Personal Finance

Make interest rates work favourably for you

Suresh Parthasarathy | Updated on February 20, 2011 Published on February 19, 2011

I have availed a car loan of Rs 3 lakh at a fixed interest rate of 10 per cent for the first year, 11 per cent and 12 per cent for the second and third years respectively. My current EMI outgo is Rs 6,426. In our company we have a society where personal loans are offered at 12.6 per cent diminishing interest rate. Is it worthwhile availing this personal loan to close the car loan?

— K.M. Mathivanan

Even though a fixed interest rate of 11 per cent appears cheaper than 12.6 per cent, do remember that diminishing interest rate is always cheaper than fixed interest rate.

For instance, if you had availed a loan of Rs 3 lakh at 12.6 per cent diminishing interest, your EMI would have been Rs 5,393 and your total outgo including interest could have been Rs 4.5 lakh. Whereas at fixed 11 per cent interest (18.7 per cent diminishing) your total repayment will be Rs 5.4 lakh.

At the end of the loan period you would have paid Rs 90,000 more than what you would have using the 12.6 per cent diminishing interest rate loan.

Even if your banker levies a pre-closure penalty of 2 per cent, considering the spread that you would get, we suggest you avail the society loan to close your car loan.

I have taken a home loan from an MNC bank and my current interest rate is 13.25 per cent. When I approached the bank, they offered to alter my loan to a lower interest rate of 10.9 per cent. But the catch is that I have to pay one per cent of the outstanding (Rs 10 lakh) as one-time fee.

Is it worth going ahead with the bank's offer? I also have the option of moving to Indian Bank, where I have my savings account. But my only concern is that for no fault of mine (just for Rs 1,000) my name is appearing in Credit Information Bureau Ltd (CIBIL) for a credit card that I never used.

— S. Swaminathan

There are several banks offering better rates than your banker.

As your name is appearing in CIBIL, for getting the loan you ought to convince the banker. It's worth trying with other banks where the interest rate is less than 10 per cent. But in terms of cost, it will take at least few more years to recover the sum.

For instance if you plan to shift your loan, the current lender will levy a pre-closure penalty of 2 per cent of the outstanding loan, which works to Rs 20,000 in your case.

Besides this the new lender will charge you a processing fee of 0.5 per cent of the loan amount and it works to Rs 5,000.

Apart from that banks collect Rs 5,000 as equitable mortgage registration charge to register the loan.

All together, you may have to shell out Rs 30,000 to switch the loan. For instance if the new lender offers you 10 per cent interest, your monthly outgo for Rs 10 lakh will be Rs 13,216; and if the interest is 11 per cent the outgo will be Rs 13,775.

Your saving a month would be Rs 560 and annual savings will works out to Rs 6,700.

So it will be a few years before you recover the cost. Considering all this, it may be prudent to accept the swap offered by your banker.

I regularly invest in shares and my current portfolio is worth Rs 15 lakh. To invest in market I have taken Rs 5 lakh as loan by pledging my shares.

I had bought midcap stocks and they have corrected 30 per cent.

To avoid further loss is it worth selling my holdings to close the loan account?

— Sridhar

There are two times in a man's life when he should not speculate: When he can't afford it and when he can — Mark Twain.

Let us emphasise that it is always better to invest in risky asset classes such as equity with surplus money and not borrowed money.

If you have bought these shares only for trading, then sell and book the loss.

If you are confident that the stocks in the portfolio have the ability to grow beyond 15 per cent per annum, wait for the stocks to bounce back to book profit to settle your loan.

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