To loan or not to loan

This is an extension of my first article Why is savings account not earning more for you? The objective behind this story is to tell you simple actionable hacks to better manage your liabilities.

So first things first. Should you take a loan today even if you have capital available with you? The simple answer is ‘yes’, if you are confident that you would not default on it come what may (essentially managing your leverage). Why I say this is because:

1. Today is 4th December 2020 and due to Covid-19, interest rates in India are at an all time low. So low that even savings account interest rates are higher than loans! Don’t believe me? Ok, I am attaching a snapshot of my own accounts.

IDFC Deposit account offering 7% interest p.a. While education loan from Union Bank costing 6.8% interest p.a. Giving me a neat spread of 0.2% p.a.

So what do I do? I pay the lowest amount possible do that my loan remains regular and keep savings the rest in my savings account. And no it’s not possible to draw loan account and credit the proceeds in savings account.

2. A lot of people as me that they already have loans but are being charged a higher amount than what is prevailing in the market. This is true and it reflects the inefficiencies and opacity of the current system. Wherein the banks are not automatically passing on the benefits to the customer and the customer is not really aware of what is happening. In this scenario, 1 of the 2 things needs to be dome immediately to save yourself from the compounding effects of high interest rates, which I shall just highlight with an example.

a) Your EMIs are high probably because your loan is still linked to base rate or MCLR. You need to get this converted and linked to EBLR immediately. Simply put EBLR is linked to external rates (such as repo rate) and gets reflected in your account immediately. Whereas base rate of MCLR are linked to banks internal rate and may take time to reflect if the bank decides to pass on the benefit.

b) If the bank doesn’t facilitate this or shows resistance, get it taken over by another bank. This may seem cumbersome but a lot of Direct Selling Agents (DSAs) of banks can help you with a smooth transition. You can in fact do the entire process while sitting at home. (This is further set to revolutionize. Read this for more info: All about OCEN)

Now as promised let me show you what a 1% reduction in interest on a loan can achieve in the long run. This is a true scenario as I got my home loan interest rate reduced from 8 to 7%.

Cool savings of 10 lacs over a 30 year period. Or a 2,700 per month savings on EMIs!!

For more such simple hacks. Reach out: basikfinance@gmail.com

References:

1. emicalculator.net