In this edition of “Money Guru”, Zee Business delves into the conundrum around loans and their intricacies. News anchor Swati Raina talks with Col. (Retired) Sanjeev Govila, Managing Director of Hum Fauji Initiatives and Viral Bhatt, Founder of Money Mantra to understand which loans could be considered good and which are bad.
What should be kept in mind when considering taking out a loan?
What are the disadvantages of not repaying the loan on time?
What is the difference between a good and a bad loan?
Is your loan good or bad?
What is a good loan?
A loan is good if it increases your net worth.
It is able to create net worth over time
He should be able to create an additional asset
The return should exceed the interest on it
What are good loans?
– Study loan
– Commercial loan
– Real estate loan
Which loans are considered bad debts?
Loans where one has to pay more than is paid as interest
When the lender and the customer face a loss
Failure to pay on time could lead to difficulty in taking out loans in the future
Bad debt interest rates are significantly high
– Automatic loan
– Loan on credit card
– Consumable loan
Understand this before taking a loan
– How much loan can be taken?
– What is the importance of taking out a loan?
– Save first, then buy
– All debts must be paid one day
– How much is the good loan?
Always keep the income to debt ratio in mind when taking out a loan
Loan debt to income ratio should not exceed 40%
Priority is given to people with a low income to debt ratio
Debt to income ratio should ideally be below 30%
Benefits of a good credit rating
Possibilities of loans with lower interest rates
People with good credit scores are likely to get a higher loan amount
Banks clear loans quickly
They also enjoy the benefits of a low repayment period
What’s your score?
Very low – less than 600
Low – 600-649
Ok – 650-699
Good – 700-749
Very good – 750-900
How is credit score messed up?
Not paying EMIs on time
The score has a negative impact on the EMI defect
Take much needed credit card loans
Higher income to debt ratio
Increase credit card limit from time to time
How to improve credit score?
The credit is calculated by CIBIL
Improving credit rating is in the hands of the consumer
Focus on reducing payment fees on credit cards
Pay IMEs on time
Avoid taking too many unsecured loans
Don’t over-apply for loans
Impact of unreasonable expenses
This could lead to high interest rates and one could end up in a debt trap
This has a negative impact on CIBILscore
One could be liable to legal action in case of misuse and defects
This could lead to stress and have a psychological, emotional and physical impact
This could lead to long-term losses
How to use a credit card appropriately?
Only use the credit card when necessary
Never use a credit card for regular consumption needs
Pay bills on time
Check the statements from time to time
Know the terms and conditions before you start using
Do not share password or PIN with others
Make a budget before using and stick to it
Don’t stick to many credit cards
What is the loan amount?
Do not borrow more than necessary
2-3 loans are acceptable
EMI should not be more than 35% of income
Which loan to pay first?
Pay off the loan with the highest interest rate first
Personal loan, credit card loans are granted at high interest rates
Pay the credit card loan first
Interest rate on credit card loans could reach 40%
On a personal loan, the interest rate can be 20%
Interest rate and penalty on secured loan