Top 7 things to avoid when using your credit card for personal loan

Though the season of excesses is now behind us, it is never too late to learn some lessons on prudent borrowing. And what better time than the new year to put the learnings into practice? Here are seven points you need to bear in mind before swiping your card, or for that matter, knocking on your bank’s doors for a personal loan, this year:

The ‘minimum amount due’ trap:

It is a mode of clearing your outstanding credit card dues that seems very convenient — paying only 5% of the amount every month to prevent the bank from initiating any action against you. But you need to remember that even if you pay this amount every month, it will not be able to rescue you from the debt trap.

With the interest on the balance amount being a hefty 39-45 % per annum, the outstanding amount is unlikely to shrink in a hurry. The ideal approach, therefore, is to use your credit card merely as a facilitator and ensure that the bill is cleared before the due date.

The lure of ‘loyalty cum credit’ card:

If you have ever visited malls and supermarkets, chances are that you have been offered a ‘membership’ or ‘loyalty’ cards a number of times. The store staff often cajole you into signing up for one – after all, there’s nothing to lose, and scores of points to be gained on every purchase made that will entitle you to discounts. Most of them score high on utility, no doubt, particularly if you shop there often. However, you need to be wary of cards that insist on you using them for spending – these could be co-branded credit cards that carry at least an annual maintenance charge, if not an enrollment fee.

‘Easy’ cash from credit card:

In an emergency, you can use your credit card to withdraw cash from an ATM. That may be reassuring, but you need to remember that you will have to incur additional charges – around 2.5% of the amount withdrawn – for the purpose. “Many are not aware that in such a case the payment becomes due from the date of withdrawal and not after the expiry of the credit period,” says VN Kulkarni, chief counsellor with the Bank of Indiabacked Abhay Credit Counselling Centre.

The ‘real’ credit limit:

You may know your credit limit courtesy the figure indicated by your card issuer, but are you aware of what it is made up of? It is not restricted to the amount spent using the card alone. “Several cardholders are ignorant about the fact that the limit includes any penal charges levied by the issuer,” explains Madan Mohan, chief counsellor, ICICI Bank-supported Disha Financial Counselling Centre . If you exceed the limit despite being in the process of paying interest on any earlier outstanding amount, you may have to shell out overdrawing charges. To avoid these charges, make sure you read the terms and conditions of your credit card thoroughly.

Dangerous leveraged investments:

The New Year apart, January 1, also heralds the tax-saving season, prompting insurance agents and mutual fund distributors to persuade you into making tax-related investments. If you find yourself short of cash to make those investments, you may feel tempted to use your card or take a personal loan to tide over your ‘temporary’ fund shortage.

A fundamental mistake, and the one that can burn a bigger hole in your pocket than what the tax outgo would have otherwise done. Such investments could come to haunt you later as they come with a lock-in period or necessitate recurring payments. Therefore, if you must borrow, do so only when you are assured of a fund inflow capable of clearing the debt in the near future.

A record of your credit history:

The credit report – issued by credit information companies like Cibil ( Credit Information Bureau )) and Experian – is a record of loans you may have borrowed in the past. It is an indicator of whether you have been a good borrower – that is, if you have been regular in repaying your loans – and is one of the factors that banks take into account while sanctioning a loan. Therefore, it would be a good idea to regularly monitor your credit history. If that is not possible, ensure that you obtain your credit re-port before approaching a bank for a loan.

Importance of a no-due certificate:

One of the most common pieces of advice doled out to borrowers, especially to those who close their loans under a compromise settlement with lenders, is to insist on a no-due certificate. It holds the key to the approval of your loan applications in the future. While the settlement may spare you reminder or follow-up calls from bank, it is only the no-dues certificate that will back your claim of having a clean slate.

Along with this, make sure your bank gives you an assurance that the settlement will be intimated to the credit information companies so that your credit record is updated accordingly. If, anytime in the future, your loan request is turned down because of an unfavourable credit history,you can produce the documents as proofs of complete repayment.

CBI:Bankers have defended the loans given to companies

Bankers have defended the Bank loans given to companies named in the CBI charge sheet in connection to the bribes for loan scam saying these were performing Bank loans and were sanctioned after due process.In its chargesheet, the CBI had named officials from the Bank of India, Punjab National Bank and even a board member of Central Bank of India for allegedly accepting bribes to sanction loans, causing worries that the loans were sanctioned to non-credit worthy borrowers.
However, the bankers contended that loans cannot be sanctioned by any single officer and their processes ensure that all loans are sanctioned after proper due diligence.

The chief of the Indian Banks Association and chairman of India's largest public sector bank also agreed that it was not a systematic failure."It is not a systemic risk issue, this is not something where something has happened on a very wide scale. All banks have policy procedures in place for risk management or risk assessment and I believe that all banks are always fairly prudent in all these procedures of assessment and that will continue.however, the issue may mean that it may take more time for loans to be sanctioned from now on. Both the Finance Ministry and RBI have asked the banks mentioned in the CBI report to disclose just how much was granted as loans by the arrested officials.

Home loans will be costlier

Home loans have just started their move towards getting costlier. Directives let out by banking regulator, Reserve Bank of India have made margin money of atleast 20% a mandatory process for any home loan to get sanctioned. The margin money earlier stood somewhere between 10 to 15%.

A slight concession has however been made for home loans upto Rs 20 lakhs where the loan can be availed by paying 10% of the total property value as margin money.

RBI has also mandated banks to increase their provisioning on teaser loans making many banks to stop this special home loan scheme. The central bank however made a concession saying that once the teaser loan period of intial 2-3 years ends and the customer falls into the regular rate structure, the provisioning for banks would also reduce accordingly.

"At present, there is no regulatory ceiling on the LTV (loan-to-value ) ratio in respect of banks' housing loan exposures. In order to prevent excessive leveraging , the LTV ratio in respect of housing loans hereafter should not exceed 80%," RBI said in a notification. "However , for small value housing loans, i.e. housing loans up to Rs 20 lakh (which get categorized as priority sector advances ), it has been decided that the LTV ratio should not exceed 90%," the notification added.

government should evolve a suitable system in this regard for proper recovery of educational loans

College admissions have started and it is time for parents to start arranging for funds to secure a seat for their wards in the course and college of their choice. The government, duly recognising the role of education in the development of the country, has evolved educational loan schemes through Indian Banks' Association to help out the needy in meeting costs.

The aim of the scheme is that no meritorious student should be deprived of education for want of finance. But since the term 'meritorious' is not defined and there is no security stipulation for loans up to Rs. 4 lakh and no minimum mark requirement, any student getting admission into a course of higher study becomes eligible to avail the loan. While students with high scores get admitted into premier colleges through counselling, majority of the students have to seek admission in private colleges under management quota. This phenomenon is increasing year after year.There is a gap between the demand and supply for engineering courses because of the increasing number of students and limited capacity to absorb students through counselling.

This does not deter the students or parents because of the availability of educational loans. They do not stop to think about whether the student will be able to get a job in that stream and repay the loan. Loan-seekers for courses like medicine and foreign studies are limited because they are mostly merit-based. If the government specifies minimum qualifying marks, the scheme will serve its real purpose. Also, uniformity should be established in the tuition fees of private engineering colleges.

Tracking of loans which have already been issued becomes difficult when details like progress made by the student in the course, details of employment, income, etc., are not communicated to the bank. The government should evolve a suitable system in this regard for proper recovery of educational loans.

loans will be costlier in coming days

Be ready to shell out more in EMIs as banks are expected to raise lending rates on loans next month.With inflation continue to haunt policymakers, the RBI—which stuck to its earlier promise of pressing the pause button for the moment —is expected to add to the pressure on banks by increasing rates when it presents its next monetary policy review towards the end of January. The RBI had opted for six rate hikes in 2010 to help moderate inflation.

In its mid-quarter policy review released on Thursday, the RBI, however, opted to focus on addressing the cash crunch or the tight liquidity in the system.

To begin with, it has lowered the proportion of liabilities that banks have to mandatorily invest in government bonds from 25% to 24%. In addition , the central bank announced that over the next one month, it will directly buy government bonds, which are usually auctioned, to ensure that cash is not sucked out from the system.

The two moves are expected to help banks service the demand for loans. With the pace of accretion of bank deposits being lower than the growth in loan disbursements , banks are finding it tough to meet their fund requirement and have been borrowing over Rs 1 lakh crore through RBI's overnight fund window, known as repo.
Bankers said that RBI's moves are going to provide temporary relief and repo loans are going to remain in the region of Rs 70,000-80 ,000 crore, above the central bank's estimate of Rs 50,000 crore or so.

Home loan downpayments demystified

The Reserve Bank of India (RBI) this month announced a few regulations to tame banks’ unconstrained housing loan policies.
This includes a regulatory ceiling on the loan-to-value (LTV) ratio
of home loans and a hike in the risk weightage for loans above Ra75 lakh to 125%.

"Asset prices in India, as in many other emerging market economies, have risen sharply in a short time, which is a cause for concern,” said RBI governor D Subbarao at a press conference.

LTV is a terminology that is used exclusively with home loans. It stands for the ratio of the market value of an asset (as per the bank’s assessment) to the value of the loan taken against it. For example, if your loan is for Rs80 lakh for a property that costs Rs1 crore, your LTV is 80%.

For loans taken against construction of houses, or ongoing projects, the responsibility to ensure that the construction is being carried out in accordance with the sanctioned building plan lies with the bank. The RBI has also made strict directives to all banks to check that housing loans are being sought for authorised structures only

If you are now thinking about ways to best manage your downpayments, here are a few inputs:

Savings, tax refunds, bonuses, fixed deposits, shares etc are of course, golden options to meet your money requirements. Those who are looking for a home in future, should start saving now

Regular savings can build up a sizable downpayment amount. For immediate requirements, depend on near ones or go in for a personal loan. But beware of personal loans with higher interest rates

Here are some other options which you can look into:

Gold loan: If you have gold, taking a gold loan is always better than a personal loan. The process is also simpler. Diminishing interest rates start from 1% per month, and you need to pay the interest only for the number of days your pledge is maintained.

Collateral securities: Many banks have schemes to include pledge of additional property, fixed deposits and insurance policies to a loan, to enhance the loan amount.

For instance, if you are purchasing an apartment for Rs45 lakh, you may need to pay Rs9 lakh (20% of Rs45 lakh) as downpayment. If you attach some other property owned by you or by your spouse (if he/ she is a co-applicant), you can borrow more under the collateral security or with a loan-against-property scheme of the same bank. Additional amount availed can be used for making the downpayment.

State Bank of India will raise deposit rates

Amid tight the country's largest public and private sector banks announced an increase in deposit rates.

State Bank of India Chairman O P Bhatt said the bank might raise deposit rates next week, at least by 50 basis points. However, he ruled out any increase in the base rate or the benchmark prime lending rate in December.

He said while credit growth had picked up, more deposits could be attracted by offering better rates.

"We have seen a slight improvement in credit growth, not much though. Hopefully, it will pick up further. So, 19 per cent year-on-year growth may be possible.

The deposit growth is much less. But as credit growth picks up, deposits can be attracted by better pricing, which is beginning to happen," Bhatt said.

"In the current scenario, the deposit rates can only go up," he added.

Sensing competition for raising resources, ICICI Bank [ Get Quote ] also raised the interest rate on retail term deposits by 25-50 basis points across various tenors. The last revision in deposit rates was in October.

ICICI Bank also raised its lending rate by 50 basis points, increasing the repayment burden on customers, including home loan borrowers. The new rates will be effective from December 6.

The revised floating reference rate (FRR) for consumer loans will go up by 50 bps to 13.75 per cent.

Similarly, its revised prime lending rate (PLR) will be 16.75 per cent, up from 16.25 per cent.

These benchmark rates are used for determining interest rates on loans and advances sanctioned up to June 30. The last revision in FRR and PLR was in August 2010. The quantum of rise in both cases was 50 basis points.

ICICI's outstanding loans at the end of September 2010 were Rs 1,94,200 crore (Rs 1,942 billion). The retail loan book was Rs 78,100 crore (Rs 781 billion).

Home loans form 65 per cent of total retail loans. HDFC, the private mortgage lender, has raised its retail prime lending rate by 75 basis points from December 1.