Internet being the quickest, visit as many dealers and agents as possible to get estimates.

Make negotiations before you purchase. Don’t let the dealer eat up your savings. Don’t take discounts as they are. Make sure the offers are indeed discounts, not future expenses hidden away inside them.

Credit counseling in India is not such a big business, though it is increasingly gaining a foot-hold in the common man’s consciousness. Sudden loss of jobs, stop on increments, over-spending on credit cards, multiple loans- a few or any of these combinations can bring you to a dead-end called the debt trap.

Before it is too late, approach your lender to make payment arrangements. If the situation is beyond repair, get in touch with a credit counselor.

There have been increasing instances of loan defaults in India recently, due to various reasons such as high interest rates, inflation, loss of job due to companies cost-cutting etc.

In India, there has been a growth in credit to household in recent years. The all-India Debt and Investment Survey 2003 estimates that nearly a fourth of the households were indebted in 2002.

When you approach a consumer credit counselor, they will try and convince the lender to decrease the rate of interest on the loan taken. That doesn’t help you decrease the loan. This means that if your outstanding loan amount is Rs. 1 lakh, this will be the amount payable, not any lesser than that.

Based on a credit counseling agency’s relationship with a particular bank, the negotiation between the debtor (you) and the creditors (bank) could be mediated to get reasonably favourable outcomes. The counselor may do a comparative study of the interest rates offered by various banks and also the terms and conditions of unsecured debt consolidation and choose the best one suitable for you.

The credit counselor also ensures that you get ample time in hand to stabilise your finances and also to pay off your debt in small installments.

But they may not be able to help you in debt consolidation.

So in a nutshell:

• A credit counselor examines ways and means to sort out the current financial crunch.
• They can help create awareness about the costs of misusing credit. This helps improve the customer’s financial management and develop sound spending plans.

These agencies help the distressed people gain access to the structured financial system, including banking.

What do they do? Who do they work for?

As the name suggests, these counselors help you gain control over your financial health that has deteriorated, thanks to reckless or over-spending.

You could liken them to a psychiatrist, the only difference being that while they help you out, they are really working for the benefit of the lenders. The benefit being that your sound financial health could help the bank recover the loan outstanding, or at least a part of it.

What do you need to check?

There are a few questions you need to get answers to before you finalise on a credit counseling agency.

• How much does the credit counseling agency charge for its services?
• Does the agency have due credentials?
• What are the services that the company can offer?
• A question you need to ask yourself. , Before you approach a consumer credit counseling service, have you read the testimonials and reviews of agencies previous or current clients as well as checked their official website?
• Is the credit counselor registered as BBB which stands for Better Business Bureau? This is a quality sign.

Education loans as a sector is becoming increasingly popular, with lenders and borrowers. In fact, being a part of the priority lending, its also getting support through Reserve Bank of India’s (RBI) initiatives.

The RBI has taken measures to encourage the students to borrow and to facilitate the growth of the sector. The central bank cut down the risk weightage on education loans from 125 percent to 75 percent. This has been done to make it easier for potential loan applicants to get loans.

Also, since education loans above Rs. 4 lakh are backed by security, it is safe to assume that education loans will have a low ratio of non-performing assets.

Some media reports also spoke of a Higher Education Loan Guarantee Authority (HELGA). This proposed entity will aid needy students in getting easy loans. HELGA may also take care of the interest rate payments during the ‘moratorium period’ of the education loans.

The Finance Ministry is also promoting the sector. In media reports, the Finance ministry urged bankers to adopt a flexible approach to extending educational loans to students.

In another attempt to make things easier, the Indian Banks’ Association (IBA) set up a working group to study how education loans can become a lucrative business. The recommendations of the group were taken into account and the banks revised their norms.

The IBA also proposed the establishment of a Rs 2.5 billion Credit Guarantee Fund. The entity is to be formed on the lines of that of the Guarantee Trust Scheme for small-scale industries. The proposed fund will cushion loan defaults and will also serve as a group insurance product.

The IBA recommended that half of the corpus be funded by the Centre while the rest could be shared by the banks and the borrower. The student-borrower will pay a premium for the amount borrowed and the bank can claim the insurance, if the student defaults. The proposal is being considered by both the RBI and the Union Finance ministry.

At a ‘loan mela’ organised by Indian Overseas Bank (IOB) in September 2008, Finance Minister, Mr. P. Chidambaram said that banks should clear loan applications on a case by case basis. He was quoted in a media report in  saying, “Don’t follow strict rules. Bankers should apply the humanitarian angle while processing the loan applications.”

Increasing costs of steel and other such inputs have already led to an increase in car prices. Add to that the sky-rocketing fuel prices and owning a car becomes bloody expensive.
What about those who already own a car, especially the ones who have bought them on loans? Rising interest rates have had a greater impact on these borrowers in terms of the increase in EMIs. The slack in the job markets, stop on salary increases…mounting pressures of inflation on expenditure… All these mean that a lot of borrowers are moving from being car owners to car loan defaulters.
Wait, this isn’t over.
Banks seem to be taking to tougher recovery measures. On the other hand, the Supreme Court extended the deadline on repossessing and selling defaulters’ cars to three months from the erstwhile 24 hours deadline.
These developments have had a two-pronged impact on the sector: lenders have made lending norms stricter and old car prices have dropped.
Finally the good news - old car prices have dropped by 15 to 25 per cent. About a quarter of the cars in this market are repossessed cars. Borrowers who can get a loan can get good cars at cut rates. They could also vie for a luxury car as these prices will see steeper falls.

“Is there any rule in banking that allows them to refuse to sanction personal loans or credit cards to a relative of a lawyer or policeman whether the person is self-employed or salaried?”

“I work with an NGO, but I am finding it difficult to get a loan.”

These are some of the common queries that I come across when I talk to people.

Or, when a friend of mine approached for a loan and said that he was working with an ad agency, the bank agent politely declined the application saying “Sir, we do not offer services in your area”. So, the friend asked which areas had the service. The agent just walked away!

Though we are not aware of any such specific practices, banks may not be keen on lending loans to specific categories of lenders.

But, hearsay doesn’t really convince one of the issues that borrower community may face. A friend, Ms. Bhateja employed with a private limited company approached a private bank for a car loan. She was employed with a dotcom company and had a good pay package. Ideally, she should not have faced problems getting the loan.

Well, she could just get about 50 per cent of the cost of the car as a loan. And, being unmarried, she could not get a loan without a guarantor.

Bhateja’s mother, a teacher employed with a listed school applied for the same loan on her daughter’s behalf. She got the loan within 15 days - without a guarantor. She also got 75 per cent of the cost of the vehicle as a loan and for tenure as short as 12 months.

Well, while the borrower community may not like the idea of ‘preferred borrowers,’ it is very much there.

People working with dotcoms, private companies, or those associated with NGOs may not have a stable source of income. In fact, in a few cases, the income may fluctuate. Banks may also be wary of lending to professional such as lawyers and doctors, especially those with private practices.

By not lending a loan to a ‘weak’ borrower, the bank is saving its interests; as well as the borrower’s. Private practices can be monetarily lucrative, but whether the pattern can be sustained or not is not a risk the lender is willing to take. Keeping this in mind, the lender may offer a reduced loan amount or tenure. A loan default can spoil your creditworthiness. Worst, it can bring you face-to-face to a recovery agent.

There can also be an issue with designations. Once a borrower has given in the application, the verification is out-sourced to some credit-verification agency. More often than not, these individuals are not well-versed or exposed to the new careers, or may find it difficult to understand or converse in English. Say, a designation of Features Writer can be very ambiguous as compared to that of a Journalist.

Ms Bhateja got a call from a bank saying that she could apply for personal loan of a lakh against her credit card. Followed a rapid round and a promise that a guy from the bank would come to pick up the documents.

She got a call in the morning, “Madam, apaka designation clear nahin hai. Journalist log ko loan mein thoda problem ho sakta hai.”

No clear answers. All vague.

“Defaulter” is a dreaded tag for both the lender and the borrower. Who are the people who default on loans? Why do they take a loan if they can’t afford to repay? How do they get a loan in the first place?

A defaulter can be a salaried or self-employed, middle class individual. Or, a high end customer with residences and offices in prime localities. (There are ample reports to prove this!) Defaulters could belong to any segment of society.

Could it be that defaulters just dupe banks if the outstanding runs into a few lakhs? Well, it could just as well be just a few thousands. Or it could be money taken to buy a new car or a personal loan to invest in a business. The borrower may just choose not to pay.

There could be a few genuine reasons for which a borrower may not be able to repay a loan, momentarily, or at all.

The current market crash and the resulting economic slow down have cost many people their jobs. Deprived of the means to repay, these people may not be able to pay off the loan.

Another reason could be unsound medical condition or ill-health. If an individual is confined to bed for a period of time for medical reasons. Or, is impaired temporarily or forever.

Yet, another could be divorce. It’s common to take a joint loan with a spouse to increase the loan eligibility. And then, one fine day (!), the marriage busts. A study suggests that 11 out of 1, 000 marriages end up in divorce in India. If the separated partner does not have sufficient means, the loan could end up as a default.

And here is something interesting. You can default intentionally too! Yes, despite stringent lending norms, there are borrowers who default intentionally. Here’s how:

Fudging identities and forging documents
A newspaper report talks about Mandeep Singh from Panchkula who applied for a loan of Rs seven lakh for buying a Mahindra Scorpio. Posing as car tool-kits trader, he got the loan. He submitted a photocopy of his PAN card and an income tax return of some town in Himachal Pradesh. It was difficult for verification agency to clearly ascertain the claims. After repaying a couple of installments, it was found that the borrower was a fraud and was untraceable. All the submitted documents were fake.
Another common instance of forgery is that of a bank statement. It has been seen that potential borrowers shows a high account balance till the time the loan is through. Once done, he withdraws the amount. Salary statements and addresses seem to be on the top of the list of forgeries.

Organised rackets
If you have some hands-on experience with dealing in bank loans either as verification or sales agent of loans or credit card sales through telemarketing, you may find the ‘Mr Hyde’ side of your personality planning sinister stuff. All you will need is a set of original documents (anyone’s). Don’t ever trust your friends or an agent so much that you hand over your original documents and forget about them. These documents could be misused.

Things have been happening so suddenly. It was a while before I realized I am almost stuck in a trap (or at least to me it seemed to be so). I am not much of a savings person. I use my credit card a lot.

The only saving grace seems to be that I have taken no loans and I have no liability.
Otherwise I’d be stuck in a debt trap. With no way to know how to get myself out of it. Let’s just say that I am one of the “lucky” ones. What about those who are not so lucky? What can they do when in a debt trap?

One option is to go to a financial advisor or consultant. But, they can be expensive.
The better solution is to approach a credit counseling center. There are several credit counseling centers in cities across India.

Some banks also have own credit counseling centers too, such as the Bank of India-sponsored Abhay, at Dadar in Mumbai. This agency, the first of its kind, also has centers in Gumla (Jharkhand), Wardha, and Chennai.

ICICI Bank’s credit counseling centre, Disha has centers at Ahmedabad, Hyderabad, Vijayawada, Kanpur, Delhi, Chennai, and Kolkata.

These centers will help you chart out a plan to repay your debts. You can swap your high cost borrowings for low cost debt. Interest rates may be bought down to as low as 18 per cent for levels such as 36 per cent in some cases.

These centers can also help you restructure the loan portfolios and formulate repayment plans. They may also help borrowers negotiate with banks for restructuring debts.

Here are the addresses:

• Abhay (Bank of India), 61 A, Sadanand, 1st Floor, Above Bank of India Branch, Gokhale Road (north), Dadar (West), Mumbai- 4000 028. Call 022-24221843.
• Disha (ICICI Bank), Prince Apartments, Ground Floor, Karani Lane, Ghatkopar (West), Mumbai 4000 028. Call 65971815/86/87. Visit www.dishfc.org
• Union Mitra (Union Bank of India), Union Bank Bhavan, 239, Vidhan Bhavan Marg, Nariman Point, Mumbai- 400021. Call 022-22896502.

Interest rates on loan can be changed, easily. Just read the agreement.

In case of floating interest rates, take rate change for granted. I read a clause in a home loan agreement of one of India’s largest private sector bank. The clause is that this rate of interest is linked to what is known as its Floating Reference Rate (FRR). And, the bank holds the right to change it at its sole discretion. The bank also holds the right to increase or decrease the EMI at its sole discretion. It’s called adjustable interest rate anyway!

What about fixed rates? I have read that banks do offer something called a fixed rate but then there is a rest clause attached to it. In the agreement terminology, it is known as “Fixed rate of interest with money market conditions.” (This is how ‘fixed’ your interest rate really is). The clause in the agreement goes something like this:

“From time to time, ___ Bank may, in its sole discretion, alter the rate of interest suitably on account of change in ___ Bank’s internal policies or if unforeseen or extraordinary changes in the Money Market Conditions take place during the tenure of the Facility. Thenceforth, the rate of interest varied as aforesaid shall be applicable to the Facility.
___ Bank shall be the sole judge to determine whether such conditions exist or not. If the Borrower/s is not agreeable to the revised rate by ___ Bank then within fifteen (15) days of the receipt of the notice from ___ Bank intimating the change, the borrower (s) shall be entitled to ___ Bank to terminate the Facility and prepay Facility and all the amounts due to ___ Bank in full in accordance with the provisions of the Facility/Agreement relating to prepayment.”

Basically, the bank allows it unlimited wriggle room to increase rates as and when they damn well please. Not that they do that, but they have legal immunity built in because of the clause.