Should you prepay your home loan?

With the fuel price hike, costs are rising. So, many with some cash in hand ponder over prepaying their home loan. It seems like you will be better off if you get rid of this debt. Kavita Sriram analyses

    Most homeowners began their home loan journey with a modest seven percent in the year 2003. Today, the interest rate hovers around 12 percent with most banks. Now, if you have a huge loan, a long tenure ahead and some extra cash, should you prepay? Borrowers must analyse a variety of factors before jumping to a conclusion.
    Here are some factors you must take into account:
Prepayment penalty
    Is there a penalty associated with prepayment? Some lenders are happy getting their money back sooner. Others charge a fixed percentage like two percent or allow you to repay some fixed amount every year without penalty. Evaluate the penalty and see if it is worth prepaying.
Pay off more expensive loans first
    If you have other higher interest commitments like car loan, personal loan or the more critical credit card debt, consider if it is feasible paying them off. This is because home loan rates are supposed to be cheaper than these and additionally provide you with income tax benefits.
Invest for higher returns The more aggressive can explore investment options that yield returns greater than the home loan rate. If your excess money is coming from breaking such an investment, prepayment does not make sense. However, keep in mind that high return investments come with high risks.
Prepay a fraction
    While prepaying a loan entirely may be a prudent decision, prepaying small amounts of the loan can be attractive in the long run. In a home loan, as the years roll by, the interest component decreases and principal component goes up as a proportion of the EMI. Some borrowers prefer not to prepay the loan after more than half the tenure has elapsed. Most borrowers are seen to repay their loans in eight years.
Evaluate job and salary
    Are you close to retirement? If so, prepaying may be an excellent choice.
    Is your job situation jittery? In case the borrower fears that he will lose his job, it is better he repays his loan with the extra cash he has. This ensures that unpaid EMIs dues don't pile up and he doesn't default. There will lesser pressure and some peace if he is without a job.
    It is better for new borrowers to opt for short home loan tenures. The EMIs will be huge, but you can pay off the loan faster.
HOW PREPAYMENT WORKS
    Let us assume a person has purchased two houses for Rs 30 lakhs each, five years ago. He lives in one house and the other house has been rented out by him. Let us consider the income tax implications on prepaying one of the two houses after five years.
    When computing tax savings on the rented property, a rental income of Rs 8,000 per month is assumed. This amount is assumed to increase at a rate of five percent per annum. As much as 30 percent of the rental income can be deducted towards expenses incurred on periodic maintenance and property taxes.
Details of loan
Initial loan amount: Rs 30 lakhs Interest rate: 10 percent fixed Loan tenure: 15 years Years elapsed: 5 Years left: 10 Outstanding principal at the end of 5 years: Rs 24,39,500
If the self-occupied property is prepaid, the net tax savings (combined for both the loans) for the years 6 to 15 is Rs 1,05,097. If rented property is prepaid, net tax savings (combined for both the loans) for years 6 to 15 is Rs 3,26,470 Hence, it is prudent to prepay the loan on the rented property, provided all factors and parameters are similar between the two home loans.

Can't Repay your loan

Can't Repay your loan?? Talk to your lender at the very earliest opportunity. They willl want to consider your individual situation. If they reasonably believe your financial situation may improve, they may be prepared to suspend loan repayments for a while, or extend the term of the loan.

In the final instance, a lender can insist on the debt being repaid. They will want to determine whether you 'can't pay' at this time, or whether you simply 'wont pay'. If your loan is secured on a major asset such as your home, you could be forced to sell it to repay the debt. Even if the loan is not secured on a specific asset, the lender could nevertheless sue you to recover the debt. If you lose, the net result might be the same - you may have to sell your property.

Ashok Kargutkar, a counsellor at Abhay, a debt-counseling centre,  says, "If someone can’t repay because they are genuinely short of funds, we help them to try for a settlement with the banks. Many a time, banks have settled genuine cases."

The operative word is 'genuine' and if you prove that your case is so, then banks may settle. So, how do you prove this?

1. You need to show relevant documents to prove that you are bankrupt, and cannot pay the outstanding amount. Also, submit an affidavit that states you have no assets that you could use to pay back.

Declaring that you have gone bankrupt in the court (after consultation with your lawyer) could also prove to be helpful.

2. Your entire debt will not be foregone even if you file for bankruptcy. You will have to pay a mutually agreed (between you and the bank) amount, which can be less than the initial outstanding amount because.  

“The settlement amount will largely depend on your ability to pay as well as the bank’s policy towards such cases,” says a senior bank official.

3. In some cases the bank may extend your repayment period and break the outstanding amount in equal monthly installments to facilitate repayment.

4. If you have credit card debt where the interest rates are 45% per annum, you could go for a cheaper loan -- a personal loan.  

5. If you bank agrees to a 'settlement', you could further request for an  extension of the duration of repayment.

If the bank won't settle
Despite declaring bankruptcy if recovery agents and banks continue to harass you, you can approach debt-counselling centres, like Abhay (a trust funded by Bank of India) and Disha (supported by ICICI Bank).

These centres have a three-fold focus: financial education, credit counselling and debt management. Kargutkar says, “Most people are in debt because of reckless spending habits. We ask them to discipline their spending and manage assets to pay off debt."

" For those with genuine problems, we first guide them. If banks and financial institutions are unresponsive, we take it up with respective authorities.”

“The best option,” Ashok suggests, “is to stick to your budget, never spend beyond your means and be financially aware.” 

The contact details for these centres.

Abhay 

- In Mumbai

Address:
61 A, Sadanand, 1st floor
Above Bank of India, Gokhale Road North
Dadar
Mumbai -- 400 028

Contact person : Shri V N Kulkarni
Phone: (022) 24221843

- In Chennai

Address
C/o Bank of India
104, Sir Theaogaroya Road
Pondy Bazar, T Nagar
Chennai -- 600017

Contact person: Shri M K Raghunathan

Phone: (044) 28152669

Working hours: 6 pm to 8 pm on every Friday, Saturday and Sunday

Web site link: http://www.bankofindia.com/home/abhay.asp

Disha

- In Mumbai

Prince Apartment
Ground Floor, Karani Lane
Ghatkopar (West)
Mumbai -- 400 076

Phone: (022) 65971815/ 16/ 17

e-mail: info@dishafc.org

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Loan is always not the right answer

we have already discussed preparations for obtaining a business loan, whether from a traditional bank or an alternative lender like The Loan Fund. While paying cash is often the best option for covering the expansion needs of your business, sometimes - like when you are looking to buy new, very expensive equipment or to double the size of your plant - paying cash may not be an option.

Both of these examples include the purchase of hard assets and banks will often lend a large portion - 70 to 80 percent - of the purchase price. But non-collateral needs such as working capital to hire more salespeople, often can't be met by traditional lenders.

The key word is successful. It is extremely hard to get anyone, even your Uncle Louie, to lend you money, let alone invest equity in a business if it is not profitable. If your business has lost money for the last two years, if you are struggling to meet payroll, if you have little or no backlog of orders, or if your product or service is just ordinary, the chances of attracting any kind of capital becomes more difficult. Lenders and equity investors want to do business with someone who has been or will be successful.

The advantages of a loan are that you know how much it will cost each month and how many months of payments there are. At the end, you tear up the note and own the asset. Based on the quality of the asset, the amount of money you want to borrow, and your credit history, the rate should be fairly low. A rate of eight to ten percent may seem expensive, but it is reasonably priced debt based on historical rates.

Even if your business is successful, there are several very good reasons that a lender may say no to a loan.

You may have too much debt or your debt-to-equity ratio is too high. You may not have enough retained earnings in the business.

Your interest and principal may be too high relative to your income, resulting in a low debt-to-service ratio that could affect your ability to make timely payments.

Your proposed collateral may be insufficient to support the loan, or your business may simply be growing too fast.

While all are legitimate reasons for a lender to say no, having more equity might allow the lender to say yes.

This was probably the case with growing companies that have been in the news lately - companies like Eclipse Aviation, Advent Solar and Miox, Inc. All three are growing rapidly and have needed new or expanded facilities and manufacturing equipment. Money has been needed for marketing and employee hiring. All three have raised equity capital, and in the case of Eclipse Aviation, it has been a lot of equity capital.

While these companies probably have sizeable loans outstanding, none of them would have arrived at the point they are without attracting equity capital. The founders of all three probably now own less than 50 percent of their businesses, but the value of their remaining ownership has increased significantly.

Attracting an equity investor is not easy. Getting $250,000 to $750,000 from a professional investor is even more difficult. Managing and growing your business through debt is often the right way to go. However, the New Mexico Small Business Investment Corporation (NMSBIC), through its equity partners, has invested in 29 New Mexico businesses over the last three years. While many of these are technology businesses, our partners have invested in chili producers, specialty bird-food manufacturers, an oil field service company, a home security company and several other more traditional businesses. To date, all but one has been successful. Most, if not all, have increased revenues, developed new products, expanded their marketing, hired new employees, attracted board members, and experienced varying degrees of success. None could have grown as quickly without equity from outside investors.

 

No Tension With Loans

Do you know about Unsecured personal loans?
Unsecured personal loans are the loan plans for all (legally) correct needs
without any residential property security. These loans have easy repayment
pattern and other borrower-friendly natures.
Loans are always the double edged weapons. In one hand they fulfill the
monetary requirements of the borrower. On the other hand in case of delay in
repayment they create several financial tough situations.
UK loan market offers you scores of loan plans. However you should go
through the nature of these loans before applying for them. You should query
about the risk factor associated with the loans and opt for that loan plan
which has least risk factors.
Unsecured personal loans are risk-free in nature. You do not need to place
any collateral in order to avail these loans. With these loans you can avail
an amount ranging from 5,000 and 500,000. Loan amount varies according to
your credit status, repayment ability, monthly income etc. they are short
term loans and should be repaid within 10 years from the date of approval.
People suffering from bad credit due to arrears, defaults, IVA, CCJ,
bankruptcy etc can also apply for these loans. They carry slightly high
interest rate but that is not very high because of the competition
prevailing in the market. To avail personal loans at lower rate of interest,
you have to fulfill certain requirements like, you must have a full time
job, regular source of income, repayment ability etc.

As unsecured personal loans are short termed in nature, they can be easily
repaid. These loan plans very helpful for tenants who don't have any
property to apply for secured loans. Also the homeowners who don't want to
risk their properties can apply for these loans. You can use the loan amount
to meet any of your personal expenses like buying a car, going for holiday,
wedding, paying previous debts and so on.

Always apply for a loan keeping in mind your repayment ability and apply for
an amount that you can repay without any hassle. In case of non-payment of
loan installments lenders may take legal action against you. There are many
financial institutions, banks and lending firms that offer you unsecured
personal loans. Compare the features of loans at different lenders before
applying for any loan. You can use Internet to search for lenders offer
personal loans without any residential property at competitive interest
rate. You can also apply for these loans online. For this you just need to
fill up an online application form and after it the lenders will get back to
you with their offers.