I am running a few textile showrooms in and around Kumbakonam. To meet the business needs, we have four chit funds worth Rs 5 lakh each. But whenever we require money at short notice, we bid for our chit at a deep discount. Is there any way I can borrow at competitive rates?— Guna
The only way to reduce your interest cost is by taking traders loan. The loan is given to meet normal business requirements and is sanctioned against equitable mortgage of property. The loan can be taken against residential property (building or a plot situated within urban limits); properties of close relatives are accepted, too.
The loan allowed is up to a few crore rupees to the tune of 65 per cent of the property or the business requirement, whichever is less. The maximum tenure of the loan will be five years. The key advantage of this loan is that, currently, it is offered at an interest rate of 13-14 per cent. Interest can be paid monthly, quarterly or half yearly.
Usual documents for identification and copy of the latest balance sheet, income tax returns, etc, are necessary.
An advocate's search report, title certificate and valuation certificate of the property that are normally required for creation of mortgage are needed as well.
In 2008, I bought a flat for Rs 40 lakh by taking a home loan from an NBFC for Rs 10 lakh for a tenure of 15 years.
Due to increase in interest rates, currently I am paying above 12 per cent. Is it advisable to do a part payment from my insurance maturity proceeds of Rs 2 lakh? Can I bring down my interest rate? Currently my savings in 80C are close to Rs 90,000 and, hence, I am not able to avail a tax benefit for the entire principal repayment.— Jyoti
Going by the general consensus, it appears that interest rates are peaking out. However, even if rates are not going up, for the existing borrowers it is unlikely that borrowing rates are going to come down drastically.
Although you have availed a loan for 15 years, for every 1 per cent increase in interest rates, your tenure would have gone up by a total of 34 months. It means that your loan tenure still could be around 15 years as your EMI remains the same. In a high interest-rate regime, it is prudent to make part payment. Consider this: if you deploy your surplus at 10 per cent interest, the effective interest earned will be 8 per cent, since you are in 20 per cent tax bracket. For your home loan, after factoring the tax benefit, your borrowing cost works out to 9.8 per cent. Thus, it is worth making part payment. However, do check with your NBFC if they are currently offering an option of pre-payment of six times your EMI in a single shot .
Regarding your second query, the NBFC you have referred to may not offer interest-rate swap facility, even after paying a fee. The only option to reduce interest is to switch to another lender. But the cost associated with it makes it repulsive. If you wish to switch, you may have to pay 2 per cent as pre-closure penalty to the existing lender and 1 per cent as processing fee to the new lender. It means you need to spend Rs 15,000. Housing-finance companies offer home loans at interest rates of 10.75-11 per cent. By shifting the loan, you may end up saving Rs 667 a month and Rs 8,004 a year. It may take close to two years to recover your cost. So, wait for interest spread of 2 per cent to switch your loan.
I am resigning from my job and planning to start my own business in 2012. I have already created adequate capital to run a business without any loans. When I resign, I may get Rs 16 lakh as retirement settlement from my employer. Till my business stabilises, I may continue to work as a visiting faculty in institutions to meet my monthly household expenses and EMI of Rs 40,000. I have a home loan outstanding of Rs 7 lakh, for which the balance tenure is six years, and a car loan of Rs 1 lakh. My total EMI is Rs 15,000. Shall I settle the loan or should I continue to pay EMI?
— Venkatesh
Generally, it takes three to five years for a business to stabilise and, hence, it is of paramount importance to maintain liquidity. Of the two loans, EMI paid towards car loan will not help you reduce your interest costs. Hence, it is advisable to close the loan. Even though the interest costs are higher, continue to pay EMI towards the home loan and enjoy tax benefits. Consider this: if you pay an EMI of Rs 11,500 a month for the next 72 months your, outgo will be Rs 8.28 lakh and it will allow sufficient buffer to meet any eventuality.
Till you start earning well from your business, keep yourself free from any other personal liability. Once you have a regular income, close the home loan because by then your principal component of the loan will be higher than the interest. Also, if the new tax code is implemented in its current form, home loan principal repayments will not be eligible for tax-benefits.
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