Home, auto and personal loans to cost more...

MUMBAI: Retail customers of home, auto and consumer loans should brace themselves for a rough ride ahead as signals emerging from the bond market point towards an increase in interest rates. And this rise could be sharp and quick.

The indications are derived from the benchmark 10-year yield on government securities (G-secs), which touched 9.27% per annum on Monday, a five-year high and the highest in the post-Lehman era. The 10-year benchmark rate is the highest risk-free rate that one can get in the country, and hence this is the benchmark rate for banks and other lenders for setting their onward lending rates for customers.

The current level is also close to the decade high rate of 9.60%, bond dealers said. The sharp rise is mainly because of the tough liquidity situation in the market triggered by various monetary tightening measures since July 15. At close the 10-year yield was at 9.22%, up 34 basis points (100 basis points = 1 percentage point) from its Friday close at 8.88%. Since May 24, benchmark yield has risen by 2.11 percentage points, and since August 1, by 1.06 percentage points to Monday's close at 9.22% per annum.

According to industry analysts and debt fund managers, the rise in rates would hurt those home customers who have gone for the floating rate plan, new auto and other consumer loan customers, besides all the large and small corporate borrowers. However, the silver lining for customers would be that along with higher borrowing rates, fixed deposit rates would also rise and one can invest during those high rates to earn better returns for several months.

In addition to the benchmark rate, yields on all other long term G-secs are either already above the 9.5% mark or very close to that level. Moreover RBI is not infusing liquidity through hopen market operations (OMOs), which is by buying G-secs from the market, pointed out a dealer with a local bond house.

"Local as well as global factors are contributing to this rise in rates in India," a top debt fund manager said. "On the local front, RBI's recent steps to curb liquidity to stem the weakness of the rupee has not had its intended impact and that is leading bond market players to assign high uncertainty premium to G-sec rates," the fund manager said.

Since July 15, RBI has tightened liquidity in the system, assuming that would force market players to buy less dollars in the forward market and hence would stem the weakness of the Indian currency. However, since July 15, the rupee has depreciated nearly 5.5%, indicating that the measures have failed. "On the global front, the fears of tapering off of by US Fed is also weakening emerging market currencies," the fund manager said.

Axis BankBSE -0.69 % on Monday raised its base rate by 25 bps to 10.25%. Earlier Andhra BankBSE -1.00 % and Karur Vysya BankBSE 0.16 % also raised its base rate by 25 basis points The country's largest private lender ICICI BankBSE 2.12 % hiked its deposit rates by 50 to 75 basis points. Canara BankBSE -0.30 % also hiked fixed deposit rates in some maturities.

Along with the rise in bond yields, the rate of inflation is also going up. On Wednesday, the wholesale price index (WPI) for July showed a jump to 5.79%, the fastest rate seen in the last five months and also higher than the RBI's comfort level of 5.5%. According to Bloomberg data, the last time the market saw 9% yield on a 10-year paper was in late August, 2008. Since then the benchmark rate has remained below the 9% level, and in between falling as low as 5.24% in early January 2009.

Fund managers believe that the government has to instill confidence among investors and that could bring in the much-needed stability in the bond market. Once that stability comes, investors would come back to invest which would lead to soften rates. "Yields are looking very attractive at this point of time. Once people see some stability on the currency front, we may see large follow up buying in bonds, including in G-secs," said Amit Tripathi, head of fixed income, Reliance Mutual Fund.

On Monday, there was spillover impact of the hardening of the rates in the auction for government papers also. In the auction for 28-day cash management bill (CMB) for Rs 11,000 crore, the cut-off yield was fixed at Rs 12.24% per annum. Compared to Monday's auction, the cut-off yield in the auction for 34-day CMB on August 13 was 11.94%.

Loan against FD, Gold loans popular alternatives to personal loans

When you are in the urgent need of cash, the easiest option seems to be taking a personal loan. But with the raging interest rates these days, it's not quite wise to get into the vicious cycle of debt. Banks also tend to look at your entire financial profile before accepting you for eligibility. What if you could have an option apart from personal loan in times of crisis?

Here are some quick fixes as alternatives to personal loans - 

Loan against fixed deposits - This is the quickest possible loan because banks lend against their own fixed deposits. The repayments of this type of loan should be done within the fixed deposit tenure. The biggest advantage is there is minimal documentation required and loans are available over 80% of the fixed deposit value. Also, your fixed deposit continues to earn interest even during the tenure of the loan. However, you must discipline yourself to repay the loan every month like an EMI.

Gold loan - Initially started off as a popular source of finance in rural and semi-urban areas, gold loans have off late become extremely popular in metros as well. This type of loan provides immediate liquidity on the basis of one's jewellery without having to sell it away. Further, there are no processing charges and prepayment fees. The loan amount depends on the purity and weight of the gold that is given. Although this loan does not necessitate previous credit history, banks are going stringent on these after recent RBI regulations. Further, the interest is not cheap and is comparable with personal loans.

Loan against Property - You can borrow against your property and the loan amount is calculated on the basis of value of property and the borrower's capacity to repay. Refinancing the property is an option if the value of loan is to be increased or the property value has risen over a span of time. Failure in prompt repayment can result in loss of ownership, and hence absolute care must be taken, as a property is usually of higher value than any other form of security.

Loan against shares - Banks lend against the shares of specific companies which you hold. However, not all shares you hold qualify for such loans. Each bank has a different list of approved securities which qualify for such loans. The amount depends upon valuation of security and ability to repay and service the loan. Although you can receive money without liquidating your investments, the amount granted as a proportion of the security offered is much lower compared to other forms of loans. With present volatile stock markets, this may not come cheap as well.

Loans against Life Insurance policies - Loans that are granted on the basis of life insurance deals have lower rates of interest and easy options for repayment. Loan amount is dependent on the value of the policy. It can be repaid anytime during the term of the policy. In the event of an unpaid loan amount, interest will be deducted from the claim. This is a quick loan with minimal documentation.

Loan against Public Provident Fund (PPF) - Loans can be taken on the basis of PPF but with tenure only up to 2 years. If the first loan is repaid, the borrower is entitled for another loan if they are within 3 to 6 years of opening an account. The benefit of this loan is that you can borrow without breaking your PPF and also with minimum documents. You can take a look at the above mentioned options see which one might suit you best. If you are in urgent need of cash but for a short period of time, you might want to consider these alternatives. Evaluate your need and financial position before deciding on any kind of loan, as these will have direct implications of your financial plan.

Pointers to stay away from loan defaults...

Becoming a victim of circumstances or willfully being a loan defaulter whether of large sums or for a small amount, is not good for your credit reputation. Often loan defaultsoccur when you take on too many debts simultaneously and then find it difficult to manage!

Moreover, currently the savings is getting squeezed due to ever rising inflation. Incomes are not growing in proportion to the price rise, and interest rates are moving upwards rather than going down. This has resulted in rising NPAs and people are defaulting on their borrowings.

Contingencies can occur in a life cycle of loan and there may be times when you could fail to pay your EMIs. It could be a home loan, educational loan, or a car loan. However, skipping of debt one time and nonpayment of EMI on a regular basis have different connotations all together. Now, before understanding the procedures that can save you from loan defaults, one must understand the term "loan default".

Loan default can occur when a person fails to meet the repayment obligations. The problem occurs when the default period extends and the bank or financial institution (FIs) has to take possession of the belonging. If the default is for one or two payments, penalty is charged on the amount due and then the loan is resumed.

The principles of loan:

It is right that the situations changes dramatically, but always take a loan on the basis of your existing capacity and future outlook. It is important to remember that future is uncertain and there may be a circumstance when the rate of interest may rise but your already stretched position in a borrowing will not allow you to keep pace with the payments. Therefore, it is advised to take the loan on the basis of ease of payment.

Keep Saving:

Savings rate is adversely impacted by the repayment of loan, but try and save on regular basis. Budget your expenses and deposit whatever you save in a separate bank account. Don't withdraw money from that account unless extremely pressing situation occurs. This will help in taking care of the loan default. If you have lump sum of money pre pay your liability and ask the bank to restructure the monthly payments.

Talk to your lender:

Lender sets the term of the loan and can be a bit flexible in your favor if you have defaulted or on the verge of default. However, this is only possible had you been regular in your earlier debt payments.

Keep one advance EMI in Hand:

Keep one more EMI fund with you so that in case of any emergency you will have those funds to repay the amount. For example: If you had taken a home loan whose monthly installment was Rs 20000, try and keep an advance EMI in hand. This will mean you will have to keep Rs 40000 only for the purpose of your loan. Expenses should be curtailed once your account reaches Rs 40000. If that is not possible make a limit as per your convenience like Rs 35000. Even this will help you a lot at the due date.

Avoid Foreclosure Situation:

If the loan sum is small, try and finish it as early as possible. There are no prepayment penalties, but yes defaults are slapped with exorbitant penalties. If it is the property which you purchased for investment purposes, you can sell the same and avoid any foreclosure. Foreclosed property will come in the possession of the bank. Therefore, it is sensible to sell it and get the benefit of price appreciation. Immovable properties at good locations can be easily sold out.

Extend Loan Tenure and Decrease Loan Amount:

It totally depends on the understanding between the borrower and the lender. A person can reschedule his debt, if he finds that the current structure is troubling him. This is also known as debt rescheduling. Under such streamlining, the loan tenure is increased while loan value is decreased. This provides cushion to the person and avoids non-payment.

Switch Loan:

Interest rates play an important part in the payment condition. It is quite possible that the loan taken by you is at higher rate compared to the loan of some other banks. From a minor sum of money you can switch the loan with other bank and can get easing terms. New customers are always attracted to easy offers, so it is better to properly analyze the offer before opting for loan switch.

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