Do a cash flow analysis to check whether a loan is good or bad

Before you apply for any loan, you need to check your credit score


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I am 57 years old now and have not taken any loans for the past 15 years. Can I get a vehicle loan now? How and where do I apply for a Cibil score?

—Sanjeev Vithal Athani 

A vehicle loan is available to all individuals having a regular income. However, the approval of loan is subject to the basic criteria being met. Firstly, in your case any loan company will want to mainly ensure the repayment capacity simply based on your age. It is also preferred that there is a regular employment. And here also, the age should be less than 60 years at the end of the loan tenure. In case of self-employed individuals, the age relaxation is up to 65 years. So, if you are employed, then the prepayment period has to be less than 3 years else longer. Generally, car loans are available for a tenure of up to 7 years. Loan for a new vehicle can be availed up to 100% of the ex-showroom price of the vehicle. In addition, you will be required to submit proof of identity, address and income proof and bank statement. 

Before you apply for any loan, you need to check your credit score. You can apply to the TransUnion Credit Information Bureau (India) Ltd (Cibil) online on its website www.cibil.com, where basic details are required to be filled, including your Permanent Account Number. The Cibil score can range between 300 and 900. A score above 750 is considered good. 

At the same time, you need to understand the concept of good loans and bad loans. So what is a good loan? Any loan that gives the advantage of tax efficiency, thereby bringing down the effective rate of interest, and/or is used for buying an appreciating asset can be termed as a good loan. So, in simple terms, buying a house generally qualifies for a good loan. A car as an asset is not an appreciating asset so it is to be checked whether it is gives you the tax efficiency. So, for instance, in case of employment, if the car is offered under a company car lease policy or is taken by a self-employed person where the interest can be taken as an expense, thereby reducing the cost of borrowing, it can be called as good loan. 

Another rationale is to check the deployment of funds—if the same funds are invested at a higher rate of interest, as against the borrowing cost, it may be prudent to go for loan. So, a cash flow analysis needs to be done to determine whether a loan is good. 

I have an outstanding credit card payment of Rs5 lakh and a ongoing home loan that will continue for another 18 years, with an equated monthly instalment (EMI) of Rs35,000. I earn Rs1.25 lakh but am unable to make any investments. How should I go about managing my money? 

—Rakesh Vijan

You do have a good regular income but are not able to plan your expenses within the same. It is important that you do you cash flows management—understand your income and expenditure. As your income is a fixed amount, it is the expenses that need to be sorted. To start with, write down your monthly expenses for the next few months to understand where your spending is high, and where it can be brought down. 

The rate of interest on an outstanding credit card balance is high. All effort needs to be taken for repayment of the same. As the outstanding amount is large, it will require much more than cash flow management, as only that can be of help for the future. 

Check the existing investments and if the same can be used for repayment of the credit card loan. Even if it means partially redeeming Public Provident Fund (PPF) or any such investment, so be it. If no such avenue exists, you may also consider taking an additional loan against property (LAP) to repay the credit card loan. The borrowing cost of LAP, or for that matter any other loan including a personal loan, will be far lower than the cost of servicing the credit card loan. This loan can also be repaid regularly in the form of EMIs, which can be paid along with your home loan EMI. Also, going forward, don’t take any loans on credit cards as if you spend beyond your means, it gets converted into a loan. Credit cards should be used more like debit cards, i.e., money spent should not be based on future income but on the balance in the bank. At the same time, try to save small amounts—start with Rs5, 000 a month or even lower to create an emergency fund, which can help you in case of any need.  Increase this amount by a few thousands or more every year along with the increase in your salary. This amount can be invested in a bank fixed deposit or short-term debt mutual funds. The key is to be disciplined and realize the importance of savings and investments. Once you have started saving regularly, you can consider other asset classes for investment.

Surya Bhatia is managing partner, Asset Managers.

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