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- Your personal loan rates could rise owing to Coronavirus outbreak - Does it call for prepayment?
- Read here the strategy you need to adopt to deal with the situation
In the latest monetary policy meet held on March 24-27 2020, the RBI has decided to give a 3-month moratorium period for all outstanding loans as on March 1, 2020. Remember, this is not an EMI WAIVER. The move is in line with the economic pressures induced by the Coronavirus outbreak. So, this could mean some savings for you on your loan and help you deal with the likely situation of less or no income. Your credit score will not reduce if you don't pay the EMI. But doing so can raise your interest liability as banks would like to cover their losses, which is likely to be the case on deferred EMI payments, by increasing the interest component of the EMI after the moratorium period gets over. So, if you have the money, keep paying to reduce your interest liability. The moratorium, which was ending on May 31, 2020, has been extended till August 31, 2020.
The Covid-19 Coronavirus, which emanated from China, has now gone on to affect more than 100 nations including India. As far as the official reports are concerned, the list of sick and deaths is only going up with days.
All that and more has made the Central government and state governments to impose a lock down of offices, factories and even the transport services across the country. While all these are done to curtail the stay of virus in India, they will slow down the businesses considerably.
The slowdown will result in the fall in income of not only the owners but even their employees. Salaries will come but not the incentives and bonuses that many earn. The weak sentiment might percolate into reduced annual increments of employees. Seeing the likely fall in the income, banks may increase the interest rate on personal loans to recover maximum from customers.
So, if you’ve taken a personal loan, the increased rate will take out much from your income. If the lock down continues for long, it can only worsen the situation for you. So what should you do now? Check out the plan of action here.
Action Plan at a Glance
Go for Prepayment – As hinted above that the rates are likely to increase and make personal loans costlier than before, you could, therefore, think of prepaying the loan with your savings. You have an option either to go for a full prepayment or a part prepayment. The decision to choose from the two will depend on your savings, the remaining outstanding balance, the charges applicable to prepayment, and the income situation you’re likely to face. If the outstanding balance is above 50% of your saving reserves, you should avoid going for a full prepayment. You can thus opt for a part payment, maybe wipe out 50% of the outstanding balance and accumulate the reserves further. This will decrease the loan EMI and interest outgo substantially over time. Let’s gauge the savings on prepayment by considering an example below.
Example – You are currently servicing a 5-year personal loan of 7 lakh at an interest rate of 15% per annum. Given the loan details in place, you must be paying an EMI worth INR 16,653. The total interest liability will be INR 2,99,177, of which you have paid INR 2,42,961 so far. The outstanding balance as of now stands at INR 3,43,454. If you prepay 50% of the outstanding balance, your debt will reduce to INR 1,71,727. The EMI will fall to INR 8,326 and will lead to an interest payment of INR 28,108 over the remaining 2 years. If we add the interest you’ve paid so far to the interest payable over the next 2 years, the resultant interest amounts to INR 2,71,069, saving you interest payment of INR 28,108. The prepayment charges, if levied at say 3% plus applicable GST, will amount to INR 6,079.14. Even if you cut down INR 6,079.14 from INR 28,108, you will still be saving INR 22,028.86.
Don’t Want to Prepay? Opt for Monthly Income Plans – You can even think of increasing your income by investing in monthly income plans offered by banks, post offices and even mutual funds.The monthly interest will keep getting credited to your account, with the principal amount likely to be received at maturity.The monthly income plans of banks come with rates at par with that of its fixed deposits. As the fixed deposit rates are falling apart with rates coming down to 4%-6% on average, having a bulk in them won’t generate enough for you. So, you should also look to invest quite a few in the post office as well as monthly income plans of mutual funds.
Post office monthly income accounts come with an annual yield of 7.6% per annum. The monthly income plans of mutual funds will invest around 80%-90% in debt instruments and the rest in equity. While the debt investments will ensure regular income, the equity proportion will let the capital grow faster. You can thus use the income generated from these instruments to have enough in the kitty to pay your loan dues on time and deal with the uncertain times that lie ahead.
The above two methods are relevant to those who have some tall savings with them. The next two methods are for those having no savings with them.
Go for Balance Transfer if You’re Servicing the Existing Loan at a Higher Rate – If you are servicing your personal loan dues at a much higher interest rate and don’t have the tall savings to prepay the loan, you can think of transferring the loan balance to another lender at a lower rate of interest. The new lender will go through your loan track and put forth an attractive balance transfer deal if it finds your credit record good.This will decrease the EMI while giving you more time to repay. Particularly, when you don’t have savings to close your personal loan, a balance transfer at a lower rate could be the option to avail of.
Say No to Excessive Credit Card Purchases – With the income situation having become uncertain because of the lock down, buying excessively on credit cards will only mount the debt for you if you fail to pay total dues on time. The revolving credit card dues could pile on the debt at a mounting rate of 30%-40% per annum. Instead, be patient and show discretion in your cash purchases.
Miscellaneous Methods That You Should Think of Contemplating for the Short Term
Don’t Fall Prey to Panic Buying – Even as the lock down is there, the government has clearly told that necessary stuff including medicines and food items will be made available to all. So you must not buy stuff for 2-3 months in advance and end up drying your bank balance. This will only worsen your situation by the time the repayment date comes.
Make the Most of Travel Savings – The lock down has a blessing in disguise by saving on your travel. The savings might tempt you to spend on other stuff. Avoid doing so and save as much as you can to sail through the difficult times.
Say No to Dining Outside – Even as the lock down is there, you could still find a few dining outlets open. This is the time you should all be staying at your home not only for safety but also for ensuring maximum savings.
Put Curbs on Your Entertainment – Staying indoors will give you the time to think of entertainment. Don’t go for expensive entertainment plans thinking that the lack of travel will create space for expenditure on entertainment.
List Your Products Online – As someone involved in businesses other than Kirana shops, you might be facing a massive pile up of inventories due to the decreasing sales of your goods. You can thus look to go online, partner with the e-commerce websites and list your products on them. This will help you dispose off your products and earn something out of that, ensuring you get enough to repay the loan EMI on time.