Can you imagine what our world would be if we were to follow the famous advice of Polonius, the character from Shakespeare's Hamlet, to his son Laertes, before he goes abroad for schooling, "Neither a borrower nor a lender be?"
Perhaps, we would have to wait for a lifetime to buy a car and a dream house and abstain from shopping binges. Loans and credit cards are an integral part of our life now.
While the uglier side of debt is rather well-documented, you may not get affected by it if you know how to use it. Here are some smart strategies to help make loans work smarter.
Smart Move # 1
Opt for lifetime free, zero surcharge credit cards: This will take care of two major recurring annual costs. Even as you opt for such a card, don't forget the old rules of not revolving credit, since interest rates are a huge 2.95 per month or 41.74 per cent per annum.
Smart Move # 2
Use overdraft facility instead of credit card cash: You should also avoid withdrawing cash using credit cards since you have to pay a processing fee, an interest of 2.95 per cent per month charged on daily basis and service taxes. Instead, opt for a bank savings account with an overdraft facility that will allow you to access funds at a much lower 21-22 per cent per annum.
Smart Move # 3
Take loans against assets: For short-term cash requirements, opt for loans against assets instead of costly personal loans (interest rates 18-20 per cent). The best bets are loans against fixed deposits (FD) where you can get around 80 per cent of the FD amount at an interest rate 1-2 per cent above the FD rate.
"This way you can lock in funds for a longer duration and use the over-draft facility to meet short-term liquidity needs," says Murali Natarajan, regional head, consumer banking (India & Nepal), Standard Chartered Bank. Next, come shares and mutual fund units of income schemes. You can get around 60 per cent of their value as loan at rates of 12-14 per cent.
Smart Move # 4
Go for an online credit card: You get an online credit card with your main credit card. It can be used only for online transactions, such as booking air tickets. These cards come with a low credit limit of about Rs 10,000 and separate your online transactions, so that even if some swindler gets your card details, the liability is limited. The card also enables you to avail discounts at travel and shopping portals.
Smart Move # 5
Time your car loan application: Submit your loan applications towards month-end so that executives sweeten the deal with freebies or discounts to meet their targets. Go during lean periods like "Shradh" (mostly a 15-day period in September, considered inauspicious for purchases).
You can also take advantages of schemes during September-end, when dealers provide promotional schemes to spur purchases by the self-employed and institutions to claim deprecation for vehicles during the same financial year. The same is true during March-end, when dealers try to clear their inventories of stocks.
Smart Move # 6
Opt for a joint home loan with spouse: This will enhance your loan entitlement and give you more tax-breaks -- up to Rs 1 lakh (Rs 100,000) per annum each under Section 80C for principal repayment and up to Rs 1.5 lakh (Rs 150,000) each under Section 24 for interest repayment -- since both would be entitled for them.
"Joint applications enhance loan eligibility since the income of the co-applicants are aggregated," says S.K. Mitter, director and chief executive, LIC Housing Finance. The move really works well for double-income families. Says Swami Saran Sharma, a Delhi-based financial expert, "If both husband and wife are working and the property is self-occupied, then the tax deduction eligibility doubles too."
Smart Move # 7
Leverage your credit history: If you have been a good borrower in the past, you can use your credit record to bargain for lower rates.
"An applicant with impeccable credit history can claim for lower interest rate and waiver of processing charges," says S. Santhanakrishnan, chairman, Credit Information Bureau (India). Many banks have already introduced products that reward good credit history with loans at lower rates, waiver of processing charges and increased loan eligibility.
Smart Move # 8
Leverage your banking relationships for access to loans: Homemakers, part-time workers and others with irregular incomes and cash flows may find it difficult to get credit cards and loans. In such cases, it pays to have a regular banking relationship, where, among other things, you operate the account regularly.
The tenure of the relationship sometimes helps get access to these products, especially a credit card. Once you build a good credit history by using your credit card regularly and clearing your dues on time, you can prove your credit worthiness.
Smart Move # 9
Apply for loans in groups to get discounts. While seeking loans, it pays to apply in groups. "If a group of friends purchase flats in the same property, they can successfully negotiate for discounts," says Harsh Roongta, CEO, Apnaloan.com.
The same is true if you take a loan along with your office colleagues. If your organisation is already in the list of preferred borrowers of the financial institution or bank, the employees can be offered lower-than-market rate loans. "The lender offer lower rates as it benefits from getting bulk business with its transaction, origination and servicing costs per loan coming down," says Mitter. The rates can be lower still if your employer agrees to deduct the EMI from your salary.
Smart Move # 10
Part-prepay home loans and get Section 80C deduction. You can claim Section 80C benefits up to Rs 1 lakh per annum from a variety of sources, such as investments in Public Provident Fund (PPF), National Savings Certificate (NSC), premium of life insurance policies, investments in equity linked savings schemes (ELSS) and pension plans of mutual funds, and principal repayment of home loans, among others.
Experts suggest that a key objective for anyone buying a financed home has to be of complete home ownership at the earliest possible time without compromising other goals such as retirement.
So, it makes sense, especially during periods when interest rates are on a high, to increase the principal repayment through part prepayment of the loan (assuming that the loan has no prepayment penalty) and claim the entire Section 80C deduction from this.