The modern day consumer is in a perplexed state owning to the multiple loans he has to service for fulfilling his various needs/ wants.

So are these loans bad or bad?

Loans, probably being my ‘middle’ name, this question coming from me may surprise many as I have been advising consumers on various facets of loans for many years on a day-to-day basis. Here I would like to draw a parallel from Bollywood movie Dayawan where film ends with a question by child character – Was Dayawan (the protagonist who plays a mafia don with a heart of gold) a good person or a bad person?

So it depends on your perception.

They are good if you are able to manage and balance your loan portfolio, besides having a good repayment capacity. But it becomes a messy affair if they are not managed well or your repayment capacity takes a beating.

Ideally loans should be a means of creating assets or enhancing earning capacity. Then they are also a means to attend to unexpected emergencies. They are a “must” whatever situation you are in but the purpose of the loan plays a crucial deciding factor. The other deciding factor is the cost of the loan. The purpose of loan must also be cost effective. As you need loan to fulfill the need for more than one asset at a time, it is very important to priorities your loans.

If you are undertaking “hair cutting” course for Rs. 20 Lacs, it may not be worthwhile, as the earning capacity may not be enhanced that much. Even when the loan is for a good purpose say paying the fee for an educational course that will substantially add to the earning capacity but if the cost of the loan is too high, then it will not remain a good loan.

At the top of the hierarchy most loans taken to fund education for self or a family member would normally qualify to be a “good” loan as they create substantial earning capacity relative to their cost and are normally available at a reasonable interest cost. Tax breaks on the interest would also reduce the post tax of the loan substantially.

Second would be loan taken to fund a reasonable cost house for your own residence. Normally this asset price appreciates in value and will also act as a source of pension income or retirement through the medium of a reverse mortgage. Third would be a loan taken to buy your own reasonably priced vehicle (two-wheeler or four-wheeler). This may result in a boost in your productivity given that public transport in most cities in India is quite poor.

Then there are loans taken for consumption such as for funding or an expensive/ luxury consumer durable.

Basically there are two types of loans - Secured loans are loans such as home loan and vehicle loans. They are backed by your assets in order to minimise the risk assumed by the lender. The assets may be forfeited in case there is a failure to make the necessary payments.

Whereas unsecured loans are personal loans and credit cards, where the lender has no entitlement to any of the borrower’s assets in case borrowers fail to repay the loan. Such a loan normally carries a higher interest rate than a secured loan. Repayment plans of loans vary based on each type of loans. Home loan repayment plans can be as high as 20 years or more, whereas vehicle loans can be repaid in 3, 5 or 10 years, and the credit period for credit cards is around 50 days.

The consumerism boom fuelled by the presence of modern places of worship – Malls, has led to the phenomenal growth of plastic money. Swipe…swipe…swipe is the new mantra chanted by one and all. And the prasad of this mantra is debt…debt…and more debt. The debt on the credit card for longer duration will land you in a financial mess. The borrowing on credit card should not exceed 30 – 45 days, as interest charged is very high on such credit.

Last would be loan taken for speculative purpose such as investments in stock markets. These are strict No-No.

I would like to quote Benjamin Franklin here: “Remember, credit is real money,” which we tend to forget.

Thus it is important that you make it your personal goal to pay your credit on time as it will impact your credit rating.

So to end – remember loans can be very useful – nay – essential to improve the quality of your life and your future generations. At the same time it has the potential to destroy your life if used unwisely.

As a child when my first milk tooth fell, I was told to keep the tooth under my pillow at night. When I woke up next morning, I was delighted to discover a One rupee coin instead of the tooth under my pillow. When I asked my parents about it, they told me that a tooth fairy had switched my tooth for a rupee coin during the night. As a child the story had lots of appeal for me. Of course as I grew older I realised that there was no “tooth fairy” and that the One rupee coin was placed by my parents.

The stories doing rounds of zero percent finance scheme are perhaps of the same genre.

The old adage that ‘there is no such thing as free lunch’ aptly describes the zero-percent-interest schemes. These schemes were widely popular till a few years back. RBI regulations advising banks to refrain from offering such schemes as well as the general withdrawal of major banks from consumer durables financing has meant that such schemes have not been in vogue for the last 2-3 years.

However there are several NBFCs ( Non-Banking Financial Companies) that continue to finance consumer durables purchase and also have zero percent schemes. The main attraction of such schemes is that they influence you to purchase consumer goods that could be more expensive than your wallet size. The lure of zero percent interest is an added attraction that makes you feel that ‘YES’ I am getting something free and thus I am able to buy a ‘bigger and better’ product.

So how do these schemes work?

Unlike their names, most Zero percent schemes have other costs in built. The biggest cost is that you forfeit the cash discount that you would have got otherwise from the retailer. Also you will be paying some processing/transaction fees and/or advance EMIs.

So let us see how the costs stack up in a so called “zero percent scheme”

Example: A LCD colour television costs Rs. 48000 and is available on “zero percent” EMI scheme for 6 months (i.e. There is a EMI of Rs. 8,000 per month for 6 months). The consumer needs to pay a processing fee of Rs. 1,000. If the customer had bought the same TV by making a full payment he could have availed of a cash discount of Rs. 2,000 which he is not getting if he opts for the “zero percent scheme”.

So it works out like this :

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Cost of television set : Rs. 48,000/-

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Amount paid/Cost incurred in advance:

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Processing fees Rs.1,000/-

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Cash discount foregone Rs. 2,000/-

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Total Rs. 3,000/-

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Net finance received Rs. 45,000/-

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Payment made by 6 instalments of Rs. 8,000/- each (aggregating in all to Rs. 48,000/- against the finance received of Rs. 45,000/-).

The effective interest cost works out to 23% p.a. (see the calculator – true cost of zero percent schemes – http://www.apnaloan.com/loan-advice-india/fmcg-interest-rate-calculator.html.

However the popularity of such schemes with consumers particularly in festive season cannot be denied. Market sources say that despite being costlier in some ways, consumers prefer to go for these staggered payment schemes and have been highly successful in pushing sales and expanding the market for the durables. This is primarily because of the fact that purchasing through credit cards is very expensive as compared to purchasing through these schemes.

Also, the success of these schemes can be attributed to the availability of credit at the point of purchase, minimal paper work, small ticket size and hence a not-so-stringent eligibility criteria.

So are there any true zero percent schemes? Yes there are.

Some of them are available on the much maligned credit cards. The credit card that I have allows me to convert specific spends greater than Rs. 5,000/- into a 3 months EMI without any cost or fees. This is the closest that hard nosed bankers come to offering true zero percent schemes. Some other major credit card issuing banks also have similar schemes.

Best way to check if a zero percent scheme is a true zero percent scheme is to ask the following questions :

1) Any fees or charges

2) If I pay full amount do I get a discount that I am not getting if I take the zero percent scheme.

If answer to both the question is “No” then you have a true zero percent scheme!

So you can ‘zero in’ on your zero percent schemes

It’s that time of the year again when wishes are horses (well almost). Imagination (and hope) runs high . Well here is my wishlist for Mr. Mukherjee.

http://www.apnaloan.com/prebudget-wishlist.html

A personal loan can be taken for any use like financing wedding expenses, medical expenses, trips, renovation or construction of the house, etc. But a personal loan cannot be taken for speculative purposes. However the lenders are not concerned with the use of the loan and no guarantors or security or collateral is required.

Does the personal loan qualify for tax deduction benefits? The principal repaid does not qualify for tax deduction benefits. However, under Section 24 of the Income Tax Act, the interest paid for a personal loan taken for acquisition, construction and renovation of the house can be claimed for tax deduction up to Rs. 1.5 lakh. The borrower can claim tax benefits only after the construction is completed and possessing the property.

While claiming deduction the borrowers may need to show the certificate of completion of construction of house property. If this is not available then the proof of occupation by a certain date such as electricity bills, telephone bills etc. can also serve as a good proof of completion and occupation.

Thus you can fulfill your dreams by taking a personal loan and also claim tax deduction benefits.

I took a personal loan from a finance company called Prime Financial. The loan was of Rs. 27, 000 for 30 months with an EMI of Rs. 1, 477. What is the actual rate pf interest? They did not give me any documents stating loan related information. When I ask them whether the loan can be closed, they tell me about some charge called the prepayment penalty which is around Rs. 23, 000. I have already paid 14 installments. Can the bank do something like this?

I had applied for a car loan in the month of October (2007) from HDFC Bank and it was approved. But, at that time, the HDFC Bank executive told me that my name shows in the defaulter’s list as Richa. One of my cousins has the same name.

When I applied for a personal loan from Barclays Bank, they rejected it, stating the same reason. I am sure my cousin never took the loan or ever used any kind of proof from my end of such a thing. What do I do?

HDFC Bank is charging me service tax on interest paid for a personal loan (availed against a credit card) EMIs being paid every month. The loan interest is not a kind of service. Is the bank correct in its policy of charging me the service tax for the same? I did speak to the bank officials and they said that, “We take this opportunity to clarify that as per current Government of India guidelines, service tax as applicable will be levied on the prescribed fees, interest and other charges as applicable from time to time. Service tax will be applied on each of the applicable items and will be reflected in the Card member’s statement. We would like to inform you that the service tax has been recently revised from 12.24% to 12.36% effective from 11th May 2007. Hence, all EMIs that are being billed currently carry the difference in the service tax as ‘ADD CESS’ and the same is payable by you.” Is it correct on bank’s part? Please advise.

I have a very bad credit records for various reasons. Currently, I have loans amounting to Rs. 15, 00, 000, in spite of the fact that my wife and I earn pretty well.

These debts have accumulated as a result of excessive expenditure towards education of my children and other contingencies. I also have a history of cheque bounces on my account. My weak financial situation will last for another two years, till the completion of the education of my 2 children who are undergoing their 5th semester (of an eight-semester course) in Engineering. Once my children are through with their course, I may be able to save some money, even if we don’t get any financial support from them. I am also willing to ensure full security of bank loan in case of my death or retirement as a normal course. I am a salaried individual with 7 years of service pending before retirement. Will there be a bank willing to lend me? The situation I am in was unavoidable; will this mean that I can’t get a loan ever? Can I get some sort of a loan with an option to pay of the loan within 10-20 years. I can afford to pay an EMI of Rs. 17, 000 per month.

I wish to bring out a company before you which is looting the consumers and the general public. And yet, no one is able to stop them from doing it. After all, they are doing it so, legally. My father took a loan of Rs. 15, 000 from GE Money in face of some financial emergency. After a few days, we got the letter from them which stated that, we will be charged at a whopping 43% interest rate. Can you imagine such an interest rate? Yes, they have been and they are doing it. I felt very bad as it is a big loss and I immediately collected Rs 15, 000 from my relatives and went to close the account. On meeting them, they said that we can not close the account for 6 months. It was again such a fraud play. They would eat heavy interest in these 6 months and loot the consumers. Helplessly, we paid 6 EMIs of Rs 1, 104 each. Thus, we had paid Rs. 6, 624. And now, when we went to close the account, we were asked to pay Rs 15, 800. Yes, Rs 15800 for a loan of Rs 15,000! Is there something that can be done?

My salary account is with ABN Amro bank. Can I give cheques of HDFC bank as PDCs if I have taken a personal loan from a MNC bank? Another question is, why don’t banks provide the customer with reasons of rejecting the personal loan application or a credit card application? The answer that we get is ‘due to internal bank policy’. Aren’t there any laws that make it mandatory for the bank to provide reasons?