Teaser rates: Avoid the trap
Banks try to attract new customers by offering them loans at teaser rates that are lower than those paid by their existing customers. Before you fall for the gimmick, keep in mind that the teaser rate is for a limited period. After a year, the loan reverts to the prevailing rate of interest. This also means that borrowers might be lured into taking loans they can't afford. As the RBI states: "There are concerns about the borrowers' ability to service such loans if interest rates were to rise sharply." If the rates rise after you take the loan, you could be faced with an extended loan tenure or a fatter EMI. Either way, it will strain your finances.
Collateral: Don't give more to take more
Non-performing assets, or bad debts, are a banker's worst nightmare and the situation became particularly grim after the 2008 crash. This is why banks are now insisting on collaterals when they give a loan. A bank may also ask you to open an account or make a fixed deposit. Some offer loans or a line of credit against mutual fund units, shares, government securities, gold, real estate, even your car. If the amount you plan to borrow is not big, it may not be worthwhile to go through all the paperwork required to take the loan. It would make more sense to break a fixed deposit at a marginal cost and use the proceeds for your needs rather than borrow against it.
Credit cards: No longer free for life
The piece of plastic in your wallet can get you an interestfree loan every month. If you pay your entire credit card bill by the due date, you get up to 45 days of free credit. However, it would be considered truly free if you weren't paying the annual fee. Now, credit cards issuers are cutting down on lifetime free card offers. ICICI Bank, the country's largest private sector bank, recently withdrew its lifetime free card scheme, which was introduced in August 2005. This forced other banks to follow suit. After the economic slowdown, banks have begun to shrink their credit card portfolios. So, if you plan to go for another credit card, keep in mind the membership fee that you will be required to shell out every year. Some credit card issuers, such as Axis Bank, have been targeting only the existing customers.
Tax: The DTC disadvantage
While most people buy houses to live in them or as investments, there are others who are guided primarily by tax benefits. There are instances where people have taken home loans just to save tax. The first thing to be kept in mind is that the tax benefits on the interest payable on a home loan are only meant to reduce the borrower's burden. For every Rs 100 you pay in interest on a home loan, the Income Tax Department gives you a deduction of Rs 10-30, depending on your income slab. The point is that you still spend Rs 70-90.
Another compelling reason for you not to take a home loan to avail of tax benefits is that the Direct Taxes Code, which is scheduled to come into effect from 1 April 2011, proposes to do away with all deductions, including those offered to home loans under Section 24B. So, you might just end up with a long-term liability without the tax benefits.
IPOs: Never borrow to invest
The Application Supported by Blocked Amount (ASBA) facility, introduced by market regulator Sebi, couldn't have been more timely. Several IPOs are in the pipeline and ASBA will allow small investors to participate without having to block large sums of money. Under ASBA, when you apply for an IPO, the money stays in your bank account, but is blocked. It is debited only if you are allotted shares. If no shares are allotted, it's unblocked immediately. However, most brokers cannot provide the ASBA facility. Instead, they offer to part-finance your IPO application at interest rates ranging from 15-18 per cent. The stocks in your portfolio are used as collateral. Now comes the tricky part. In case you default in repayment, the broker can liquidate your shares to realise his debt. This is a recipe for disaster, as many investors discovered in 2008. When the markets crashed, brokers offloaded shares kept as collateral at rock bottom prices. Moral of the story: don't invest borrowed funds in IPOs.
Loans: Update records
Many borrowers would like to repay their loans as soon as possible. Since all loans are linked to your credit history, you should be careful while settling a loan with your bank. Banks are required to update their borrowers' records with the Credit Information Bureau of India (Cibil) regularly, and once you have cleared your loan, your record in Cibil should indicate this. However, some banks, in case of compromise settlements, say, on credit cards, report it as 'written off' while updating the records with the bureau. This may not affect you immediately, but when you approach another bank for a loan, your application might be rejected due to the unfavourable credit history. To avoid this, make sure that you always obtain a no-dues certificate from the lender, which clearly states that you don't owe them any money and the account has been satisfactorily closed. Cibil looks at a range of transactions, including utility bill payments, credit card bills and other loans, to assess the credit history.
