Financial Updates


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Personal Loans and their Forte

Personal loans are the single most powerful credit facility that is available through banks, coming second to none. Every other loan from banks has a set of restriction on how it is to be used, but personal loans do not fall under any such boundaries. One could use a personal loan for practically any purpose that is not explicitly speculative. Even when compared with credit cards that offer unbridled spending capacity, personal loans leave them far behind in the race with great interest rates. In addition to the same, these loans are offered on secured and unsecured basis and just have a minimum income limit and a mediocre to high credit score requirement.

Personal loan being available in unsecured forms actually are a boon for people who do not have either substantial gold or property to offer as security. On the flip side, these loans have a higher interest rate than secured loans. These loans are offered both to salaried as well as self-employed individuals and they have slight variations in the respective loan applications. Personal loans offered to self-employed individuals also tend to be of higher value than the loans offered to salaried people.

Basic Eligibility Criteria for availing Personal Loans

Here, begins the difference between applications submitted by self-employed individuals and salaried employees. The basic eligibility of course covers age and income levels and apart from those, there are a few additional requirements.

personal-loan-calculator

  1. Age Requirements – Varying from lender to lender, the maximum age limit could be anywhere from 50 years to 70 years. But in the case of salaried individuals, this age limit is generally lower, obviously due to restrictions on the maximum age for retirement
  2. Income Levels – Salaried individuals stand at an advantage here, because salary is not something that can drastically reduce any particular month, so there are no losses to be worried about for lenders. In the case of self-employed individuals, business often have that risk of uncertain loss during the course of the loan. That makes offering an unsecured loans a great risk for lenders. So, self-employed people would need to have a higher rate of turnover in order to qualify for a personal loan amount that a salaried individual can be approved for with a lower salary
  3. Concerning additional requirements, salaried individuals are again at an advantage, since most verification details are made through the companies that they have worked with and their work history serves as the proof of their behavior concerning expenses and savings. Self-employed individuals would need to file a lot more paperwork than salaried individuals but end up with a loan amount that is higher than a salaried individual if they dot their is and cross their its properly

Apart from the above criteria, the documents that might be required banks to process the application could be of the following for salaried individuals and self-employed individuals –

personal-loan-emi-calculator

  1. Salaried Individuals –

    1. Latest ITR form that has been acknowledged
    2. Latest Form 16 from the employer along with the computation details
    3. Latest 3 months’ payslips
    4. Latest 6 months’ account statement from the bank account that serves as the salary account
    5. Photo identification proof (government approved)
    6. Latest and current address proof
  2. Self-employed Individuals –

    1. Proof of qualification or registration for doctors, engineers, MBA consultants, CA and architects
    2. Latest 6 months’ account statement from the bank account that serves as the income account
    3. Latest 2 years’ CA certified balance sheet
    4. Latest 2 years’ CA certified profit and loss statement
    5. Latest 2 years’ CA certified income computation
    6. Latest 2 years’ acknowledged IT returns copies
    7. Photo identification proof (government approved)
    8. Latest and current address proof

One should bear in mind that the rates offered to one in the same business as another might vary. That is due to the nature of business as a source of income, one’s credit history and stability in come or employment.

Check Top 3 Bank Personal Loans here:

SBI Personal Loan

HDFC Personal Loan

Axis Bank Personal Loan


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How to Repay EMI Smartly?

An EMI helps you in adjusting repayment of a loan or a credit over a period of time so that you don’t get overwhelmed by the amount. EMI stands for Equated Monthly Instalments and is one of the most popular forms of loan repayments right now. The principal amount that you have borrowed, along with the interest calculations for the tenure of the loan repayment, are divided into equal monthly instalments. With the option for EMI, anyone can now borrow a substantial amount of money and then repay it in easy instalments that don’t put a hole in the borrower’s’ pockets.

EMI calculations are therefore an important part of your debt management. If you can calculate the amount and tenure of your loan repayment, you are in an empowered position and can map out the future payments with ease. EMI calculations can be done by using an EMI Calculator which is available from a variety of aggregator portals. These calculators allow you to mix and match different combinations of principal amount, interest amount, tenure and interest rate so that you can optimize the process of repaying the loan to the best of your abilities.

Once you have calculated the best combination of principal, interest and tenure for your loan, the next step is to ensure that you are paying less interest, or that your overall tenure somehow gets reduced, once you start repaying the loan. The steps below will help you repay your EMIs smartly:

Loan Calculator

EMI Calculations easy with Bankbazaar EMI Calculator

Rate changes

Some loans such as home loans are generally available at floating interest rates. This means that the interest on your home loan is not fixed and will change in the future as and when the bank announces rate changes. So, if there has been a rate cut during the repayment tenure, you will potentially be quoted a lower EMI figure going forward. You should not get swayed by the lower monthly figure, and continue to repay the old EMI amount, as this can reduce your overall repayment tenure.

Part payments

In general, the loans you have taken will come with the clause for partial payments. Let’s say you just received a bonus in your work, or you receive a good return from your investments in the equity markets. Invest the additional cash into the loan so that the principal get reduced. Consequently, your overall interest amount will also get reduced as interest is calculated on the principal, and a lower principal translates to cutting down of the interest by some amount.

Enhance EMI amount

With time, if you find increase in your monthly income, you can opt for a higher EMI payment per month. This will allow you to wrap up the loan in a shorter duration. For instance, if you received a hike of 20% on your salary, and use this amount as top up on your existing EMI, you are potentially repaying the loan 20% faster than the normal duration. This is a significant point, as for a loan of 20 years’ duration, you can reduce repayment by more than 50 months, a good amount of time.

Balance transfer

Some loans such as home loans or personal loans can be refinanced from a different lender. What this means is that you can transfer the whole loan to a new lender who is offering lower interest rate on the same amount. This can substantially reduce the loan burden on you. As you can see, there are some ways to speed up the process of repayment as well as reduce the overall costs of repayment if you act smartly during the repayment tenure. Therefore, be proactive while repaying loans and know your options in full.


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Did the Rate Cuts Help Home Loan Borrowers?

Home loan borrowers are typically in for the long run. Loans are available in tenures of decades providing borrowers ample time to repay the loan EMI. These loans are available in both fixed and floating rates, where floating rates denote dynamic interest rates that vary according to base rates decided by the apex bank in regular policy reviews. Fixed rate home loans are to be repaid at the per-decided interest rate irrespective of market dynamics.

Despite two base rate cuts since January this year, Indian banks have been reluctant to reduce their lending rates to put it mildly. The major banks in the country had to eventually be strong-armed to reduce rates by Raghuram Rajan, the governor of Reserve Bank of India (RBI).

Their excuse – even with the rate cuts by the RBI, the overall cost of funds for banks has remained at similar levels as before the rate cuts, making rate cuts for customers a potential loss-making scenario for banks. The RBI and the Finance Ministry categorically rubbished these claims before the major banks ultimately slashed their base lending rates to customers.

So, are home loans cheaper now?

Online EMI Calculator

Calculate every EMI

Only after the major banks caved in to slashed rates, their smaller and mid-size counterparts followed suit. Moreover, banks have been actively advertising the compulsory lending rate cuts as concessions to existing borrowers. On a closer look, it can be seen that new borrowers are receiving low interest rates compared to existing customers.

If you take a look at historical data on home loan rates from 2011 onwards, you will see that rates have more or less remained the same for new borrowers. In fact, existing borrowers have had to pay higher rates at almost 11% in April 2015 as compared to figures from January 2011. The lenders have not been completely fair to borrowers in the past in terms of providing the benefits of revised rates.

In fact, a home loan borrower from the public sector State Bank of India in 2011 is at a slight disadvantage in terms of EMI when compared with borrowers who took loans from private sector lenders. And this is the scenario for the top lenders, the smaller lenders have been even more stringent is passing on benefits to customers.

A consolation here is that banks have been brought down to spreads between 0.05% and 0.15%, which in turn provides them with little leeway while differentiating among existing and new borrowers going forward. Meanwhile, housing development companies such as LIC HFL and HDFC are exempt from changes in the base rate regime. As such, they do not have any limitations of spread while offering attractive rates to customers. A similar ‘unfairness’ survey if done in 2018 may show the housing finance companies as demanding unfair EMIs.

We can all hope that this sort of competition does not become a trend in the Indian banking sector, and the regulatory bodies step in to make the lending environment fairer to all borrowers.


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Main Features of Loan for Self-Employed

Self-employed Loans and Business Loans

Customers need to have clarity about loans meant for self-employed for many confuse it with business loans. Business loans, in most cases, are a separate category of loans. However, there are some similarities between business loan and loans for self-employed in that both are unsecured loans offered by Non-Banking Financial Companies (NBFC) and banks. Banks, however, have stricter regulations compared to NBFCs for offering personal loans to self-employed persons. Also, NBFCs charge a higher rate of interest than banks for loans offered to self-employed persons.

Features of Loan for Self-employed

The salient features of loans for self-employed persons are listed below:

  • Age: Different banks have varying age bar for offering loans to self-employed. While the minimum age to avail of loans for self-employed is 28 years for ICICI bank, Axis bank offers loans (self-employed) at 24 years
  • Eligible persons: ICICI bank offers loans to self-employed/proprietorship firm and non-professionals, Axis bank offers loans to doctors, chartered accountants, architects and company secretaries who are self-employed
  • Turnover (minimum): Major Banks have their own set criteria in terms of minimum turnover to provide loans. For instance, non-professionals and professionals must have a minimum turnover of Rs.40 lakh and Rs.15 lakh respectively to avail of loans offered by ICICI Bank. Some NBFCs are open to offering loans to firms with an annual turnover Rs.12 to 15 lakhs
  • Stability: Banks have different set conditions in terms of business stability. For instance, ICICI Bank offers loans to self-employed persons with least 5 years of experience and doctors (self-employed) with three years of experience
  • Profit after tax: Axis Bank offers loans to self-employed persons whose firms have registered Rs.2 lakh p.a as (minimum) net profit. ICICI Bank offers loans to proprietorship firms with profit after tax of Rs.2 lakh (Rs.1 lakh for non-professionals). Akin to disposable salary which is an important factor reviewed by banks before offering loans to salaried professionals, profits after tax is a critical factor which determines whether a self-employed individual is eligible to avail of a loan offered by a bank or NBFC
  • Type of business: Most lenders will hesitate to offer loans for volatile businesses. Most banks and NBFCs look for stability and the revenue generating model of business before offering loans to ensure timely repayment and avoid bad loans or defaults
  • Income Tax Return: Not many are aware of the fact that it is important to file income tax returns without fail to avail of loans for self-employed persons offered by banks and NBFCs. Most lenders demand ITR of a minimum of 3 years to offer a loan. An individual (associated with a private limited company or LLP) has to file income tax returns in his or her name for a record of the income generated from his or her business.

how-to-get-a-loan-to-start-small-business

Documentation

The following table shows the list of common documents requested by banks and NBFCs for offering loans to self-employed persons

Identity Proof
Address Proof
Audited Financials (two years)
Office Address Proof
Office Ownership Proof
Bank Statements
Passport size Photographs
Proof of Occupation
IT Returns

*May vary from bank to bank


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Advantages and Disadvantages of EMI

EMI or Equated Monthly Installment is a fixed amount paid by the borrower to the lender at a specified date each month. EMI’s are used to pay off both interest and principal amount each month for a certain period of time until the loan is fully paid. EMIs are very different from variable payment plans where in the borrower can make higher payments, but in EMIs, borrowers are allowed to make fixed payments each month.

How does it work?

EMI is fixed payments made every month as a part of loan repayment or a purchase. EMI constitutes of the principal amount to be paid and a certain rate of interest. The rate of interest depends on the amount borrowed, the duration for which it is borrowed and the lender. The principal component is lesser than the interest component in the initial period of repayment and the rate of interest will decrease gradually and the principal amount will increase over the period of repayment.

How to calculate EMI?

EMIs can be calculated by using EMI calculators that are available on the lender’s websites or financial websites. EMI calculators require a few parameters to produce the desired results.

loan emi calculator

Calculate your EMI

  • Loan amount
  • Tenure period
  • Interest Rate
  • Processing Fee (If any)

Advantages of EMI

EMIs are a boon to people who depend on a steady source of income and are incapable of paying off lump sum amounts at a time. Listed below are some of the advantages of EMIs.

  • Affordability: EMIs give the consumers the freedom to afford things that they won’t be able to make full payments for. EMIs lets the consumer make payments in installments thus allowing them the freedom to purchase a home, car, home appliances for which they can’t make lump sum payments.
  • Flexibility: The EMI option lets you decide the amount that you want to pay in installment and the duration for which you want to make the payment depending on your financial situation and income.
  • Absence of a middleman: The EMI is directly paid to the lender and there are no hassles of a middleman.
  • Easy on the wallet: EMIs save you from burning a hole in your pocket since you only have to make minimal payments every month instead of a lump sum payment.

Disadvantages of EMI:

There are several disadvantages to EMIs. Listed below are some of the disadvantages of EMIs.

  • Long Term Debt: EMI is a long term debt. One has to keep making payments till the entire loan is paid off.
  • Additional costs: Additional costs in terms of interest. One doesn’t have to pay interest if the payment is made all at once.
  • Prepayment penalty: Several institutions do not allow prepayment and even if they do there will be serious penalties that one will have to pay for prepayment.

Serious consequences: One will face serious consequences if one fails to make timely payments. The consequences might be as serious as repossession of purchased commodities, heavy penalties and strict legal action.

EMI Calculator – Calculate your EMI in 3 EASY Steps


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How to get personal loans in India sans hassles

Personal loans are sought-after by millions of Indians. In other words, a borrower can avail of personal loans for any legitimate financial requirement and is not obligated to declare the purpose to his lender. All banks – public sector, private sector and MNC banks across the country offer personal loans to their customers. It is important to note that in most cases, salaried individuals, self-employed professionals such as lawyers, doctors, chartered accountants and so forth, employees of public and private limited companies, MNCs, public sector units, local bodies and self-employed individuals (businessmen) can avail of personal loans in India.

However, there are several factors which are taken into consideration such as the employment history, age, place of current residence, monthly net income, repayment capacity, previous loans and employers among others. Given that personal loans are a highly popular financial instrument, banks offer competitive interest rates. Loan seekers can compare personal loan interest rates across various banks online.

Criteria for getting a personal loan

Loan seekers have to ensure that meet various criteria to acquire a personal loan without any hassles. Some of the important parameters to be considered by loan seekers to get personal loans are listed below:

how-to-choose-PL

  • Age: The minimum and maximum age to avail of personal loans is 21 years and 60 years for Axis Bank and 23 years and 58 years for ICICI bank. In some cases, the age bar may differ depending upon the occupation and professional status of a loan seeker. For instance, the minimum age for self-employed individuals is 28 years whereas for doctors, it may be 25 years.
  • Loan Amount: In most cases, the minimum loan amount which can be availed is Rs.25,000 while the maximum is Rs.15 to 20 lakhs. All the same, customers should get quotes from different banks to get accurate figures
  • Rate of interest: The rate of interest may vary across banks ranging from 15.50% to 24% p.a.
  • Purpose: Personal loans can be acquired for any purpose such as funding vacations, tuition fees, child’s education, wedding and home renovation among many others
  • Minimum net income: ICICI bank requires a salaried individual to have a minimum net income of Rs.17,500 per month to avail of a personal loan while Axis Bank requires a loan seeker to have a monthly net income of Rs.15,000. Most banks offer Rs.15 to 20 lakhs as personal loans to eligible customers.
  • Eligible individuals: Salaried individuals, lawyers, doctors, chartered accountants, architects, engineers, public and private sector employees in addition to self-employed individuals such as businessmen can avail of personal loans in India
  • Security: Many banks do not demand any collateral for a personal loan, subject to conditions. For instance, no guarantors are required to avail of personal loans from ICICI bank
  • Loan approval: Most top banks take 24 to 72 hours to approve a loan request, provided all the required documents are in order and the customer has a clean repayment history and a good credit score
  • Repayment tenures: Many top banks offer a flexible repayment tenure ranging from 1 year to 60 months
  • Repayment methods
    • Standing Instruction (SI): Individuals who already have salary accounts with their banks they are seeking personal loans from can avail of this facility
    • Post-Dated Cheques (PDCs): Individuals can issue EMI cheques (post-dated) regularly
    • Electronic Clearing Service (ECS): Individuals can also make use of this facility wherein EMIs are automatically debited every month from the bank accounts
  • Top-up facility: Many banks such as ICICI bank offer top-up facility on personal loans provided EMIs for a year are paid by customers
  • Balance Transfer facility: Several banks offer the balance transfer facility, subject to specific conditions. For instance, ICICI bank offers the balance transfer facility to customers upon payment of 12 EMIs
  • Documentation: While documentation required to avail of personal loans may vary from bank to bank, the following are some of the common documents requested by most banks
    • Filled-in application form
    • Age proof
    • Photographs
    • Bank statements (three to six months)
    • Proof of income
    • Proof of residence
    • Registration proof qualified professionals such as architects, consultants, company secretaries, chartered accountants and engineers
    • Loan Agreement
    • Post Dated Cheques or request for Standing Instructions


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Why Reverse Mortgage Scheme is Not So Popular in India?

Reverse Mortgage Scheme has been in existence for the past 8 to 9 years. For countries in West, the product is quite a hit, and is definitely a preferred option for retirees. However, in India reverse mortgage products are not yet in the limelight while some are not even aware of an option such as this. People have not been interested in this scheme, despite goodies being rolled out in the second phase. There might be fair reasons why Indians do not like it but first let us understand what the scheme is really about and its basics.

Reverse Mortgage and How it Works

Any individual can mortgage his or her residential house or apartment to a financial institution under a reverse mortgage scheme which in turn pays a fixed installment at a defined rate of interest. The first phase of this scheme was called Reverse Mortgage Loans where the pay-outs are generally for up to 5 to 20 years. Once the term is over or early death of the borrower or the legal heir is able to claim the house by repayment of the loan. The fixed term payout was never a very lucrative option also considering there are too many restrictions, the retirees were not too pleased with the product. Finally a few institutions tied up with some life insurance companies and came out with a lifetime annuity within this scheme for the amount of loan availed. Despite of the advantage acceptance was slow as annuity is taxable. For appeasement, the annuity under reverse mortgage was made tax free, later. Hence, the final product remains where the borrower can receive a lifetime annuity that is even payable to the spouse on the death of the first annuitant.

reverse-mortgage-loan

Why People Do Not Like Reverse Mortgage Scheme in India

In India investing in real estate is a very dramatic decision. When a family lives in an apartment or house for 20 to 25 years then it’s a melodramatic situation to see the ownership going away to any financial institution. Also the decision gets more Bollywood when an individual has built the asset through loan. Hence, the house the individual buys in his lifetime is considered to be an asset for next generation. Considering that the children take care of their parents in their old age no parents wish would be a liability on the house and then pass it on to the children. These reasons may sound selfless too many while it is the way of life in the Indian society and hence attribute to the slow acceptance of Reverse Mortgage Scheme in India.

Also if you consider the tax-free lifetime annuity, Reverse Mortgage is a fairly good scheme to rely upon when the financial constraint is too high and there is no recourse. With such an option, the risk of living longer is also taken care of and hence with better pay-outs. The house ownership can always be claimed back by simply paying the loan availed. If an institution sells the house then cash surplus, if any, is then paid back to legal heirs. Despite its shortcomings in an Indian sentiments mind, the scheme in its current form in 2015 does provide a good option for retirees to plan their post-retirement income.