Should you change your bank?
A higher rate of interest on the savings account is not reason enough to change your bank. Here’s what you need to consider before making the switch. If you are thinking of changing your bank, assess the reasons why you are doing so. Here are some parameters to keep in mind:
1. Quality of service
If your bank’s service standards are not up to the mark, shift to one that matches your expectations. However, improved customer orientation comes with a price tag. PSU banks require a low minimum balance of Rs 2,000-3,000, while private banks insist on figures that are 4-5 times bigger. Move only if you are ready to pay that cost.
2. Product portfolio
Is your bank providing the services you need? If your bank’s product portfolio does not match your needs, it’s time to switch. Your bank could also be offering services you don’t need or want, but you are being charged for them.
3. Unsuitable timings
The branch timing can be an important consideration for customers who don’t use Net banking or mobile banking services. A well connected location is more convenient than a branch in a suburb.
4. High charges
For many private bank customers, the high charges are a trade-off between costly but efficient service, and cheap but poor delivery.
5. Higher interest rates
Banks try to lure customers with offers of a higher rate than the usual 4% offered by most banks. Is this a good enough reason for you to change your bank? Not really. If your average balance during the year is Rs 40,000, then you will gain about Rs 50 more per month if you shift to an account that offers 5.5% interest. Unless you have a huge sum (Rs 1 lakh and above) idling in your account, it will not make a significant difference.
6. Financial strength
It may be a good idea to shift your account to a bank that has a strong balance sheet and is not likely to shut shop. PSU banks are any day a safer bet than a private bank, but even established private banks are as solid as rock. It’s only obscure names that are in the negative list.
If you are still intent on dumping your bank, keep in mind that switching to a new bank requires a lot of paperwork. However, if you really feel you will benefit from the change, find out what you need to do.
(Originally published on 21 Jan, 2013)
Golden rules of borrowing
Lenders are luring customers with attractive rates and swift disbursals. Go through these thumb rules before you take a loan.
In an ideal world, everybody would have enough money for all his needs. In reality, many of us have little option but to borrow to meet our goals, both real and imagined. For banks and NBFCs, the gap between reality and aspirations is a huge opportunity. They are carpet bombing potential customers with loan offers, promising low rates, quick disbursals and easy processes. While technology has altered the way loans are being disbursed, the canons of prudent borrowing remain unchanged. We list nine immutable rules of borrowing that potential customers must keep in mind.
1. Don’t borrow more than you can repay
Don’t live beyond your means. Take a loan that you can easily repay. One thumb rule says car EMIs should not exceed 15% while personal loan EMIs should not account for more than 10% of the net monthly income. If your EMIs gobble up too much of your income, other critical financial goals might get impacted.
2. Keep tenure as short as possible
The longer the tenure, the lower is the EMI, which makes it very tempting to go for a 25-30 year loan. However, it is best to take a loan for the shortest tenure you can afford. In a long-term loan, the interest outgo is too high. Increasing the EMI amount can have a dramatic impact on the loan tenure. If a person takes a loan of Rs 50 lakh at 10% for 20 years, his EMI will be Rs 48,251. If he increases the EMI every year by 5%, the loan gets paid off in less than 12 years. If he increases the EMI by 10% every year, he would pay off the loan in just 9 years and 3 months.
3. Ensure timely and regular repayment
Whether it is a short-term debt like a credit card bill or a long term loan for your house, make sure you don’t miss the payment. Missing an EMI or delaying a payment are among the key factors that can impact your credit profile and hinder your chances of taking a loan for other needs later in life.
How much EMI can you afford?
4 Don’t borrow to splurge or invest
Never use borrowed money to invest. Ultra-safe investments like fixed deposits and bonds won’t be able to match the rate of interest you pay on the loan. And investments such as equities are too volatile. Similarly, avoid taking a loan for discretionary spending of any kind. On the other hand, taking a loan for building an asset makes eminent sense.
5. Take insurance with big-ticket loans
If you take a large home or car loan, it is best to take insurance cover as well. Buy a term plan of the same amount to ensure that your family is not saddled with unaffordable debt if something happens to you. The lender will take over the asset (house or car) if your dependants are unable to pay the EMI.
6. Keep shopping for better rates
Keep shopping around for the best rate and switch to a cheaper loan if possible. However, the difference should be at least two percentage points, otherwise the prepayment penalty and processing charges will eat into the gains.
What’s your loan to income ratio?
7. Read the fine print
Read the terms and conditions carefully to avoid unpleasant surprises. If you are unable to understand the legalese, get a financial adviser or chartered accountant to take a look.
8. Substitute high cost loans
If you have too many loans running, it’s a good idea to consolidate your debts under one omnibus low-cost loan. It is also a good idea to prepay costly loans as soon as possible. Divert windfall gains towards repayment.
9. Don’t nix retirement by avoiding loans
Dipping into your retirement corpus to fund your child’s education can be risky. Students have options like loans and scholarships to cover their education costs but there is no such arrangement to help you plan your retirement needs. Your retirement is as important as your child’s education.
(Originally published on 14 Sep, 2015)
