Personal Finance

Consolidate loans for greater control

Suresh Parthasarathy | Updated on March 19, 2011 Published on March 19, 2011

I am running a small-scale engineering business since 10 years and filing income-tax returns for the past five years. All machines and the land where my factory stands today were bought through my own funding.

For running my business I had taken a couple of personal loans with high interest from private financers. But I have not defaulted any time, despite my constraints. Is there any way to reduce interest outgo?Rajaram

Debt reduction is important for a profitable business. If you have taken loans at higher interest and if you have the ability to service them without any default, it indicates that you are running your business in a profitable manner. Having said that, you can consolidate the loans to have control over outflows. Approach banks for their SME focussed medium-term loans. Explain your cash flow to the banker and restate your repaying capacity.

There are banks offering a minimum of Rs 25 lakh and above if you have satisfactory credit records for the preceding three years. You may be able to raise the loan at less than 14 per cent interest.

Alternatively, if you own a house, try for a loan against that property.

Financial institutions offer loan at less than 13 per cent and you will also get longer repaying period. If you are not having free-hold property (if you have a home loan) then try for a secured loan against your machinery. In such a case, the interest cost might be more than the other options. But it will definitely be lower than interest rates offered by the private financers.

I am engaged in a business. I had taken a land loan a few years ago with a commitment to construct a house. At the time of sanctioning the loan, the bank informed me that if I do not construct within three years, my interest rate will go up marginally. Due to some personal reason, I postponed the construction of the house. My land loan currently costs me 14 per cent.

Is it advisable to switch to another bank to reduce the interest cost? The current outstanding loan is Rs 14 lakh and my property cost is Rs 60 lakh.Ratnam

Land prices have become volatile in the past few years, and banks and financial institutions have become choosy in sanctioning loans for land. The best solution is to request your lender for a lower-interest loan on payment of one-time fee. If they do not give you that option, try other banks or institutions.

Consider this: For every one per cent reduction in interest costs, you can save Rs 58 a lakh. For instance, if you can borrow at 10 per cent, your monthly EMIs will be Rs 18,502 as against Rs 21,738 for a 14 per cent loan and this translates to a saving of Rs 38,832 a year.

However, for transferring your loan you need to shell out Rs 28,000 (2 per cent of the outstanding) as pre-closure penalty and 0.5 per cent (Rs 7,000) as processing fees towards new loan. It will take 11 months to recover your cost. But considering the interest spread between old and new loans, it is worth trying for a switch.

I work in a private company and my wife works as a teacher in a school. We have two credit cards and the current outstanding is Rs 2.2 lakh. I don't have any savings except my PF. When we bought a house five years back, we had some outstanding and over the years it has increased to the current level. What is the best way to settle the outstanding?Sridhar

As you have not told us why you have not attempted to take a personal loan to close your credit cards dues, we presume that your loan eligibility may be the constraint. When your eligibility is the question there are only two ways with which you can settle the outstanding.

As you are not allowed to take provident fund loan to settle your credit card outstanding, you can apply a loan to settle your home loan dues. Once the outstanding comes down, go for a home loan top-up loan to the extent of your repaying capacity to settle your card outstanding.

Another option is to take a jewel loan and minimise your monthly outgo. Once you do this, interest out-go on credit cards will come down. The average interest cost in both the options will only be 13-14 per cent, as against 35 per cent in credit cards. But the only disadvantage is that you may need to sacrifice tax benefits to the extent of the home loan settled.

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