Home loan, car loan, personal loan borrowers having trouble repaying: how to avoid missing the IME
In Pune, businessman Rahul Palekar regrets the day he sold his trusted sedan and switched to an SUV in 2019. His business has not performed very well over the past two years and the loan of Rs 9 lakh now looks like a grindstone around his neck.
They are not alone. Many borrowers are struggling to repay their loans, which is reflected in the rise in bank NPAs
(see graph). In its financial stability report released in July, the RBI acknowledged that “central banks around the world are preparing to face the expected deterioration in the quality of banks’ assets given the depreciation of the service capacity of banks. loans to individuals and businesses ”.
For borrowers like Sharma and Palekar, last year’s moratorium on loan repayments came as a hiatus. But once the moratorium was over, stress returned to haunt their finances. To relieve borrowers, the RBI announced another loan restructuring program in May of this year. By virtue of this, all borrowers who regularly paid EMIs until March 2021 were eligible to restructure their loans.
All personal loans, including home loans, supplemental home loans, personal loans, auto loans, student loans, and gold loans can be restructured under this program. While the terms and conditions are left to individual banks, the borrower can choose from various restructuring options. This can be a full repayment holiday of up to two years, or the payment of just one simple interest on the loan. One can also extend the loan term to lower the EMI to accommodate the post-covid pocket.
Should we restructure?
While the restructuring of the loan will certainly provide relief, it will also impose an additional interest charge on the borrower. Whether you opt for a repayment holiday or an extension of the loan term, any easing will result in the accumulation of unpaid interest, which will increase the overall cost of the loan. The higher the interest rate on the loan, the greater the impact. For example, missing 12 IMEs of a 16% personal loan will add two more IMEs to the loan term. So do not opt for a payment period if the loan has a very high interest rate (see graph).
Also consider the length of the loan balance when you take out your restructuring loan. “If you apply for restructuring early in the loan process, the impact will be very high,” warns Raj Khosla, Managing Director of MyMoneyMantra.com. Gaurav and Deepti Sharma took out a 20-year home loan in October 2017. MyMoneyMantra estimates that if they take 24-month repayment leave, they’ll add 63 months to their loan. Even after four years of paying IMEs, they will still have 21 years of repayment left.
What should borrowers do?
One way to keep the loan term from swelling is to pay off the simple interest on the loan. On an outstanding of Rs 39 lakh, the simple interest at 7% amounts to approximately Rs 22,500 per month. This is not a very good option as the principal amount remains intact, but it will give the Sharmas a bit of a break without extending the term of their loan. If and when their income improves, they can start paying the regular EMI again.
However, some borrowers are not even able to pay the simple interest. Many people who have lost their jobs due to covid or who have suffered significant pay cuts are in this situation. Experts say that despite the liquidity shortage, a borrower should not ignore EMIs as it will sully their credit history and jeopardize access to credit in the future. “A bad remark on your credit report is like stepping on a piece of chewing gum. Its negative impact goes with you for a very long time,” says Khosla.
Also Read: How To Raise Money For Lending IMEs: Liquidate Those Investments Or Take Out Loans Against Assets
Where will the money come from? “This cash flow crisis is a good time to review your investment portfolio and make some tough decisions,” says Rohit Shah, founder of Getting You Rich. If you have term deposits or debt funds, close them to pay off your IMEs. Interest rates are now very low and the after-tax return on term deposits is barely 4-5%. Shah says low-yielding insurance plans that offer low life coverage and swallow up large premiums should also be put on the chopping block. “Giving up on such unnecessary plans will not only raise funds, but also free up the premium amount,” he says.
A lot of people may find this too drastic. If you do not want to buy back your insurance policy, you can take out a loan on it. LIC offers loans at a flat rate of 9% interest, which can be used in times of crisis. There are several other options for raising funds, including investment and asset loans (see chart).
A loan against the property is particularly useful in such situations. Being a secured loan, the rate of interest is not very high. You can consolidate outstanding debt by taking out a large loan against a property and using the money to pay off personal loans and other more expensive loans.
Some advisers even suggest that stocks and equity funds should be sold to pay off the loans. “The stock market recovery has inflated the equity allocation in most portfolios. It is time to rebalance by selling some of the stocks and equity funds,” said financial planner Pankaaj Maalde.
Read also: Unable to repay the loan? Here are the rights you have as a defaulter
Create an emergency fund
The lack of cash that people face underlines the importance of setting up an emergency fund. Financial planners typically suggest setting aside six months of emergency spending, although this can vary depending on individual circumstances.
A savings account with easy transfer or a liquid fund are options to consider. Feedback is not important here. What is important is that this money is not used for any other expense and is accessible to the individual in the short term.