Tag: Loan

Are you Overestimating your future income and getting into debt trap ?

Posted on by Jagoinvestor

Today I want to discuss a problem which is part of almost everyone’s life and creates some really big issues. I am talking about the problem of “Over Estimating your Future Income” . Yes – A lot of people take their current life decisions, based on what they feel about their future career and future income.

over estimation of future income

My Salary Hike

When I was working in Yahoo, Bangalore around 2008, I saw all the newcomers around me “expecting” their salary hike to be around 20% and 25%, and guess what – It actually happened.

Then in 2nd year, the same people “estimated” that they deserve a minimum 15-20% salary hike at any cost, because they have given their best. It happened again ! .

Then in the 3rd year, they got into the same – “I think my salary hike this year will be .. ” game and by then these people were using maxing out their credit card limits, had bought all the financial products for tax saving and committed to pay huge premium, at times as high as 80,000 per annum. They were all living a life which they deserved after 7-8 yrs of their career.

Then there was a layoff in Yahoo and some people got FIRED (some were my friends)

One guy had almost finalized a home loan, obviously based on his “future income”. Another guy could not pay his credit card bills for next 3 months, because there was no money (he eventually got another job in few months) . And most of them wished if they had saved a bit more, it would have been a better situation.

We focus on positive side, but not on negative’s

The incident I explained above looks fine at the start of career, there is less to loose. But just imagine the depth of this problem. This shapes our financial life.

If you have been working for many years now, you probably have lots of things to achieve in life and due to peer pressure, you can go overboard on your expenses, just by assuming that your future is too bright. The issue is not that we look at the brighter side, the issue is that we look “only” on the brighter side – the salary hike, the promotion, the better salary if we switch companies, the extra bonus which we will get, and then the side income which we can generate along with job .. etc

We do not look at the negative side seriously or just under rate them. We feel job loss is something which happens to others, not us! . The accidents can never happen to us. We cant loose our wealth due to some reason. What about a sudden medical emergency which can wipe out your wealth, what about “No Salary hike” this year , what about “bonus below the expectation” , what about a Fraud which creates a big hole in your pocket?

When we see our future from current situation, it looks like a straight line without any issue or problems, we extrapolate our smooth past into future and every thing looks promising. However the reality is full of surprises, and problems. Things can go terribly wrong and it can really damage your plans in life. How serious it will be depends on how much over estimation you have done for your future income. The image below clearly explains what I want to say here.

your plan in life vs reality

I posted this same point about “overestimation of future income” on my facebook wall, and I got a very good reply from Vishnu Prasath, which I feel everyone should read, below is that reply

Vishnu Prasath reply for overestimation of future income

In our 6 weeks online Investors Bootcamp, one of the weeks is about getting clarity of your current situation and where you stand in your financial life. With the help of an amazing excel sheet, participants are able to find out 12 insights which are related to their financial life, it tells them key hidden points about their financial life.

Yeah .. I am starting my business !

Let me also touch upon the point – “starting my own business”. When you do calculations and plan for your business potential, MS Excel makes you millionaire on paper and shows you all the rosy picture. However things are so different in real life. Assume a person, who is going to leave his job and going to start a business/startup . He forcasts the cashflows and profits and declares that in next 1 yr itself he will break even and start making money. Life will be on track again, but in reality – it can take 4-5 yrs. There can be losses, things can go totally wrong ..

In that case, imagine the situation, the stress the family will go through , the “I told you so … ” the person has to be hear every month. This is one real life example almost all the not-yet-successful entrepreneurs can relate to .

How we spend more and more Today

So because we over-estimate our future income, we buy bigger car, bigger Home, we go on more longer and premium vacations, and commit to higher EMI’s which looks possible considering our future income and cash flows. I do not want to sound like a pessimist here, I am not saying don’t be confident in life or career, one always have to do a calculative move and take decisions based on some assumptions, but some people go over board and damage their future at the cost of today. On that point I want to focus on two main points – which are

We are Consuming more today and not leaving much for future

The biggest problem I see today in most of the people financial life is that they are consuming a lot on the name of “Life is here to Enjoy” .. Yes – its a crime if you dont enjoy your life despite earning so much, but there is a limit to it. There is a always a cieling to your spending. If your yearly salary package is Rs 8 lacs, then you should NOT be spending all 8 lacs , because you “feel” , next year your package will rise to 10 lacs and “at that time” you will save more. If your salary is 8 lacs per year, you should start with Rs 5 lac car, and not Rs 16 lacs car, because your future looks bright. It just does not work that way in most of the cases.

Getting into Debt Trap

Another issue is that, When things dont turn out as per your expectations, you also feel very disappointed and frustrated and start comparing your imagination with reality. Just because you assume future is too bright, you spend on those things, which you dont really need today, but have potential to pay. You also over spend and this is also a cause at times for Debt Trap, you get into a small debt first, you assume its normal and next month you will take care of it, and then it never happens and after 3 yrs, you feel you should have controlled yourself in the start itself.

One of the guys commented his real life experience on one of the facebook groups I am part of. Here is what he said

The biggest problem with our generation is that we overestimate our future cash flows,, think ourselves entitled to expensive lifestyle due to easy credit and fall prey to EMI trap rationalizing it with our increasing incomes every year. I represent this generation and have badly suffered the consequences of overestimating my future earnings.

I took personal loan for construction of my home, then took top up loan next year when my salary increase  and put it in interior and then again took maximum personal loan that I was entitled to for my sister’s marriage next year rationalizing every time that my income will only increase every year in my job.
But then I left job to start a business with one of my friends and all hell broke loose. All my cash flows dried up, debts increased and

I was reduced to begging for money. I had to live on borrowed money for more than a year. All my aggression,confidence,self image and big talks took a bad beating. It was hell of a time. Now I hate debt and credit of any kind. It is slavery, bondage and evil.

You never know when things can go wrong for no reason or for no mistake of yours. Think a hundred times before committing yourself for high EMI, high tenure loans.

(Source : Asan Ideas for Wealth Facebook Group)

How long can you survive financially if you loose your job ?

So you must be wondering about your own case right now. Let me ask a very simple question – “If you loose your job, how many months or year can you survive without working?” . This is a powerful and disturbing question at the same time. If you have been working for many years, and your answer to this question is in months, then there is some issue.

Whats the right way ?

There is no right or wrong way here, there is only logical way. You always have to keep a balance in your spending and saving. You can surely expect the future to be good and bright, but make sure you do not over leverage to a limit which turns out to be a disaster if things go wrong. Also think about situations which are negative and then take a balanced decision.

Let me know what are your comments on this topic ? Have you ever faced any issue because you over estimated things ?

Taking Personal Loan to help a friend ? How it can impact your financial life ?

Posted on by Jagoinvestor

“Friendship is Forever” – One of the best relationships in this world is Friendship . You are close to your friends  more than your relatives or in some cases even family members. You can go miles to help your friends, spend time and effort for them or even help them financially at times. But there is difference between helping a close friend and any friend.

Personal Loan for friend

Some investors are very casual about their financial decisions which they take for their friends or any relative who is not very much close to them. Its the social pressure or the want of “looking good” in front of others which leads to this situation. Now I do not say that you should not do favors for your friends . Even if you are having some loss, its fine at times to help your friends financially , but just make sure you are aware about its impact on your financial life. It should not happen that you repent it later and regret it. For example one of the mails I recently got was this

My friend is in need of Rs 10L and i am planning to give him money by taking personal loan and going to collect interest which i am going to pay for personal loan. In this case i have not got any profit. Will there be any tax for interest collected from my friend. (source)

This guy was going to take a personal loan for his friend on his name (or swiping credit card and taking cash later from friend) and collect the EMI part from friend and pay it back . Now it was a help because the other friend might be in need of money and being a good friend he was helping. But the problem was that he was not aware what it could mean to his financial life.

Impact on Credit Report in this case !

In this case , if you see there will be a entry in his CIBIL report about the personal loan part and being a unsecured loan, its not a very positive thing on someone’s Credit Report . Now what if after 2-3 yrs he needs a home loan and the lender does not want to lend him because he has a personal loan on his credit report ? The assumption is that friend will pay the EMI to him on time , but what if the friend loses the job ? What if something happens to friend like accident or sudden death?

What if loan is not repaid on time and then your DPD sections on Credit Report is messed up . The impact of this on the loan eligibility will be high and one will really regret it later, but then it would be too late. Below are some more experiences of lending to friends and relatives and then suffering later …

Hitesh shares his personal experience

Yes. I have helped a friend in his financial down for continuous 3 years.I have taken personal loan for him on my name which is still running and he does not pay EMI regularly (but I do).Because of delay in getting EMI’s from him my financial situation got worsen by months.

Above all that i have given him money very frequently and all my plannings went on toss. Because of friendship i have been digged down under as i have not got full money back yet. Personal loan taken will end in November 2014.

I want to apply for home loan next year i.e March 2014 and after reading this i am in very uncertain state though i maintain a cibil score of 720.

Brundaban shares his experience..

I’m also a victim of this painful personal loan lending to a friend. In 2007 i gave a friend 10lakh as personal loan, everything went on smoothly, but after 6 months the real drama started, he didn’t pay the EMI in time so i had to pay penalty with interest, sometimes i used to pay from my salary, it was totaly difficult for me to pay the EMI as it constitutes 70% of my salary then, still i was getting frequent calls from banks to pay.

When i opposed he didnt pay the loan, switch off his mobile, even told he dont know me,so i thought that i wont pay now, then stopped payment, and after going to his home many times he agreed to settle the loan, and finally settled on 2010, with a condition that i’ll pay him 2 lakh, even i did that, still i’ve not recovered the same amount from him, now if someone even ask me for 5K i think 100 times, bocz of this situation, so suggest friends dont give any personal laon to anybody!!!!

Divya’s experience

I have the experience-its painful. My brother gave 7L rs to his close friend. he did not take it from his pocket-he has taken two loans, and gave. and one fine day, he committed suicide, reason- the friend ditched him. He did not bother about the money-what bothered him was the breach of trust that he had in his close to heart friend.We lost him. his wife and kids are orphaned. Never help anyone out of your way. we can make up for the money lost- but the person we lost, we can never get him back.

Sivamohan shares his experience

Some years back my father helped my uncle my getting him some loan from a local lender(at very high interest) and by becoming a guarantor for his son’s educational loan. My uncle was not able to repay the loan and my father ended up paying the principle and interest. And since this incident our family relationship has become very sour. Recently my father received a letter from the bank saying his son hasn’t paid the educational loan back. We often wonder all things would have been fine if my father had just said no.

What other casual decisions investors taken for friends ?

  • They become guarantor for their friends without understanding its impact – Read more about it
  • They transfer money to and fro to each other accounts, without understanding its tax implications – Read more
  • They handover their important documents to friends without realising how they can be misused by someone if the intention is wrong – read more about it
  • Lending them money and not asking it back thinking that relations will soar – But the point is if you do not have space to talk freely about asking money back – the friendship is already on the rocks then !
  • Buying financial products from friends who are agents or brokers and then paying the premiums for useless products for years and destroying your wealth creation process.

At times, you do not have a choice, but to go a ahead and help a friend even if it means some problem for you, thats fine . But in cases where the other party can be said – NO , or the impact of your decision on your financial life can be bad , which you can not afford, you have to think hard and take tough decision

Have you done any financial help of friends and what do you think about it ?

SBI MaxGain Home Loan Review – With FAQ’s

Posted on by Jagoinvestor

In this article we are going to share SBI Maxgain Home Loan review with you. Now a days many home loan borrowers are opting a particular type of home loan from State Bank of India which is called Max Gain because it has many advantages compared to other kind of home loan scheme’s. In this SBI Max Gain home loan, an Overdraft (OD) account is assigned to the customer’s home loan & any amount parked by customer is treated as loan repayment for the purpose of interest calculation, for the days, the amount stays there in that OD account. As on date following banks are offering similar types of home loan to their customers. I would like to thank to Mr. VKS Nathan who gave the Idea of this article.

sbi maxgain home loan review

SBI, IDBI, CITI, HSBC & Standard Chartered. Punjab National Bank can also be added in this list but it’s offering a combo of normal loan + Overdraft. In this article, we are going to discuss only SBI Max Gain as in OD linked home loan, the maximum business is with SBI & the most discussed topic on Jagoinvestor Forum is also related to SBI Max Gain Scheme

What is an Overdraft account?

Before we discuss Max Gain, first understand, what is an Over Draft Account? All of us are well aware of functioning of an ordinary saving bank (SB) account. Here account operates between zero to positive & positive to zero. As we deposit our money, it’s used by bank & we get interest on our money from bank. In case of an OD account, bank first ask for a security & then assign a credit limit on the basis of the market value of that security. This security may be Fixed Deposits, Insurance Policies, National Saving Certificates, Shares, Mutual Fund units, house/commercial property etc. Now when we are using this assigned credit limit, the amount is going from zero to negative zone & when we are repaying, it’s coming from negative to zero. As we are using bank’s money in this case, the interest ‘ll be paid by us to bank. That’s how an OD account works.

So what is the correlation between Max Gain home loan & Over Draft account?

For Max Gain borrowers, State bank of India opens an Over Draft account where the Credit limit as discussed above is equal to the loan value assigned to the borrower. Here underlying security is the home you have purchased or constructed from that loan amount. Now as & when you are parking any surplus amount into this OD account, the parked amount is treated as payment towards loan (effectively you are bringing down your loan liability from negative towards zero position) and thus the interest ‘ll be charged only on the difference amount i.e. total loan amount – parked surplus amount.

What is the primary benefit of SBI Max Gain Scheme?

Well the primary benefit of MG is to keep your liquidity intact & still bringing down your interest outgo. To understand it better, please imagine a situation you are running a home loan of 30L Rs. & now you do have 2L Rs. with you to prepay. In normal home loan, your 2L Rs. ‘ll be accepted by bank & adjusted towards home loan & your amount is gone forever so no liquidity for you of that 2L Rs. amount. On the other hand, if you are MG customer, simply park those 2L Rs. in your MG account & your interest outgo ‘ll be lower from that month itself till those 2L Rs. or a part of it is there as surplus in MG account.

What is Drawing Power ?

Drawing Power is nothing but your as on date actual outstanding loan amount. Before final disbursal or start of loan repayment, it’s your sanctioned loan amount. Once your EMI starts, it’s your as on date actual outstanding loan amount. Please check Image below, Drawing Power here is 1867053 Rs. as on date. (Click here to understand it better)

What is Available balance?

Before final disbursal, it’s the sum of undisbursed amount + parked surplus & post final disbursal, it’s your parked surplus amount which is available to withdraw. Please check Image below, Available Balance here is 1084177.72 Rs. as on date. (Click here to understand it better)

What is book balance?

It’s the adjusted loan amount arrived after deducting the Available Balance amount from Drawing Power. In your account statements it’s shown with a negative sign. Please check Image below, Book Balance here is  – 782875.28 Rs. as on date. (Click here to understand it better)

Is there any extra interest for Max Gain?

No, the interest for home loan is same in SBI be it for normal home loan or for Max Gain.

I’m an existing SBI home loan customer. Can I convert my old term loan to Max Gain?

Yes, you can. Please contact your loan serving branch or RACPC for the required paperwork to be done. This may be an outdated info so please do check with your loan serving branch for current day rules on conversion.

I have taken the Max Gain for an Under Construction Property. Can I park surplus amount to save on interest outgo?

The answer is yes & no both. Yes you can park your surplus during under construction phase but do remember SBI is disbursing partially at this juncture & in case due to any emergency you want to liquidate your surplus, SBI ‘l not allow the same. so park only that much surplus, you feel you ‘ll not need even in an extreme emergency.

If I’m parking some money on monthly basis or in lump sum, will my loan term come down or EMI go down?

No. Neither your EMI ‘ll come down nor your loan term. The only saving is in terms of interest outgo. To understand it better, Let’s assume a test case of loan amount 30L Rs. @ 10% Rate of Interest for 20Y term. The normal EMI for these nos. ‘ll be 28951 Rs. The break up of your EMI for first month ‘ll be 25000 Rs. interest & 3951 Rs. for principal repayment.
Now if you do have 2L Rs. surplus in the very first month & prepay the same as below –

Case – 1 Normal home loan

Your 2L Rs. is gone & outstanding loan amount ‘ll come to 2796049 & interest outgo ‘ll still be 25000 Rs. but the no. of months ‘ll come down from original 240 to 198 months.

Case – 2 Max Gain home loan

Your 2L Rs. are parked in that OD account & the interest for the very first month ‘ll be calculated on 28L Rs. & thus it ‘ll be 23334 & thus there‘ll be an interest saving of 1667 Rs. which‘ll remain available in your OD account as surplus along with your parked surplus 2L Rs. so for next month, the parked surplus amount ‘ll be 201667 Rs.

Please do note in case 2 above, Your loan term is still 240 months but the saving of interest ‘ll keep on increasing on mly basis from the parked surplus & of course the liquidity of those 2L Rs. is there.

How can I calculate my saving in Max Gain?

To know your actual saving, first of all please demand a loan amortization schedule from your loan serving branch & now for each month compare the scheduled interest outgo as per your loan amount. schedule & the actual interest outgo.

What should I do to maximize the savings in Max Gain?

If you are paying your EMIs from SBI’s SB account, you can maximize your benefits. How? here it goes. Say 15th is the EMi date on which EMi amount is debited from your SB acct. Now in a normal home loan, people ‘ll keep at least 2-3 months’ EMI amount as buffer in SB account. but in case of Max Gain, you do not need to keep buffer in SB account. Keep this buffer amount also in your MG account along with your routine surplus amount. now use the power of net-banking of SBI for your own good & create a schedule transaction of your EMI amount 28951 Rs. (in the above example) to be transferred on 13th of every month from MG account to SB account. At a time you can schedule for next 12 months by using standard instruction. So it’s technology that’s helping you.

I can transfer to MG account from my existing net-banking enabled SB account but reverse is not happening. why?

The answer lies in the fact that Net-banking transaction rights on your MG account is not enabled yet by your loan serving branch. if final disbursal is done, you can apply for transaction rights. if only partial disbursement has been done, sorry, you can’t apply for transaction rights till final disbursal.

Is it mandatory to purchase property insurance & life insurance along with Max Gain?

Having property insurance as well as sufficient life insurance is compulsory but purchasing the same from SBI’s sister cos. like SBI General ins. & SBI Life ins. is not at all mandatory. if you feel that policies are being cross sold to you to exploit your position (home loan seeker), please contact the AGM of your local RACPC where your loan application is under processing.

Is SBI charging higher processing fee for Max Gain?

No, as on date there is no differentiation in fee for term loan & Max Gain but SBi reserves the rights to charge different fee.

Can I claim section 80C principal repayment benefit for the surplus amount parked in Max Gain?

The answer is NO. Only the regular principal repaid by you from your EMI as part of your loan amortization schedule is available for tax benefit under section 80C. the parked surplus amount is liquid money & you can withdraw it any time, hence it’s not considered as actual repayment of loan & thus not eligible for tax benefit.

Can I avail cheque book & ATM card for my Max Gain account?

Yes, as & when you‘ll demand these, SBI ‘ll offer you the same. In case you are already holding an SBI SB acct. linked ATM card, you have the option to link your MG acct. also with this existing ATM card.

Can I enroll my MF SIPs in Max Gain?

Yes but do note, there should be a surplus balance i.e. available balance on the date of SIP, else your ECS or SI mandate ‘ll bounce.

Can i pay for my utility bills, credit card payments, online shopping from Max Gain?

Yes, you can do all this & more. In fact it’s in your best interest that you treat your MG account as your primary money parking account & route all your transactions through it so that money is lying there for maximum possible time & thus helping you to bring down your interest outgo.

I used my MG account ATM card to withdraw cash from other bank’s ATM & I was charged the money very first time in the month. Why?

The reason is, as per RBI’s circular 5 transactions on other banks’ ATM are free only for SB account & in this case, you forget the point that your MG account is not SB account. it’s an overdraft account.

For an imaginary situation, my loan amount is 30L Rs. & parked surplus amount is also 30L Rs. Does it mean, my loan is closed & I can claim my property papers from SBI?

No, your loan is not closed. Only interest outgo ‘ll become zero & EMi ‘ll remain continue as it is. Yes the interest part of your EMI ‘ll keep on accumulating in your MG account. If you want to close your loan at this point, you w’d have to inform SBI in written & now SBI ‘ll adjust your parked surplus amount towards the outstanding loan amount. you ‘ll lose the liquidity of your money but loan ‘ll be over & now you can get your property papers back.

How can I transfer my loan from other banks to SBI Max Gain?

For loan transfer, first of all contact your existing lender & ask for following things.

  • Loan Account statement from day one.
  • List of Documents, which were submitted by you at the time of availing original loan. In day to day language of bankers, it’s called LOD.
  • As on date outstanding loan balance with applicable interest, penalty & any other fee to close the loan.

Now contact, the nearest SBI Branch (if you do have an existing SB account with SBI, it’s advisable to contact there for ease of operation). Inform in that branch that you want to transfer your loan from existing bank to SBI Max Gain. fill the application form, submit the necessary papers & SBI’s RACPC ‘ll do the back ground job.

Once SBI is ready to accept the transfer, it ‘ll issue you a sanction letter of the loan amount & ‘ll ask you to go for loan related agreement documentation work with SBI. If you are not having property insurance, SBI may ask to purchase one. Same ‘ll be the case for your life insurance. Once legal documentation is over, the cheque of the loan balance ‘ll be issued directly into the name of the bank in question. After the amount is credited to your existing bank, within next 20-30 days, you ‘ll get the original documents submitted by you, from the existing bank. Now you w’d have to submit these documents to SBI. In some states like Gujarat, Maharashtra, Karnataka, SBI may ask to go for registration of mortgage deed on your property in the office where your property was originally registered in your name. 

 

SBI Max Gain

Normal Home Loan

Liquidity of your part prepayments is there

No Liquidity. Money is gone for ever, once you prepay.

A bit complex to understand

Easy to understand

For people who can generate regular surplus amounts

For people who can only manage regular EMIs

 

Click here to know the real life example of Mr. Sudhir S for SBI Max Gain.

Do you feel, this article was able to answer your all queries related to SBI Max Gain? Was this article helpful for you to understand the overall concept of SBI Max Gain home loan? Please feel free to ask for more help

This article is written by Ashal Jauhari, who manages a great facebook group on investments and also is one of the most active and helpful member of our Jagoinvestor forum. This article was written by him and reproduced from this blog here

Days Past Due (DPD) section – What is the meaning in CIBIL Report ?

Posted on by Jagoinvestor

You might have seen a section in your Cibil Report which says DPD (Days Past Due). While Loan Status and Credit Score matter a lot when it comes to getting a loan approved or rejected, a big myth among people is that a clear report (without SETTLED or WRITTEN OFF status) and a credit score above 750/800 are the only two things that they need to get a loan.
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That’s not true. While a clean report and a good score are definitely primary level requirements for getting a loan approved, there are finer details which a bank looks at, before deciding if they want to give you a loan or not; and Days Past Due or DPD is one of those important metrics. Lets understand this then …

What is Days Past Due (DPD) on a CIBIL report ?

Days Past due or DPD means, that for any given month, how many months worth of payment is unpaid. And this information is for each account . Which means that if you have 3 different loans going on, then you will have DPD information for each of those accounts. For each account you can see Days past due information for each month for the last 3 years , i.e., 36 months.

You might already be aware that your cibil report contains the past 36 months of your credit information. Each and every month, your lender who is a member of CIBIL, will update the CIBIL with the latest information like Did you pay on time or not? How much outstanding loan do you have at that moment? How many months worth of loan is remaining and other micro details are shared on monthly basis by banks and lender to CIBIL. So each month, a new month’s data is added and the oldest month (36th month) is removed from the cibil report and this way a sliding window of 36 months data is available on your cibil report at any given point of time.

Example – Date 06-12 and DPD value is 90

If DPD value is 90 for a date say 06-12, it means in June 2012, the payment is due for last 90 days, which means 3 months dues! So you can now understand the the DPD in the last month (May 2012) would be 60 and for Apr 2012 would be 30.

When you default on any payment or do not make the full payment, this DPD value will start getting a number and it will be a negative thing. So if there is a cheque bounced from your side and the loan not paid on time, you can expect one entry of DPD for the latest month with value 30 – which says one month of dues are not paid. If you clear it on time before the next cycle comes, it will help you to improve your bad credit score and the DPD value for next month again will be normal, but if you do not make the payment and keep those dues , then the DPD value for the next month will increase to 60, which implies that from 2 months you have not paid the dues. See the graphic below to understand more examples of DPD

Days Past Due (DPD) example in CIBIL report

What does XXX means as DPD Value ?

There are certain values which can appear in DPD section and each of them has some meaning, however the safest values are 000 and XXX . If you have the value as 000, it means the dues are totally clear on that date and nothing is outstanding. And if the DPD value is XXX, then it simply means that bank has failed to report the data for that month to bank, and it does not impact you at all . At times instead of 000, the value can be STD which means that the dues are for less than 90 days . While any other number other than 000 is a negative thing, but make sure it does not go above 90 days , because then its super negative.

At times, some lenders also report DPD values in a different way, as per asset classification norms set by RBI. In that case, the values which appear under Days Past Due section are STD , SUB , DBT or LSS which denotes good to bad , where STD is good and LSS is the worst one. Here is what each of them denotes

 

STD (Standard) Payments are being made within 90 days. Note that any delay of more than 90 days is seen as Non Performing Assets (NPA) by banks
SUB (Sub – Standard) An Account which has remained NPA for upto 12 months
DBT (Doubt ful) The Account which has remained Sub Standard Account for a period of 12 months
LSS (Loss) An account where loss has been identified and remains uncollectible

 

Can DPD values be changed ?

There have been cases that lenders have rejected loan applications based on DPD information even though the credit report was clean and the score was quite good. And the common worry at the time is “Can’t I change my DPD information somehow?” and the answer is NO . You can’t change DPD information like you can change SETTLED or WRITTEN OFF status by taking some action. All you need to do is wait for some time and as time passes, new month information will get added to your report and old data will keep getting phased out. So if you have some bad DPD data before 12 months, then it will go out in next 24 months, and if you have some DPD data 2.5 years old, it will go out in 6 months period.

For those who like to learn through video’s, we have a 40 min course on Credit Report and Scores in detail on our Jagoinvestor Wealth Club, which will explain all the aspects of the subject in a clear manner and great detail

Did you understand the meaning of Days past due or DPD which appears in CIR (Cibil Report) ?

4 things to do, when you are forced to buy a Policy with Home Loan !

Posted on by Jagoinvestor

Have you even seen cases where when a person wants to get a home loan, and the bank or the lender says that taking some kind of ULIP policy or some other kind of insurance product is mandatory if you want the loan to be approved? Most of times, banks impose this restriction in the final stages of loan approval process because that’s the time when most of the customer will not reject the option and will forcefully go for it, because they don’t want to lose the home loan for this tiny roadblock.

Policy Forced Selling with Home Loan

If you are thinking about 50 lacs of home loan, you will not get stopped by this 40,000 per annum premium policy. Here is a case which was discussed on our jagoinvestor forum.

I recently planned to buy a home. So, after market research I approached SBI bank. But the manager informed by saying that ‘I need to take SBI Insurance along with home loan’ else will not sanction SBI home loan. Please let me know whether is it the case with SBI home loans?

Cross Selling is Unfair – IRDA

Some customers falls for these kind of gimmicks, but in reality there is no compulsion to buy any kind of product with home loan. It’s just a marketing gimmick and a way to exploit people. IRDA itself has clarified in its circular that this kind of bundling or forced selling is not fair and should be stopped. However banks still continue to ask customers to buy the insurance along with home loans and ill treat them.

Tying is defined as two or more products packaged together where at least one of the products is not sold separately while Bundling occurs when products are packaged but are also available separately. There could be various issues of concern for the consumer that arise from cross-selling. Packaging two or more products could become unfair to the consumer when it impedes his or her choice or makes price comparisons difficult or impossible.

One of the major concerns is bringing in transparency to prevent unfair commercial practices. At the same time, cross-selling facilitates service providers to use existing channels to reach out to those who are looking to buy insurance products. It is, however, necessary to ensure that the consumer is not put to any kind of disadvantage because of the packaging.

J. HARI NARAYAN
CHAIRMAN (IRDA)

So what’s the way out? It might be, that if you are careless on documentation front, the bank might sell you the policy and you come to know about it very late; like it happened in this case where Axis bank sold life insurance along with home loan to this guy. While you always have an option to go to consumer court over the issue, that comes a little later.

What way you can settle this at the bank level itself? The main idea is to communicate to bank officials that you are not a easy bait and are an informed investor who knows his rights as a customer. Below are a few things you can do in a situation when bank tells you “Sir – Insurance is compulsory along with home loan, else it will not be processed”

What to do when forced to buy insurance along with home loan ? Lets see 4 tips which you can use when you are told by your lender that some kind of policy is mandatory to buy along with home loan.

Option 1 – Directly tell them, you know the rules

One of the simple things you can do is tell them straight forward that you know the rules on this, you are aware about the RBI circular that these practices are not fair and ask the bank for an explanation on how they are still doing it. Also tell them, that you have yourself helped another friend of yours to get a home loan without the bundled insurance when XYZ bank asked for it. You can tell them that you have already filed for RTI to IRDA and asked for this, if they want you can bring the RTI reply from IRDA. This first tip itself should be enough for your home loan provider to come to the right path.

Option 2 – Reject the Offer and Wait – They will come back

When you show desperation, they know you will do anything for getting a home loan and that’s one reason why they put forward such idiotic restrictions of taking policies. Another thing you should do in these kind of situations is that you can just reject the offer totally and tell them that you really are not so desperate to get the home loan, you can wait for some months or you already know other bank officials who have not put forward such kind of restrictions . In all probabilities, they will just come on track or if not that time, they will be back to you later saying – “Sorry Sir, we take back that restriction .. blah blah… ”  This is exactly what happened with Muthu Krishnan which he shared on this blog some time back

IDBI tried to con me in similar manner. I told them that I don’t need their loan. After two days, they called back and offered loan without insurance which i accepted. Though you are absolutely desperate for loan, do not show it to the banks. The banks are very desperate to disburse loans as it is their livelihood and not ours. They will come around to our terms.

Option 3 – Ask them to give it in writing

The next option is to look at the bank official and ask him to give in writing that “Buying the Policy is mandatory along with Home Insurance” and also tell them you are thinking of inquiring about this with banking ombudsman because you have already filed a case for your friend and got compensation for this. If they are not ready to give it in writing, tell them that you don’t need home loan from them anyways, but you will still file a complaint with Banking Ombudsman to see what can happen and politely ask the official if he can also share his Name, designation and Employee id for additional information.

Option 4 – Take the Policy and return back in Free Lookup period

This is the last option, but if you feel that other options are great but you are victim of family pressure and at this time just need to go ahead even though you are disgusted by this force game, just go ahead with policy and pay the premium for first year. Then be a little alert and make sure the moment you get policy documents, just initiate the process of returning back the policy within the 15 day free look-up period . For those who do not know, the free look up period starts from the day you get the policy in your hands, not from the day you bought the policy. This helpful tip was shared by one of the person who shared his case with ICICI mis selling.

Conclusion

Any kind of loan should not be bundled with other products. Most of the bank officials try to pressurize the customers just to meet their deadlines and targets. So do not fall for forced selling and act like an informed and powerful customer.

Have you come across a situation like this? Can you share?

Prepayment Charges abolished by RBI

Posted on by Jagoinvestor

This is a little old news. RBI has finally abolished Prepayment charges or penalty on home loans with floating interest rates. Borrowers can now transfer to new lender which provides them less interest rates without paying any kind of charges or penalty. Damodaran Committee on customer service in banks, RBI) has been observed that banks have been unfair in asking for charges when home loan borrowers want to switch to some other lender with lesser interest rates. Now if you prepay the loan from your own sources or through another lender, you only pay the outstanding loan amount.

Here are the excerpts from the circular from RBI on abolition of fore-closure charges/pre-payment penalty

2. In this context, attention is invited to paragraphs 81 to 83 of the Monetary Policy Statement 2012-13 announced on April 17, 2012 with regard to home loans on floating interest rates. The Committee on Customer Service in Banks (Chairman: M. Damodaran) had observed that foreclosure charges levied by banks on prepayment of home loans are resented upon by home loan borrowers across the board especially since banks were found to be hesitant in passing on the benefits of lower interest rates to the existing borrowers in a falling interest rate scenario. As such, foreclosure charges are seen as a restrictive practice deterring the borrowers from switching over to cheaper available source.

3. The removal of foreclosure charges/prepayment penalty on home loans will lead to reduction in the discrimination between existing and new borrowers and competition among banks will result in finer pricing of the floating rate home loans. Though many banks have in the recent past voluntarily abolished pre-payment penalties on floating rate home loans, there is a need to ensure uniformity across the banking system. It has, therefore, been decided that banks will not be permitted to charge foreclosure charges/pre-payment penalties on home loans on floating interest rate basis, with immediate effect.

Prepayment Charges removal will help !

This new rule will surely be taken in good spirit by borrowers and end the discrimination done by banks between old and new customers. This will also make sure that the interest rates become more competitive in the overall system.

Have you prepaid your home loan just some time back with charges ? Are you going to prepay the loan soon after this Prepayment Charges removal ? What are your thoughts about this new circular !

Which is the best bank for Home Loan ?

Posted on by Jagoinvestor

Taking a Home loan is a big task in itself and one of the biggest financial decisions. A home loan is the longest debt in our life. At times 10-20 yrs, which makes demands a long term commitment. Each month you have to pay your EMI, sometimes you have to prepay some part of home loan, sometimes you need some documents and visit the bank. There are numerous things to be done during taking the home loan and after taking the home loan, hence you should be very clear that which is the best bank for Home Loan. Without much confusion, it’s very clear that everyone wants to go with the bank which makes your life easy at the time of taking a home loan and even after that. So the biggest question on everyone’s mind is “Which is the best bank for a Home loan?”

Best Home Loan Bank in India

First thing first, you have to be very very clear that their cant is a single bank or loan institution which is perfect for everything and you will never face any issue with them. Also, there is no “best bank for Home Loan” which has always worked for everyone to date. But overall we can always pick some banks which have been better than others on different parameters. You can say that on a high level “Bank A” is better than “Bank B” and this is based on many loan takers’ experience over the years. So now in this article, we will try to understand the difference between different banks and how they differ with each other. We will also see a survey result done with the vast community of this blog and which bank they choose collectively as the best bank for a home loan.

Public Companies vs Pvt Companies

While researching on this topic, the first thing which came to my mind was “all banks are the same, everyone has a bad experience will all kinds of banks, whether PSU or private”. But we have to understand that while some people can have a bad experience with some banks, there are a positive experiences too and we have to see things from a very high level and not judge a bank just based on a handful of bad experiences. The first confusion which comes to any loan taker mind is “PSU bank or private bank?” and based on the experience here is the conclusion.

PSU Banks are good post-loan but not friendly at the time of taking the loan

Private banks are very fast and friendly at the time of disbursing the home loan, they will treat you like a king up-till the loan is disbursed, but once every formality is complete and your home loan is sanctioned, you are a trash to them! As they are extremely aggressive in the marketing of home loans, a lot of people fall for it, Private companies presentation and the way they approach you is good but only till you are not a home loan customer. A lot of times private companies make things easy for you and also bend some rules for home loans. the number of documents they need also is less compared to a PSU bank.

On the other hand, PSU banks are not that great at the start of home loan , their rules are very strict and stringent and they still operate  in the “sarkari” style, however, once your loan process is complete and things start, their afterlife is much easier compared to private banks. The overall handling is much professional and as per the process. In short, they don’t suck your blood every now and then as private companies do.

Private banks are first to raise the interest rates

On the interest rates increase and reduction side, its seen that private companies are first to raise the interest rates after the rate increase from the RBI side, but private banks hide somewhere when there is a time for reducing the interest rates. However, PSU banks are more transparent on this front and much less annoying than Private banks. Also private banks arbitrarily increase the pre-payment charges (  like from 2% to 3%) the conversion fees are also charged heavily if you want to move down to lower interest rates.

Also the changes of fraud at employees level in Private bank is much higher than PSU Banks. I can’t say that PSU banks are not into the bad game, but it’s much much higher in Private banks because of sales pressure and targets. There has been cases of forced selling of home insurance and also cross selling of ULIP’s and other financial products along with the home loan

Which is the best bank for Home loan in India?

Now there are millions of people who have taken home loan and there are various parameters on which a bank can be ranked like Processing time for a home loan, Transparency in whole process, Attitude towards the customer, Interest rates and pre-payment charges, online tracking of your home loan after disbursement. But there is no ranking of banks on all these parameters. However still you can rank a bank overall as good or bad in total. I ran a survey on this blog and got around 1504 participants to vote for the best bank for home loans and based on that we can judge which banks are more preferable and more trusted. Here are the results.

Best Bank for Home Loan in India (Survey Results)

Best Bank for Home Loan in India - SBI , HDFC or LIC

A good place to look for all the home loan related data (Click here)

Top 5 banks for Home Loan at the moment

If you see the survey above, you can clearly see that the top 5 banks for a home loan are SBI, HDFC, LIC Housing, Axis Bank and ICICI Bank and these 5 banks comprise 83% votes. While a big reason for this can be that these are big banks having a wide reach and has more customers and hence the results are a little biased. But at least you can see that out of 1504 people on this blog, 83% of them have a home loan from these 5 big banks, in which SBI tops the list.

1. SBI Bank

Based on the survey and overall reading’s done over the net and comments section of this blog. SBI bank seems to be the best bank for Home Loan. While SBI Bank still carries the hangover of Sarkari culture and they are strict in the overall process, which means you will have to run all over the bank and many times to get things done, but once the whole process is complete, maybe you will have a smooth experience overall. Things will be easy post home loan process if you need anythings from bank compared to other banks. For those who want to know why SBI is preferred, follow this thread

2. HDFC Bank

Overall HDFC bank seems to be have mixed reviews. Some people had a great experience and some had a very bad experience. HDFC Bank is overall recognized as the bank for the home loan itself. But overall the experience was very very mixed.

3. LIC Housing Finance

LIC housing finance seems to be a decent option after SBI. While they are not that great as SBI, still they seem to be a good choice after HDFC and ICICI bank. LIC Housing Finance has lesser documentation requirements, but one has to run around for smaller details.  LIC seems to offer better rates and also giving the option to fix the interest rate for 5 years. One thing which many people do not know is that LIC reduces the interest rates for home loan for its customers having any insurance/investment policy with LIC by at least 0.25 %, but only if Sum assured of all policies collectively is more than 15,00,000 and all policies should be under the name of the loan applicant.

4. ICICI Bank

ICICI Bank seems to be very very fast and too friendly at the time of loan processing, but once the loan is done, life seems to be hell for most of the people. They are not very supportive most of the times and one gets too frustrated with their attitude. Overall their interest rates are also very high.

5. Axis Bank

Axis Bank is another good option as a big bank. One good thing about Axis bank is that they have NIL charges for any pre-payment. It’s a big surprise that Axis bank was more preferred than ICICI bank overall in the survey. While Axis Bank has few good options, there was one recent case from axis bank which I had highlighted on this blog on how they forced sell a life insurance policy along with home loan, While this was a negative thing from Axis Bank,  we have to understand that good and bad experience are part of all the banks.

So what is the final answer ?

While there are positive and negative experiences from different banks, the clear answer coming out of different comments from readers and survey is that if one has to choose just one name, SBI bank is the best bank for home loans. We have seen most of the votes going to SBI Bank and all the pointers are suggesting that its the right choice.

Which bank do you have home loan with and what was your experience overall from start till the end. Can you share it in for others benefit?

How Axis Bank fooled a Home Loan Customer – Real life Case

Posted on by Jagoinvestor

This post is to bring to you notice how banks can get you in trouble while signing the home loan documents and use your casualness and trust to force-sell you some junk product. Recently one of our readers Nitin Mittal took a home loan from Axis Bank after a lot of research and study, but Axis Bank officials sold him a home loan insurance without his notice and issues him loan of extra 4.25 lacs along with Max New York life Insurance company. Read his story in his own words

I applied for a home loan to Axis Bank, Ghaziabad Branch considering good interest rates and transparency. The property was Amrapali Heart Beat City-I, Sector-107, Noida and I was sanctioned a loan of Rs 45 lacs. In this duration 100s of papers were signed by me telling me that these are all formalities and are needed.

However when the first disbursement was made then I came to know that the total sanctioned amount is Rs. 49.25 lacs. When I enquired I was told that the balance 4.25 lacs is the amount of insurance policy that the bank has paid to the Max New York company for a full cover of 49 lacs for me and my wife for a full tenure of 25 years in single shot.
This was never told to me clearly and I cannot bear such a loss. The purpose of bank was to earn unlawful commission from insurance agency at our cost. Also the cost of insurance is much higher than the prevailing market rates. I and my family feels cheated by this unscrupulous activity and seek you help to save our hard earned money.
As nobody in the bank replies properly and only assures that the insurance will be returned if loan is prepaid . this is only a way of fooling customers. The bank has not only disbursed 4.25 wrongly but also charging interest on the same.

It is, therefore, requested kindly do something in this matter so that my loan amount is reduced back to 45 lakhs. Also please the interest charged on this insurance amount should also be waived off.

Home Loan Customer and Mistake of Axis Bank

The fact that the customer came to know about the home loan insurance after the loan was sanctioned clearly shows that Axis Bank operations was not transparent at all and the customer was taken for granted. How can you sell him a home loan insurance without even telling him? This has to be communicated well? Was there a person one to one communication done with the customer if he can afford it or not ? A normal term plan with 50 lacs cover with 25 years tenure will cost less than 1 lac , but a policy worth 4.25 lacs was issues and no one even cared to understand it from customer point of view. This clearly shows the in-sensitiveness of the bank officials involved in the whole process.

What do you suggest in this case? What can this customer do and what do you think about Axis bank ? Will you ever consider Axis bank for Home loan after hearing about this case ?

Want a Loan ? Pay your phone/electricity bills on time !

Posted on by Jagoinvestor

Is there a way to determine whether or not it is risky to lend ‘You’ money? How do I know that you wont be a bad customer one day? Very simple – Just look at your credit history and see if you paid your dues on time or not; How many times you were late in making your credit card payment, home loan payment, personal loan dues. This is how CIBIL took birth in India.

But wait – Is this enough? No, we have several other kinds of dues and we make various  payments – those are mobile bill payments (post paid- around 5 crore of them), internet monthly fees (post paid), electricity and other utility bills, even your health insurance premiums. So now very soon you will hear that your mobile bills, electricity bills, internet bills etc are being tracked (actually they are already being tracked) and they will contribute in making of your credit history.

As of now CIBIL, Equifax and Experian (all 3 are credit Beauru) use only your Loan repayments as the criteria for your credit report and credit score, but the Credit Information Companies (Regulation) Act 2005 allows insurance, cellular as well as phone services companies to be counted amongst specified users of credit information companies, therefore, making them eligible to use the database. So very soon all such payments will start contributing to your credit score.

Past records will also affect your credit report

All the major telecom service providers in the country — BSNL, Vodafone and Airtel — are now in discussions with CIBIL for sharing their customer database. So, have you ever declined paying your phone bill? Have you delayed your electricity bill for many months/years or have been late all the time? Do you have this attitude of paying the mobile/internet bills only after getting 2-3 reminders? If the answer is YES, then you better know that all those past sins are staring at you and soon will haunt you.

Be ready to see your home loan or car loan application being rejected because you never paid that vodafone bill for Rs 1,500 and ran off or changed your address? Dude!, your name, photo, past address, DOB is all with them- it will unfold now and if you doubt that- see what CIBIL has to say about it.

“Our systems are capable of handling past payment records as well. If the telecom companies are able to give us the past payment records, we will upload them in the system,” says Arun Thukral – MD, Credit Information Bureau

It’s not clear how much weightage will be put on these kinds of utility bills and insurance premium payments because these are small ticket size in nature and should not be seen in lines with home loan EMI’s and credit card debt which can grow to a big amount. But what do you think about this move and do you think its right?

Does Home Loan kills Enterpreunership ? May be YES

Posted on by Jagoinvestor

Who doesn’t want to start some venture of their own? Majority of the people are in jobs and a big number of people do not like what they do. If they had a choice, they would really run away in this very moment. But our responsibilities in life and the situation we create for ourselves makes sure that we are stuck and can not get out of the rat race. We see so many people who want to work in start-ups, many people who really want to do something which they really love and enjoy even if it does not pay a lot but it’s not possible for lot of people to simply quit and start something of their own. Today we are discussing if home loans are a big killer of entrepreneurship which lot of Indian’s have in them?

Does home loan kill entrepreuneurship ?

We all know flipkart.com – One of the co-founder of the company, Binny Bansal made an interesting comment that – Home loan kills entrepreneurship.

India is definitely happening and there are a lot of opportunities in different fields. If you are thinking of starting up, this is the best time. But don’t take a home loan,that actually kills entrepreneurship. You can never get out of it. – Binny Bansal , co-founder flipkart.com (via)

Home loan is a big commitment, especially in a family where there is one earning member. People take jobs, get married, get a home loan, car loan etc, have kids in between and life becomes so “formula driven”. Income has to be earned and expenses have to be taken care. Risk of job loss, income loss due to medical emergencies and similar kind of risks are on the minds of a people who are paying for home loan – and this pressure kills the dreams of doing something of his own and the natural thinking then becomes – “Not an issue – Let me earn for next X years and once I retire, I will live all my dreams”. I am not sure if it really works at the end or not.

There can’t be a bigger liability than owning a house on Loan

Santosh Navlani of moneysights.com confirm’s in one of this comments, that saw same kind of thing while he was hiring people.

I am an entrepreneur & meet many people who at times are potential employees for my start-up venture. Now, most of these house-owners even if they are “excited & thrilled”, don’t join a start-up which would offer them great earning potential in the future because of the uncertainties that a start-up job brings to their income. Simply because they have a huge liability!

If one factors the cost of “forgoing” the pursuit dreams, I guess there can’t be a bigger liability than owning a house on loan. I have seen people getting stuck in wrong jobs where they sacrifice their long-term future by satisfying the urge of saving the rent. And yes, you don’t decide to pursue a dream of start-up or a job-switch by thinking extremely hard on it. It just happens that you are not able to take the job anymore. The last thing one wants then is fear of home-loan coming in way.

So what you do if you are young enough, unmarried and want to taste entrepreneurship? This is the right time to take the plunge and take the risk, so that you have that cushion to come back in the game if you fail. Once you take a home loan and are married, life is full of commitments and you will not be excited enough to start something on your own or join a more fun (low paying – at least in starting years) job. One of the friend who didn’t want to reveal his identity shared with me on facebook.

When I was 25, working as a software engineer at Hexaware Mumbai in 2002, earning Rs. 25,000 per month, I quit my job and went to Goa, following my dream and started a completely new career stream at an income of Rs 4,000 p.m. At that time, I was single, did not have any home loan or other commitments and that certainly helped otherwise I may not have been able to take that jump.

Interestingly, when I met a few ex-colleagues from software industry recently, to my surprise, I figured that not only I earn more or equal to them, but am also much happier because I am enjoying what I’m doing. They confessed to not enjoying their jobs and feel that as software professionals working late nights to meet client calls in US, long daily commute to office etc. they felt as though 10 years of their personal life was “sucked” by their jobs.

Conclusion

There is saying – “If there is a will, there is a way” and a lot of people I talked about on this topic, said that if a person has the guts, vision and passion, he can make it real, even if he has huge debt!. But we are talking about the masses here (majority of people) and for most of the people it’s really difficult to take that kind of risk, even thought they have huge passion and mindset- their situation just does not ALLOW IT. Do you really agree to it ?

Would you like to share about your experience and thoughts on this topic ? Do you really think that home loan (or any such kind of huge responsibility) really kills entrepreneurs and stops people to explore low paying but hugely satisfying careers ? Really ?