Revolving credit can land you in soup

I am aged 30. I have three credit cards and exhausted credit limits in all the cards. I am finding it difficult to repay even the revolving credit. I have no savings except the life insurance policy. How do I get out of this mess?

Sunil

As you have not disclosed your outstanding or the current value of your insurance it would be difficult to offer a solution. However, you can either consider pledging your insurance policy or taking a personal loan to settle your card outstanding.

Personal loans — with 14-18 per cent interest rates currently — will be relatively less expensive. The rates would be based on the individual's earning capacity and nature of employment. Credit cards, on the other hand, charge you an interest of 2.5-3.15 per cent per month (37.8 per cent annualised) and it's based on the type of the card. It would be prudent to stay clear of revolving credit facility offered by banks.

I need Rs 3 lakh for my domestic needs. Is it better to withdraw from my provident fund (EPF) or take a personal loan?

Krishnan

Interest rates have been creeping up for quite some time now on account of unabated inflation and the resultant monetary measures by the RBI. This in turn has pushed lending rates higher. Currently banks are offering personal loans at an interest rate of 14-18 per cent. In contrast you earn only 8.5 per cent on your EPF outstanding.

With a substantial spread between the personal loan and EPF rates, it may be prudent to withdraw from EPF now. However, keep in mind that there are hardly any debt instruments that currently offer safe and tax-efficient return like an EPF. Therefore, ensure that you refill the EPF coffer regularly. Here's how.

If you take a loan of Rs 3 lakh at 14 per cent interest, your monthly outgo for servicing the loan would be Rs 8,200.We recommend that you save Rs 6,250 a month for the next 48 months to bring back the Rs 3 lakh to your EPF kitty.

Besides relatively lower outgo a month, the voluntarily contribution in EPF is eligible for tax benefit under section 80C and this will reduce your tax outgo and enhance your monthly surplus. For instance, if you are at 20 per cent tax slab, your net final outgo towards EPF would be Rs 5,000 after the tax benefit (Rs 1,250).

I have taken a mortgage loan for Rs 6 lakh after pledging my house property. My interest outgo is 13.25 per cent. Currently I have Rs 4 lakh. Is it advisable to make a part repayment?

Jayaraman

With higher interest rates and the EMI on this loan not being eligible for tax deduction, it is better to pre-close the loan.

If the loan is closed from personal savings, banks and housing finance companies will not charge you pre-closure penalty. However, do check the pre-payment clause with your lender. Pre-payment clause often kicks in when the repaid amount exceeds a certain sum. In that case, close your loan in tranches in such a way that they do not attract any penalty, especially when preclosure rates are higher than 2 per cent.

I am a businessman. I have taken three personal loans totalling Rs 15 lakh for my business at an exorbitant rate. I took a home loan for Rs 35 lakh five years ago and my current outstanding is Rs 28 lakh. I am finding it very difficult to service my personal loans. Can you offer some solution?

Raghavender

The best option available to you is to go for a top-up loan against the mortgage of the property. The maximum loan amount under this product is 60 per cent of the market value of the property less the outstanding. However, this loan is subject to your current eligibility status.

If you disclose your intention to repay the personal loan you may be eligible for the top-up loan. Besides, that property values have gone up in the past five years may also help while calculating your eligibility.

Based on your repaying capacity you can fix your loan tenure. The maximum duration allowed under a top-up plan is 10 years. Currently top-up loans are offered at 11 per cent and would be at a good discount to your personal loan. With the lower interest rate and longer tenure of the loan your monthly commitment is likely to come down. This will not only eliminate the possibility of your falling into the defaulters' list but also help your credit history in case of future loans.



This column will appear every fortnight. Queries can be sent to >Financialplanning@thehindu.co.in, or to The Hindu Business Line, 859, Anna Salai, Chennai — 600 002.

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