All You wanted to know about Personal Loans

 

There was a time when borrowing used to be considered as almost a sin. Whereas today, you name an incident a loan is available for you from not one but many resources. Whether you want to get married, go for a vacation, celebrate a festival – ‘Personal loan’: your loyal and honest companion will be with you 24*7! 

Personal loans are attractive:

It is very simple and easy to get this loan. This loan is unsecured loan, it means you do not have to give any guarantee to acquire this loan. As it requires very few documents to process the loan, documentation is simple. After you put in the request and fulfill the eligibility criteria, you are in receipt of the money within a week or two. 

You generally get 1-5 year’s time to repay the loan. You need not give anything (movable, immovable assets) as a security to process this loan.

If this is the case then why any financial institution will give away a loan like this? Why they will try to benefit their customers at the cost of their own risk? Alternatively, there is something in between the lines, which we need to pay attention to..., let us see.

Basics of Personal Loan:

First, let us know about the documents mandatory to apply for the personal loan. And these include

●      Pan card, passport or driving license as identity proof.

●      You can submit passport, ration card , electricity / telephone bill, Gas Bill, Bank statement as a residence proof.

●      If you are working then you need to give your salary slip, form 16 and 6-months’ bank statement. And for a person who is self-employed needs to submit his 2-3 years’ accounts statement/IT returns as proof of income.

Remember when you give such proofs to the organization while applying for the personal loan .You are actually giving them a blueprint of your wealth condition. So don’t be under the impression that bank is asking for no documents from you.

Coming to the Interest Rates:

As banks claims it to be, loan with no end-use restrictions and no-security. Interest rates charged upon Personal are extremely high. They can range between 16 to 30 % annually. More to that, interest rates differ from bank to bank and person to person.

For salaried person if interest rate is ‘X’ then for the same personal loan it can be ‘X+1 or 2%’ for self-employed person.  For government employee interest rates may go down further. So depending upon your repaying capacity and bank’s willingness to lend you can negotiate for the better rates. You can even offer your Equities, M.F. and insurance policies as security to bank which will increase your credibility and may decrease interest rates.

Other charges:

Interest, of course, is the most significant of the costs. But that doesn’t mean you should ignore the other charges. These would typically include:

●    A fee which is charged for complete procedure. This processing fee is non-refundable if your loan is approved and partially refundable if your loan is rejected. It can be between 0.5% to 3% of the loan amount.

●    If you prepay your loan then bank might lose out on interest money acquired on your personal loan .Hence penalty is charged on the prepayment of the loan .And this can be up to the 5% of your loan amount.

●    Not only that bank might charge you for the things like documentation, late fee, duplicate statement, service tax etc. 

A personal loan can be proved beneficial in certain conditions. How? Let us explore that too.

Examples of Right usage of Personal Loan:

●    Setting a debt which has higher interest rates: Say, you borrow Rs 1 lakh from a moneylender for your sister's wedding of which interest rate is 2.5% per month. So practically, you will pay Rs. 30,000 as interest to your lender while loan amount will be the same. In such a case, you can take a personal loan to repay the loan to moneylender. A loan of Rs 1 lakh for two years at 18% a year means an equated monthly installment of Rs 4,992. After two years, you would have not only paid off the entire loan, you would have paid only Rs 19,818 as interest, much less than the Rs 30,000 you would have paid the money lender as interest for one year.

●    Paying off a large credit card balance: A personal loan can also be used to pay off a substantial credit card balance that is being rolled over for months. Paying just the minimum amount on the card bill will not help you as the interest is charged over the total bill amount and is very high, usually 2.5-3% a month. It's better to divert the money to paying the EMI of a personal loan. You could save 16-30% depending on the rate of interest you are able to get on the loan.

So you can always opt for personal loan when you are in dire necessities mentioned above but with a caution that” Personal loan is injurious to your financial health”!!!!!!  

 

The author is Ramalingam K, CFP CM is the Chief Financial Planner at holisticinvestment.in, a leading Financial Planning and Wealth Management company.

Managing Your Personal Finance

Why your personal finance is out of your control and how to bring it under your control?

“I was a safe investor. So I invested everything in fixed deposits. My returns are not even beating inflation. So to beat inflation, I invested in stock market. But now the markets are crashing…”

“I kept a sizable emergency reserve in liquid funds; I didn’t have any emergency situation for 3 years. The liquid fund where I kept the sizable emergency fund was not giving me good returns. So I invested that money in a small property. Now I have an emergency and the property is not easily liquidable…”

“ When I see return on my investment portfolio, at times, I feel that I’m not getting good returns and start investing in aggressive investments.  Then, I feel that I’m taking too much risk…”

Does any of the above sound similar to you?

Why managing your personal finance is out of your control?

Why are you in a dilemma always?

Why you are not able to take any confident investment decisions?

When things go out of your control, you feel less confident and you are in a dilemma.

Lesson 1: You have control over your personal finance and investment decisions. But you don’t have control over the consequences of your personal finance and investment decisions.

Lesson 2: Timeless personal finance and investment principles have control over the consequences.

I discovered the above 2 lessons after studying and reviewing hundreds of investment portfolio.

Putting lessons on the perspective:

Let us put the above lessons in a proper perspective.

You have control over your investment decision:

You can choose to invest in Fixed Deposit or Equity Mutual Fund. You have complete control over this choice.

You don’t have control over the consequences:

Fixed deposits beating inflation or markets being stable are not under your control. The consequences are not under your control.

Timeless Investment Principles control the consequences:

Following are the few principles which control the consequences in our example;

a)      A safe investment will not deliver higher returns.

b)      High return investments will be volatile.

Investment principles like these are timeless. They produce both personal peace and dramatic investment results.

How to bring personal finance and investments under your control?

By now you could have guessed. If you take your personal finance and investment decisions based on the timeless investment principles, the consequences will be under your control.

So, that leads to the next question, ‘How to take decisions always based on timeless investment principles?’

Though the question looks tough, the answer is simple. Create a principle based personalised financial plan. The power is in principle based financial plan.

Financial Plan – A powerful Solution:

To bring your personal finance under your control, financial plan is really powerful.

         i.            Personal Financial plan is created based on timeless investment principles, your goals and priorities.

       ii.            Personal Financial plan empowers you to close the gap between what you deeply want from your personal finance and the way actually you manage personal finance and take investmetn decisions.

      iii.            Personal Financial plan help you escape the tyranny of dilemma of investment decisions & market moods and march peacefully towards your personal finance goals.

     iv.            Personal financial plan stops you take decisions based on your mood or market mood.

       v.            Personal Financial Plan stops you take long tern investment decisions based on your temporary emotions. It helps you take rational decisions.

     vi.            Personal financial plan gives you clear direction to take any personal finance and investment decisions. Personal financial plan is like a light house which guides us whenever we need direction.

    vii.            Personal financial plan can guide us on

·         What amount of safety to look at and what amount of risk to take?

·         How much liquidity is required and how much can be locked in long term investments?

·         How much returns are required to meet my goals?

  viii.            You will stop taking investment decisions based on advertisement, sales pitch, scheme brochure; you will start taking investment decisoons based on your personal financial plan.

Conclusion:

Don’t allow any other forces to control your personal finance and investments. You yourself can consciously control the consequences of your personal finace and investment decisions by creating a personalised financial plan.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Director and Chief Financial Planner of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in

10 Commandments of Personal Finance

We all work and earn money. Do we manage our hard earned money effectively and efficiently? New Year is the time to take resolutions. Why don’t you take a resolution to prioritize and organize your personal finance? Here are the 10 commandments of personal finance that can help you in managing your personal finance better.

1.  Create a budget

Most of us hesitate to make a budget because we think it is about cutting all the fun in life. Budgeting is not about cutting all the fun; it is about conscious allocation of funds. Once we start spending consciously, our mind will find out a whole new way of having fun within the budget. You need to create a workable budget that gives you extra money and life.

2.  Spend smarter and save more

Spending less and saving more are lifelong living skills that need time to develop. Unless and otherwise, you have a clear written budget, you will lose your focus and go after consumerism and materialism.

To save more, obviously you need to spend smarter. To spend smarter, you need to understand your own spending patterns. Consciously you need to track all your expenses on a daily or weekly basis. So that you can find out what influences your spending pattern and you can stay away from those influencers.

3.  Family protection

As a bread winner, you provide a lifestyle to your family. This life style need to be protected with sufficient life insurance cover. Otherwise your family may not be able to continue the same lifestyle in case of any mishappening to you. A word of caution here, don't fall prey to ULIP schemes. Opt instead for a pure term insurance policy. These policies give you high coverage with low premium.  

Also cover yourself and your family members with adequate health insurance coverage. The coverage amount of the health insurance policy needs to be decided based on your health consciousness, your family health history, and the class of hospital you choose for treatments.

4.  Asset protection

Before starting to build fresh wealth, it is our duty to protect our existing assets. Assets like house, flat, or car can be insured against accident and natural perils. The event of earthquake or terrorist attack to our flat/house seems to be remote. But the impact of such things could change our financial stability upside down. So protect your house and other major assets with proper insurance.

5.  Emergency reserve

You need to accrue savings for some surprise situations like loss of job, break in job or sudden expenses like a major repair to your car or house. Generally, the emergency fund needs to be in the range of three to six months' family expenses. If you have created this contingency fund, in the event of an emergency you need not pre-close your other investments and thus you avoid paying penalty or booking losses.

6.  Debt payoff plan

If you are in debt, you need to create a debt payoff plan with different scenarios. So that you can find out how some more savings or a different repayment order will help you get out of debt faster. When creating a plan, you need to choose one which fits your attitude.

7.  SSetout goals & layout plan

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If you don’t know where you are going, you may end up somewhere you don’t want to be. Decide your financial goals first. It may be buying a home, buying a car, or children’s higher education.

To get where you want to go in life, it is important to decide in advance how you will get there. What you need is a roadmap, a financial plan to achieve your financial goals.

So create a financial plan for you and your family.

8.  Retirement plan

In spite of the world wide pension crisis and a growing acceptance that we must plan and save for our retirement, the harsh reality is we are actually not saving enough. Research reports reveal that only 15% of the individuals are saving sufficiently for their retired life. Don't put off today what you can't afford to do tomorrow. Do your retirement plan TODAY to have a comfortable and enjoyable retired life.

9.  Review

You need to check up your financial plan and investments semi-annually so that when there is any deviation from our original plan, you can take corrective measures to control the deviation. 

10.         Work together with a Professional Financial Planner 

There is a lot of help available for you online to create a financial plan in various websites with financial calculators. But if you want to create a complete, comprehensive, customized and workable financial plan, you may seek assistance from professional financial planners. 

You really need a professional assistance when you want to review your financial plan and investments, when you want to add a new goal, or when you want to pre pone or postpone one of your goals.

If you follow these simple but authentic 10 commandments, by next year you will be richer than what you are this year. Celebrate the New Year with much more confidence and peace of mind by following these simple steps for financial success.

(The author is a Certified Financial Planner, Founder and Director of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. ramalingam@holisticinvestment.in)