Payment of credit card debts through a debt

A question often asked by borrowers is,” Should I avail personal loan or balance transfer to disentangle from credit card debt?” Short-term debt like credit card can be a convenient source of quick funding but can eventually make a deep hole in your pocket. Remember, the interest rates on credit cards are much higher than that on other loans. But weigh all your options and their consequences before you avail a personal loan or low-interest balance transfer as you run the risk of being debt trapped.

Balance transfer versus personal loans

How can one break out of this viscous circle? Either you should ask your bank or credit card issuer to lower the rate or find out whether you can afford to pay off the debt without opening any new credit accounts. Do a little homework to figure out the right option to protect your credit score and save money.

Although both are possible consolidation options for your credit card debt.

Balance transfers are performed by switching one credit balance over to another credit card, usually for a low promotional rate over a limited time period. On the contrary, personal loans are provided by banks and credit unions and can come in secured or unsecured forms. These loans typically have lower interest rates than credit cards, especially if you secure the loan by pledging an asset, such as your car as collateral.

Selecting which option depends on various aspects. For example, how your debt is currently distributed might limit your options. Even though many credit card issuers allow you to transfer over balances from multiple cards into your new card, not all do. On the other hand, a personal loan is probably the cheaper option.

You might be not found it suitable to pledge collateral against a possible secured personal loan. If you default on your credit card debt, it’s unlikely that the card issuer will sue you and comes after your assets. That changes when you open a secured personal loan; the company does take the asset to recoup its loan if you default.

Whether a personal loan or a balance transfer, both categories are likely to negatively impact your credit score, even if you never miss any payments.
Visit: www.cibilconsultants.com
Source Secondary

Loan Against Insurance Policy

Loan against Insurance Policy is not so very common in India. One of the major reason is that the most of the policyholders are not aware of this option. Secondly, the penetration of insurance is very low in India. In fact, if we remove Income Tax benefits attached to the Insurance Policy then penetration will be negligible. Insurance Premium is either considered as a waste of money or is paid for investment purpose. Both, India psychic and Insurance industry are responsible for this sorry state of Insurance products. 

What is Loan against Insurance Policy?

You can avail Loan only against Life Insurance Policy. Only exceptions are Term Insurance Plan & ULIP. Pre-condition is that Life Insurance Policy should have completed 3 years. In short, traditional insurance policies like Endowment Plan, Money back policy etc are eligible for Loan against Insurance Policy provided policyholder is paying the premium for 3 years. IRDA banned loan against ULIP in 2012. Some insurance companies do provide loan against ULIP but it depend on the fund you have selected & NAV of the ULIP. For ULIP, the loan amount is 40%-50% of Fund Value. As a thumb rule, for any life insurance policy which has the surrender value, you can take Loan against Insurance Policy. Surrender Value is basically the amount which the policyholder will get if he/she decides to close the insurance policy before maturity. The surrender value of policy keeps increasing with the policy term depending on your insurance product as you accumulate bonus over a period of time. Normally surrender value of the policy is 30% of the Policy Value. Loan against Insurance Policy is one of the best way to raise funds during emergency situation. You can avail loan from your insurance provider or pledge the policy to banks. 

Loan Amount: Its a complex calculation which depend on Surrender Value of the Policy, No of Premiums Paid & No of years Completed / Remaining. There is no scientific calculation to arrive at Loan Amount. As a thumb rule, you can assume that 80%-90% of the surrender value can be availed as Loan Against Insurance Policy. For example, if your insurance coverage is Rs 10,00,000. The surrender value will be Rs 3,00,000 therefore you can avail a loan of between 2.4 Lakh to 2.7 Lakh. If you have accumulated an additional bonus of Rs 1 lakh then Loan eligibility will be approx 3.2 Lakh to 3.6 Lakh. Another method which is used by LIC to calculate loan amount is approx 50% of the premium paid. Assuming, for a policy of Rs 10 Lakh, you have paid a premium of Rs 8 lakh at the time of availing Loan Against Insurance Policy. You can get a max loan of Rs 4 Lakh. Normally, Insurance provider will not share how they have calculated loan amount but it is the FINAL WORD.

Rate of Interest: The interest rate charged by the insurance company is variable and depend on the existing interest rates. Currently, it is around 10% – 12%. Interest is payable every 3 months, 6 Months or yearly basis. In some cases, there is minimum commitment period of say 6 months. The borrower has to pay interest for min commitment period even if the loan is cleared before 6 months. Please note that Interest Rate is variable and is revised annually. 

Documents Required: You need following documents to avail Loan against Insurance Policy

(a) Original Insurance Policy

(b) Deed of Assignment: Under Deed of Assignment, the benefits of life insurance policy against which the loan is taken will be assigned to the bank or insurance company. The policy will act as collateral or security till the loan is repaid. The assignment can only be executed by the policyholder and it has to be endorsed on the policy document. In short, you transfer the title of the policy till the loan is repaid. Future premiums are paid by the policyholder only.

(c) Payment Receipt for the Loan Amount: Normally, the Loan is disbursed through NEFT therefore advance receipt is required

(d) Cancelled Cheque

Repayment Options: Repayment options also vary. For example, in case of insurance provider like LIC you need not pay the Principal amount provided you are paying the interest on time. Now you must be wondering how will insurance company recover the principal amount. At the time of maturity or claim, principal outstanding will be deducted from the policy value. Balance amount will be paid to the beneficiary or policyholder. If the policy is pledged to a bank then you need to pay the principal amount as per amortization schedule. Normally, the repayment period is 6 months.

Loan Processing Fees: A nominal fees of Rs 250 is charged.

Time Taken to Process Loan: Banks and Insurance provider claim that the loan will be processed in 2 days time, but it may take up to 7 days time.

Default on Repayment of Loan / Future Premiums: In case of default in repayment or payment of future premiums, the insurance policy will lapse. The insurance company also reserves the right to recover the principal / interest due from the surrender value of the policy. The threshold is surrender value of the property i.e. if principal + interest outstanding equals to surrender value then your policy will be terminated.

Loan Closure: Upon the repayment of Loan, Insurance Provider or Bank will reassign the policy to the policyholder by an endorsement in the policy.

Insurance Provider or a Bank?: Some people are in a dilemma whether to avail Loan against Insurance Policy from a bank or Insurance Provider. It is suggested to avail Loan against Insurance Policy only from the insurance provider. The reasons are:

(a) You need not repay Principal which will be adjusted from Maturity / Claim amount. Though it is not advisable but still, it can be an option in case of emergency.

(b) Banks charge higher interest rate

(c) The loan from a bank is basically overdraft facility against the pledging of an insurance policy. Any overdraft facility is reported to CIBIL. If you default on Loan against Insurance Policy from the bank then it will impact your CIBIL score negatively.

Benefits of Loan against Insurance Policy

(a) CIBIL Score:  People with low CIBIL Score can also avail the loan.

(b) Alternative to Personal / Consumer / Short Term loan: Loan against Insurance Policy is best alternative to low-value loans like Personal Loans etc. Reason being, interest rates are lower compared to unsecured loans. The interest rate on a personal loan is average 14%, but the interest rate on Loan against Insurance Policy is 11%.  

(c) Chances of Application Rejection: There is no fear of application rejection except on technical grounds like signature mismatch etc. Whereas in unsecured loans income details, credit worthiness etc are checked therefore chances of rejection of an application are high.

Summary: Insurance policy provides financial security to dependents in case of any unfortunate event. Loan against Insurance Policy should be the last option for a policyholder. It should be availed only for emergency situations. Even if the loan is availed, it should be repaid within 6 months – 1 year so that benefits of the policy can be restored.
Visit: www.cibilconsultants.com
Source-secondary

Is Your Home a Collateral for Other Loans?

Collateral means to pledge an asset as a security against repayment of a loan. A collateral can be forfeited if there is a default on the loan. When you take Home Loan, you pledge your Home as a collateral for repayment of a Home Loan. But what if bank say that besides Home Loan, you have to give your Home as a collateral for any other loan or borrowing from the bank. On top of it, you also provide the commitment that this clause will cover all the past, present or any future borrowings from the Bank. Sounds Scary !!! But it is TRUE. Knowingly or Unknowingly, whenever you avail Home Loan, under Home Loan Agreement you also agree to clause “Indebtedness of the Borrower“. This is also known as Cross Collateralisation. By agreeing to this cause, you give your Home as a collateral for other loans or borrowings from the bank. Not all Home Loan Providers include this clause, but experts observed this clause in Home Loan Agreement of most of the Banks.

Ref to the sample copy of Home Loan Agreement of an Indian bank available online. Refer Article 1, clause 1.1, sub-clause “m” on page no 4. The definition is as follows

“Indebtedness of the Borrower” means any indebtedness of the Borrower to the Bank at any time for and in respect of monies borrowed, contracted or raised (whether or not for cash consideration) or liabilities contracted by whatever means (including under guarantees, indemnities, acceptance, bond, credits, deposits, hire purchase and leasing by the Borrower or by a person or entity related to or connected with the Borrower); and shall also be deemed to include any indebtedness of any associate or affiliate of the Borrower or any entity related to or connected with the Borrower, towards the Bank or any associates or affiliates of the Bank.”

To understand, let’s take an example of one lady. Her husband expired 4 years ago which put the entire family into financial problem. She was serving Home Loan from her salary. For her daughter’s education, she took the personal loan from the bank. Her Home Loan provider “Bank” happily approved the personal loan without any hassles. As her Mother in law is Class I legal heir of her husband’s wealth therefore under family settlement it was decided to sell the house. The proceeds will be divided equally between her and her Mother in Law. Recently, she closed the Home Loan but to her surprise Bank refused to issue NOC against Home Loan. Without NOC, she cannot sell the property. Bank put a condition to clear Personal Loan before they issue NOC for Home Loan. In short, Bank revoked Indebtedness of the Borrower clause in the Home Loan Agreement. In laymen terms, besides home loan her home is also a collateral for Personal Loan without her knowledge. Legally, the Home Loan Agreement is signed by her therefore she cannot claim ignorance.

Implications of Home as Collateral for Other Loans:

1. Indebtedness of the Borrower usually covers all loans/borrowing of a borrower i.e. Past, Present & Future from the bank.

2. Your Home will be collateral till you clear all the balance outstanding against all the loans with the banks.

3. The bank may include the clause to cover its associates, affiliates or subsidiaries under this clause. What it implies is that suppose you availed Home Loan from Bank A. Now, you availed Consumer Loan from ABC Finance Limited. ABC Finance Limited is a subsidiary of Bank A. In this case, your Home will also act as a collateral for your Consumer Loan.

4. Though you are securing your unsecured loans like Personal Loan, Consumer Loan etc by giving your Home as a Collateral. Unfortunately, you are paying higher interest rate for unsecured Loans. Normally loans which are backed by collateral are secured loans and charged at lower Interest Rate.

5. Bank reserve right to set off any amount against other borrowings without any intimation and consent of the borrower. For example, person defaulted on the credit card in past. It was reflecting in his CIBIL score also. Both credit card and Home Loan was availed from the same bank. Now the bank was smart enough and adjusted few Home Loan Installments against the credit card default. Normally, the borrower doesn’t check Home Loan statement but while going through some other details. As the balance outstanding against credit card was cleared willingly or unwillingly him. When we requested to update the same in CIBIL. Bank replied that since the account is closed therefore Bank cannot update the same in CIBIL. On raising the dispute, Bank referred the relevant clause in Home Loan Agreement.

6. Bank also reserves the right to encash PDC’s (Post Dated Cheques) deposited for availing Home Loan for other loans with the bank.

In short, by availing Home Loan from the bank you are giving your Home as security or collateral for all the Borrowings/Cross Default. All the amounts due to the bank or its affiliates/associates/Subsidiary will be due under Home Loan Agreement. It will be backed by Home as a collateral.

How to Safeguard your Financial Interests?

Though Home Loan agreement is standard format and bank will not exclude clause related to Indebtedness of the Borrower for one borrower. It is important to follow these points to safeguard your financial interests.

1. Read the Home Loan Agreement Carefully: You should read the document before signing. If you don’t understand certain clauses then it is always advisable to take professional help. In case, you have any apprehensions about the clause related to Indebtedness of the Borrower i.e. giving your Home as collateral for other loans then check other options. Before you apply for Home Loan, you should ask for a sample copy of Home Loan Agreement. If you will back out at later stage then it may impact your CIBIL Score.

2. Selection of Home Loan Provider: You should select your Home Loan provider carefully. Even if you have agreed to the inclusion of Indebtedness of the Borrower clause then you should ensure that you don’t have any existing financial relationship with the bank. In future also you should not avail any financial products especially loans, credit card, overdraft etc from the same bank.

3. Check your Statements Regularly: Many people have a habit of not going through the monthly/quarterly statements, but it is important to check them as and when you will receive. For any suspicious transaction, you should immediately bring to the notice of the bank.
Visit: www.cibilconsultants.com
Source: Secondary

Low Value Loan and CIBIL Score

Loan in any form is not good for financial health of an individual specially low value loan. Don’t believe in Good Loan or Bad Loan, it should be avoided (If possible). Rather believe in credit discipline and good credit practices to improve CIBIL score. For an asset like property, an individual cannot be save such a huge amount to buy property without home loan. Barring few exceptions i.e. high value assets, we can manage our finances to avoid low value loan/ borrowing. A Loan should be availed if following 2 conditions are fulfilled:

(a) Purchase / Buy should be an Asset: An Asset is basically a belonging which should be appreciating in nature and adds value to the wealth of an individual. By this definition, Property is an asset whereas loans like vehicle loan, personal loan for foreign holidays, consumer loan for white goods etc are not assets. Any kind of consumer or personal loan for non assets is not advisable. Lets take example of a car, If one bought a car of 5 lakh through Car Loan then it doesn’t make sense. Considering Interest rate of 14%, cost of car along with interest will be approx 6 lakh plus. As car is a depreciating asset and there is a famous saying in North India that value of car is half as soon as it comes out of showroom. Therefore it doesn’t make sense to avail vehicle loan for depreciating asset like Car, Bike etc.

(b) Value of Purchase: Any low value loan shows credit hungry behavior of a buyer which is true for vehicle / consumer / personal loan.  Though mortgage of car / bike is secured loan but point is to make is low value loan. Low value loan impacts CIBIL score negatively. You should avail loan only for high value purchase like Property. Though people avail personal loan for foreign holidays which is also High value purchase but its not an asset there, same is not suggested.

Low value loan has no correlation with the income level of an individual. As example, man who earns Rs 2 lakh per month but his savings are actually NIL whereas someone with a salary of 1 lakh can save Rs 30,000 per month easily.  Its a wrong notion that with high income, if you avail low value loan then it will not impact your CIBIL Score. Infact its other way round, if one's income reported in CIBIL database is Rs 1,50,000 per month and he avail low value loan of Rs 50,000. At micro level, Its show how pathetic he is in managing his finances and poor state of my savings level.

On the other hand, an individual with salary of Rs 30,000 per month availing low value loan of Rs 50,000 can be justified but it has its own problem. The repayment capacity of person with low income is low therefore probability of default is very high. Low income group lives under hand to mouth situation. Any unexpected expenditure disturbs the monthly budget and Axe falls on EMI of low value loan. In short, its a double edged sword. Any wrong move may permanently close the doors of availing future credit from financial institutions.

As we observed that in both the cases i.e. high income and low income, low value loan impacts CIBIL score negatively. In few cases, it is observed that people opt for low value loan just to avail some scheme at the time of purchase. In one of the case,  Ms. X bought washing machine through consumer loan. She is well off but retailer was offering free mixer grinder if purchase was through consumer loan. We should avoid such temptations and strictly follow financial & credit discipline. Any such adventure can impact our CIBIL score.

How to Avoid Low Value Loan?

This post is not conveying that we should not buy vehicle, white goods like washing machine or should not plan foreign holiday etc. We should plan all such purchases but there is a small change in the plan. Mode of payment should shift from Postpaid to Prepaid.  In short, instead of availing low value loan for such purchases, we should save for these low value purchases in advance so that it will not impact our CIBIL negatively. Recurring Deposit is one such blessing in disguise which can help us in short term savings to plan low value purchase. Only catch is that we have to plan in advance. Suppose, one person is planning to buy a new refrigerator or Bike during this year at the time of Diwali. Instead of availing low value loan at that time,he can plan now as he have some time to save. He checked and found that on-road price of a bike is Rs 38000 therefore he set a target of Rs 42,000 in 9 months to adjust any price change. He will open recurring deposit of Rs 4,500 per month for next 9 months at 8.25% interest rate. On maturity, He will receive Rs 41, 908 thus will avoid low value loan at the time of purchase. This approach will have triple advantage:

(i) It will not impact his CIBIL Score

(ii) He will not bear the interest cost which is another savings for him i.e. icing on the cake.

(iii) Last but not the least, he avoided low value loan through intelligent savings

You can check return from Recurring Deposit through Recurring Deposit Calculator.

To summarize, borrowers should avoid low value loan as it may impact CIBIL score negatively. It shows credit hungry behaviour and financial un-stability. Loan should be availed only for big ticket purchase which classify as an asset and add long term value to the financial portfolio of the borrower.
Visit- www.cibilconsultants.com

Source-secondary

Biggest Misconceptions About Credit Score Debunked

Bangalore: Nowadays to apply for a loan or credits it has become mandatory that you should have a high credit score. According to rating on your credit scores the insurance companies, cable companies and even utility providers will decide on the rates or deposit amounts that will be charged on you. But often it is seen that like many other important things in life, even the credit scores are often misunderstood. There are many myths about the credit card scores that are going around about what hurts or improves.

Let’s have a look at seven popular myths about credit scores and credit reports:

I cannot check my credit card report as it will hurt my credit card score : 

There is no harm in checking your personal credit report. Usually while you review your own credit report that is called as a “soft pull,” or “soft inquiry,” that will be seen on a personal credit report and in addition to that this will have no impact on your scores.  It is advisable that everyone should at least annually check their credit report.

When lenders or others check your credit card score then it is called as a “hard enquiry” and this can affect your credit card scores.  Sometimes hard inquiries are shown to other lenders in order to represent new debt that might not be shown on a credit report as an account. Thus hard inquiries can really affect your credit scores but soft enquires don’t.

Employers should not check a job applicant’s credit : 

This myth is wrong it is actually legal for an employer to pull and review a credit report of a job applicant before hiring him or an employee. But yes the employer should seek job applicants or employees permission for this reviewing. In some of the fields like finance, government and banking agencies have to often review credit reports before hiring any person as they might have access to large amount of money or any confidential information. But it is advisable for employers to just check the financial habits or failings of a job applicant instead of checking their credit report.

By paying cash instead of using credit card might increase my credit score : 

Using cash every time instead of credit cards will not help you increase your credit scores, instead using credit accounts is the best way to help you establish and build credit. As both cash and debit cards are just like an electronic check these are not the better options. In order to get qualified for the best rates in order to for instance apply for a home loan or a student loan you need to prove that you can manage your credit responsibly. Second way to build your credit score is to make sure that you make loan and rent payments on time and in addition to that when you have high scores you will be offered with best and new services.

My academic background can affect my credit scores : 

Your Academic background or education level is never part of a credit report, so it will not affect your credit scores. Only debt related information is included in credit reports. Therefore, information about loans, credit cards and payment history, as well as bankruptcy, tax liens and civil judgments will be reported.

Other information like income, investments or assets such as stocks or bonds will also not be included in a credit report. In addition to that there is no information about savings accounts, checking accounts, certificates of deposit or other non-debt banking relationships etc. Additionally, factors like race, gender, marital status, national origin or religion are also not included in credit report.

Source-secondary

It is important to stay credit healthy

A sound credit history can be your most precious financial assets. If your credit health shows that you had been prudent in paying off your debts, you will not only be able to qualify for credit whenever you need it, you will also be able to borrow money at the lower interest rate. Lenders use these credit reports to evaluate your ability to repay, your character and any joining to take a decision to entrust you money. These ratings are also used by debt financing firms, investment banks and dealers to know your credit potential. If you find that there are discrepancies in your credit report but neither have time nor knowledge how to remove name from CIBIL defaulters list, it is better to hire an experienced and professional credit repair agency.

By delegating responsibility of eliminating errors from your credit report into the hands of professionals, you can utilize your time and efforts in completing your other essential tasks. Also, professional firms make sure that your credit repair process is completed without any procrastination by taking immediate action on all procedural formalities. 

There are many who believe to take help of professional credit repair agency at-least once in a life time so as to understand all the procedures and tricks to eliminate problems with CIBIL report as well as to understand the procedure so next time, they can do it themselves.

Remain credit healthy and creditworthy by opting for appropriate credit health packages at www.cibilconsultants.com

Source: Secondary