Their Story. What’s Plan B?

Not everyone is prepared when money is needed at short notice — if not for hospitalisation, God forbid, then for unexpected celebrations, weddings, travel, etc. How do people make good in such circumstances? Muthukumar K finds out

‘Approach friends for loans’

“I would rather borrow from my friends or relatives than go for a personal loan,” says Gurvinder Gandhi, a senior marketing professional in a chemical-trading company. He reasons that interest rates are atrociously high for personal loans and he would therefore refrain from signing on the dotted line. Instead, he could pay friends or relatives the interest on the borrowed amount at market-determined rates — which would be much less than that for a personal loan. (One-year fixed deposit rates are currently in the range of 7-8 per cent per annum as against 15-24 per cent for personal loans)

Sometime back, when he faced a temporary shortfall in his finances, he had to withdraw a part of his insurance investments. “However, after becoming a life insurance advisor myself, I realised my folly,” he says. He has now learnt that investing should be for the long haul and temporary glitches in finances should be met by the provisions made to meet such situations.

Gurvinder says he does not use his credit card to tide over financing gaps. He recalls that before he understood how a credit card worked, he was told by a marketing official that he could pay 5 per cent of the credit card due and repay the rest later. She didn’t, however, tell him that the bank would be charging interest at the rate of upto 45 per cent annually. Gurvinder is savvier now. While he does use his credit card, he ensures at all times that he repays the bill amount on the due date. Credit card is the last thing on his mind when it comes to borrowing.

The RBI should perhaps put up a clause mandating all agents who peddle personal loans — over the phone — to disclose the interest rate, he suggests.

‘Save regularly for a rainy day’

Nishant Vaidya is a retail professional. In 2012 he took a home loan and the EMI weighs down his take-home salary; by almost 30 per cent. “A personal loan is the last thing I would like to get into to meet any emergency spends — given that I already have a loan burden,” he says. He bought a car two years back entirely from his savings — without taking a loan.

He would rather go for a top-up home loan, which has interest rates in the range of 11-12 per cent (which is usually applicable for a home loan) than go for a personal loan which charges upward of 15 per cent. He is confident that his finances would improve over the years – helping him pay back the home loan much in advance. Banks usually provide top-up loans to their existing home loan takers. And since these loans are given against the security of the house property, the interest rates are equal to that of a home loan — in the range of 11-12 per cent.

He has a Plan B to meet his financial exigencies. He saves a part of his earnings every month and parks it into liquid funds. This is usually equal to six months’ salary. Liquid funds are the safest avenue for investment and have given a robust 7-8 per cent in the last one year. And when he needs money, he could redeem its units and it would be in his bank account the very next day. “By God’s grace, this system has worked till date” he says.

Personal finance experts often advise that the interest outgo should be no more than 50 per cent of the income. And among various categories of loans, EMIs on loans excluding home loans should not be more than 20 per cent of the overall income. However, he wouldn’t like to go for personal loan — given the highest interest rates charged on it.

Taking many loans also affects his CIBIL score. Having too many unsecured loans – be it in the form of credit cards or personal loans – could impact the CIBIL score negatively.

‘I tap savings, don’t borrow’

“I have not taken any loan till date. I try to live with what I earn and don’t spend beyond my means” says Suhas Gaekwad, who works for the hospitality industry in Mumbai. Recently, he bought a house in Mumbai and for that the bulk of the finances were arranged from the sale of his house in Nashik. If he has any temporary shortfall, he digs into his savings. But he never resorts to borrowing.

Recently, his close friend fell into a debt trap. The friend owns a property and borrowed through the Public Provident Fund as well as other loans. He also went in for an additional loan for his son’s marriage. On the advice of his son, who works in a private bank, he consolidated all his loans from the bank — by mortgaging his house property.

“To his misfortune, he lost his job. Now, the bank is warning him that a default in interest payments of more than three months would result in his property being attached. I advised him to sell his house and repay the loan rather than have the bank attach his property and sell it for a song,” he said.

This whole issue has reinforced Suhas’ conviction that it is best to live within one’s means. “I don’t understand how loans work. And I feel that if you don’t understand something, it is better to stay away from it,” he said. ‘Better to be safe than sorry’ is his mantra.

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