A fixed asset often provides immense value at an hour of need. LAP is one such means that allows you to convert a fixed asset as a source for emergency funds. Loan Against Property (LAP) is a good option to turn to in the case of planned expenses like funds for education, wedding, or a surgery, which requires hospitalization and funds. The rate of interest for a loan against property is lower compared to the other two options.

The loan amount you can avail for this loan depends on the value of the property, which you place as your collateral for the loan. This can range anywhere between 1 lakh and 3 crores. This comes with the risk of giving up your home if you are unable to repay the amount in full. The financial institution has the right to auction your home to claim the remainder of the loan amount you owe them.

The repayment tenure can be as long as 20 years and the interest rates are generally between 12% and 17%. Generally a LAP takes time to process, as the valuation for the property has to be completed and verified before the loan is sanctioned.

What purposes can I take a loan against property for?

Loan against Property can be taken for following purposes:

• Expanding your business

• Getting your son/daughter married

• Sending your son/daughter for higher studies abroad

• Funding your dream vacation

• Funding medical treatments

What kind of properties can I mortgage for a loan?

You can normally take a loan against your self-occupied or rented residential property. This could be a house or even a piece of land.

What is the eligibility criteria to get a loan against property?

This criteria will vary from one bank to another. However, from all the host of factors, the common factors that all banks look at are:

• Your income, savings, debt obligations

• Cost/value of the property mortgaged

• Your repayment track record for other loans, credit cards etc.

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A home loan transfer (also known as refinancing or balance transfer) is an option that most individuals opt for to avail the benefit from lower interest rates prevalent in the market. Usually the existing borrower of a bank who is about 2 or more years into his loan tenure does not get the benefit of reducing interest rates in the market. RBI has been insisting on lower interest benefits to be passed on to the existing borrowers as well but it seldom happens.

Such individuals could discuss with their bank on re-negotiating the interest rates based on the good repayment track record etc. If the bank is not amenable, then they could shift to another bank which offers a lower interest rate prevalent in the market.

How does the process work

You will need to submit a letter to the existing lender requesting a loan transfer. Based on your request, the bank will give a consent letter / NOC and a statement mentioning the outstanding amount. This needs to be provided to the new lender who then sanctions your loan amount to the old lender for an account closure. Once the transaction is over, your property documents will be handed over to the new lender, the remaining post dated cheques / ECS will be cancelled.

The bank you are shifting to will offer you a loan based on the current home loan rates they are offering to their home loan applicants.

A prepayment penalty was earlier levied by the existing lender which can vary anywhere between 2%-5% of the principal outstanding of the loan at the time of refinance. However recently  NHBs and some banks like ICICI and SBI have waived this fee, but some banks could still charging a penalty. Do check with your bank and try to negotiate a waiver as the RBI and NHB mandate clearly are not in favour of penalty for prepayment in the case of a floating interest rate loan. Also, remember that you will also need to pay a processing fee to the new lender, which could also be negotiated and waived in this high interest rate regime.

This can range anywhere between 0.5% to 1% of the loan applied, most banks restrict this amount to Rs.5000.

Factor in all these costs when comparing the total loan cost between the two offers. If you feel there is a significant amount of interest to be saved from the move, then you can make a profitable switch.

The current interest rate climate however looks unfavourable for a switch unless you want to do it for other reasons. Starting this new year all major banks have increased their interest rates by 0.25% to 0.75%. More hikes are expected after the RBI monetary policy review slated for the end of January.

Remember that for a home loan switch you need go through all the procedures involved afresh. These include a credit appraisal, legal verification of property documents and technical evaluation with the new bank  etc. and a loan will be approved only when conditions are met.

Apart from saving on interest there are a few other reasons as well to switch a home loan, these include:

Bank is not agreeable to change loan terms: You might want to re-negotiate certain terms and conditions with your bank. For example, you might wish to extend the tenure of your loan to lower your EMI, your bank might not be ready for this change and hence prompt a shift.

Top up loan: The property value might have climbed much higher from its original price. On the basis of this you might want a top up loan to meet a money requirement or for a home renovation perhaps. If your lender is not open to finance this you might opt for a new lender.

Service issues: Sometimes you might just be unhappy with your bank’s service and accessibility, which might prompt a change.

Things to watch out for:

-        It is always better to switch the loan early on during the tenure as you would have already paid out a substantial amount of the interest due initially.

-        In the recent past a loan transfer was the most sought after when teaser loan schemes hit the market. However one should keep in mind that the teaser rate will contractually rise after a stipulated time frame.

-         Get a statement from your current lender stating that property documents will be dispatched within a certain time frame to avoid hassles on this front.

-        Remember that a loan switch will not be possible if you have been irregular with your loan repayment with your current lender.

Try and pay the down payment from your own money, savings or by liquidating some assets. Opting for a personal loan can be a costly affair, as interest rates are very high. If you don’t have enough savings or assets to pay up the money, then its wise to wait and build assets and savings that can come handy for the downpayment, when the time is right.

Down payment generally amounts to 10-20% of the total cost of the home, as banks generally fund only about 80- 85% of the loan amount. This is to make sure the buyer has some stake in maintaining the property. Also, this ensures that the loan amount lent by the bank is always lower than the market value of the house.

Age of the building

Another factor banks consider while determining the total amount to lend, is the age of the building. Depending on the age of the building the down payment is likely to increase, the older the more down payment, you may need to shell out. The Bank always decides the home loan eligibility based on the property first. This means if the building is old and the down payment chunk is huge, banks will still insist on the down payment, even if your income can easily qualify for larger loan amount.  Banks adhere to such measures to safeguard their interests and to help them indulge in safe lending operations.

Make as much down payment as possible

Try and pay the down payment from your own money, savings or by liquidating some assets. Opting for a personal loan can be a costly affair, as interest rates are very high. If you don’t have enough savings or assets to pay up the money, then its wise to wait and build assets and savings that can come handy for the downpayment, when the time is right.

The concept of a down payment exists due the following reasons:

a. It indicates borrower’s credit worthiness due to access to the down payment

b. The amount of real investment a borrower has in their purchase, and their fidelity in continuing to make payments regularly are linked

c. It acts as a sort of insurance for lenders, since borrowers know that if they default on their loan; they will not only lose the property but their down payment as well

d. It ensures that the buyer (borrower) has some stake in maintaining the property

e. It ensures that banks are protected from fall in interest rates since the amount that they lend is lower than the market value of the house. Therefore, if there is a fall, they can still recover the losses

Home buyers are always looking for the best home they can buy with the resources and time available with them. Now, more than ever, real estate prices are subdued and buyers are again active in the market.

Buying a home is the most exciting and at the same time, tedious task for people. While the excitement of owning your own home pushes you harder to expedite the process, the tedious task of going through enormous amount of details frustrates you. Going through the process is a necessity. Though the process is tedious and demanding, any negligence on the due diligence can cost us big in the future.

In this article, we will take a look at some options that home buyers have and how they can choose the best one based on their requirement.

Buying an under-construction home

This is the most popular way of buying a home. A builder announces a new housing complex through newspapers, TV, or any other media. Agents start going around the market, companies, malls, and even homes of people to advertise the same. The goal of the builder is to sell as many as possible before the housing complex is built. In fact more than 75% of the flats of known builders are booked even before a brick is laid.

The advantage

Cheaper – Buying an under-construction home is cheaper compared to buying the one that is already built or about to be built. The cost difference is significant. In the Delhi and NCR region, a ready to move flat with 2 bedrooms that costs home buyers about 40-50 lakhs can be bought anywhere in the range of 30-40 lakhs while under-construction, depending on the location. On an average, the difference is anywhere between 20% and 40%. This is a big difference for majority of the home buyers.

Low EMI – The EMI is paid as the work progresses hence the initial EMIs are low in the case of an under construction home.

Win-win situation for buyers and sellers – Buying an under construction home is a win-win situation for both buyer and seller. The seller gets a ready set of customers even before he starts laying the foundation while buyers get the cost benefit.

High returns – Since the prices are lower, you may get higher returns on the under-construction home. This kind of return is not possible in a ready to move home. However, high returns come with high risks. To give an example, people who invested in Noida authority plots earned high returns while people who invested in Samshabaad in Hyderabad are still waiting for the area to pick up.

Caution Points

Risk is high – All is not so well in under construction home buying though. There have been cases where builders could not complete the housing complex and buyers lost the money. Real estate sector is full of such stories where the builders could not complete the property because of cash crunch, high interest rate, and high raw material costs.

On the other hand, the market outlook may also change like how it happened in Samshabaad in Hyderabad. Samshabaad was supposed to host the largest Infosys campus, a chip factory, few engineering & medical colleges, banks etc. but none of it happened due to the 2008 crisis.

Many times, you don’t get what you are promised – This is another common complaint the home buyers have. They usually do not get what was promised in the documents. What is distressing is the carpet area that buyers get once the home is constructed. The carpet area is usually 70% of the super built area. The illusory swimming pool may never come up.

Important Points for buyers of under construction homes

Buyers should also check the past history of the builder. If the builder has done great in the past, chances are very high that he will repeat the same. However, if the past is checkered, rest assured history will repeat itself. Hence the track record of the builder is of paramount importance.

Buyers should clarify loan tenure and how the money will be released to the builder. Typically it is completion based.

Buying a ready to move home

A new trend is observed in home buying since the last couple of months. A good number of home buyers are slowly shifting towards moving to `ready to move’ homes than buy an under construction home and wait for a couple of years to get the possession. The reason is not hard to guess. Since the economic slowdown in 2008, there have been many cases where builders could not complete the housing complex and buyers had to wait helplessly. There have been many such cases.

The advantage

Immediately Available – Investors do not have to wait to move to their new home as it is ready and all buyers have to do is to pay the money, sign necessary documents, get all titles and required documents and transport their baggage to the new home.

Either EMI or Rent but not both – In the case of ready to move, you just pay the EMI. In case of buying under construction home, you have to pay the EMI and live in rented apartment till you get the possession.

You get what you see – In the ready to move home, you get what you see. Since the housing complex is ready and there are people living there, getting feedback about the area, maintenance, locality, shopping centers, and utility centers become easy.

Caution Points

The biggest negative of ready to move home is that you will have no idea of what went on behind the scenes, i.e. in terms of materials used, in terms of strength of the foundation etc. If the maintenance is shabby, the house can start to look old in no time!

Also, the price of ready to move home is about 25% higher than the price of under-construction home.

Important Points

Ready to move homes are generally more expensive but do not take this as gospel. Do your research; speak with a few people in the locality to find out the fair value of the home.

Group Buying

Since the last couple of months, many new companies such as www.groupbookings.in have encouraged home buyers to form a group and thus increase their bargaining power. Once the group is fairly big, the group buying companies will negotiate with builders on their behalf and get extra discounts. Essentially these companies act as a mediator between the builders and home buyers.  For builders, giving extra discounts is not a problem because they are saving big in advertisement and sales force.

The Advantage

Group buying empowers home buyers to negotiate better with the builder. The group home buyers usually get a better discount than what they can get individually.

Caution Points

In group buying, an individual buyer doesn’t make much difference and hence group’s interest takes priority over individual’s choice.

The down payment usually is higher.

Important Points

The buyers should study the documents carefully. Don’t assume that someone is reading these documents. You will be surprised to know that everyone has the same assumptions.

Group buying of homes take time and hence you have to be patient about it. The group buying company has to build the group, and negotiate the price with the builder for additional discounts. These activities take time.

Buying run-down homes

This option is not yet popular in India but slowly picking up. Essentially buyers choose to buy a rundown home at dirt cheap prices.  Once the house is yours, you can fix it and spend some money to get it up to date. This can fetch a better value in the market and the investor can make a killing in profit.

The Advantage

The houses are much cheaper even when you add the cost of repairing the house. Run-down houses are generally row houses and hence you get the land with it too.

Caution Points

The look of run down houses can be deceptive. You may have thought how must it should cost to renew but when you start to repair it, it may exceed your cost estimation.

Important Points

Unless you have experience about this field, do not venture into it. You may end up buying a worthless property in an area where people are migrating from.

What should you choose?

Your choice should depend upon your financial condition, timing, and your choice of location. Location is the most important factor in real estate.

If you are ready to wait, can take medium to high risk, and do not care much for location (in terms of being near to the market etc.), you can go for booking an under-construction home. You can even go for group booking if your requirement is to stay with people of your social standing.

If you cannot wait and cannot take high risks associated with under-construction homes and need to be near  amenities of your choice, try to find a ready to move home or go for a group buy.

If you and your spouse earn similar incomes, then its best to opt for an equal co-ownership of the property and split the tax benefits of the home loan equally as well. In case one of you fall under a smaller tax bracket,  it is good to let the partner with the higher pay make a higher contribution towards the home loan resulting in a better tax benefit collectively. This would help you optimize the benefits from the tax exemption on principal and interest repaid.

A home loan often means all the more caution with money management and monthly budgets. It also means some smart thinking on the part of the individual who is taking up the home loan. Apart from things like evaluating fund flow, future job prospects, negotiating a pay hike, understanding loan eligibility, maintaining a good credit score and getting the best interest rate in the market, one also needs to consider the possibility of opting for a joint home loan!

Who can opt for it?

Banks insist that all co-owners of the home must be co-borrowers in a joint home loan.

- One could team up with parents or the spouse to be able to maximize the benefits of a joint home loan.

- Some banks allow brothers to take a joint home loan provided they opt to become co-owners of the property.

The exceptions are sisters, friends or unmarried couples living together as most banks generally don’t allow them to opt for a joint home loan.

Key advantages of a joint home loan
a. Banks do not allow a person to borrow to an extent where their EMI exceeds more than around 40-50% of their monthly income. This ensures that there is no stress on an individual’s monthly budget. Hence, when the incomes of all the joint applicants are combined to decide the loan eligibility, the result is a better loan amount for a better home.
b. All co-applicants are eligible for simultaneous tax rebates under Section 80 C for principal repaid and under Section 24 for interest repaid. However, these tax deductions are capped at 1 L for the principal repaid and 1.5 L for the interest repaid. Do note that this is applied for each individual loan applicant thus maximizing the tax benefits on the home loan.
If you and your spouse earn similar incomes, then its best to opt for an equal co-ownership of the property and split the tax benefits of the home loan equally as well. In case one of you fall under a smaller tax bracket,  it is good to let the partner with the higher pay make a higher contribution towards the home loan resulting in a better tax benefit collectively. This would help you optimize the benefits from the tax exemption on principal and interest repaid.

Eg. Let’s say the principal and interest repayment on your home loan for a given year is Rs 2.4 lakh and Rs 3.5 lakh respectively. Now, under Section 80C, you can get a maximum tax deduction of Rs 1 lakh on principal repaid and under Section 24 you can get a tax break of up to Rs 1.5 lakh on interest repaid. However, if you and your spouse have opted for a joint home loan, you would collectively be able to claim a deduction of Rs 2 lakh and Rs 3 lakh on the principal and interest repaid.

Do note that the tax benefits are according to the proportion of the loan. That is, if the ratio of the loan is 70:30, then a loan of say, Rs 50 lakh will be split as Rs 35 lakh and Rs 15 lakh respectively and this ratio will be applicable while calculating tax benefits on the interest and principal repaid on this loan.

Also keep in mind, that tax slabs might change according to new budget specifications each year and there could be changes in the gross income as well, not to mention changes in the total principal and interest repaid in every new year of the home loan. In this respect, the interest repaid will become considerably lesser and the principal repaid will become higher during the latter years of the loan.

For tax purposes, it is best to procure a home loan sharing agreement, detailing the ownership proportion in a stamp paper, as legal proof for ownership.
So taking a joint home loan has the significant twin benefit of increasing your loan eligibility and maximizing your tax rebate.  Do remember that though the banks insist that all co-owners of the property should also be co-applicants in a joint home loan, the reverse need not be true.

Moving into one’s own home is a joy, which is to be felt not explained. It is utopia what with the poojas, house warming functions, searching for just the right furniture and fittings, praises you get for having taken care of the finer parts in construction and decorating the house and the pride in having acquired a physical symbol of success.

After the festivities are over, and with the dawn of a new month, a new realization comes home. For the fortunate few, it is the reminder to fund your bank account, as the loan EMI is due after a week. For others the money simply flew out of the bank account.

It is time for us to act like the fund manager of a mutual fund or investment fund. Taking informed decisions to manage the asset that we call home and the liability that we call housing loan. By being prudent, you can get high “returns” in the form of saving on interest outflow.

Fund Management When Carrying a Home Loan

As a fund manager of the house, one has to find ways to maximize the benefits of the cash flows. Make a list of all the loans and savings/investments that you have made. Do you find places where the savings/investment is giving lesser returns than the loan rates? This can typically be seen with your endowment insurance plans, your EPF and PPF, the postal deposits, sometimes-even ULIPs. Why should you be invested in something when you are paying higher interest to somebody else? It is better to close all or most of these lesser returns savings/investments and divert the funds to close the home loan.

Care should however be taken to replace an endowment insurance plan with a term plan of higher cover. Your employer and your EPF officer will allow withdrawal of funds from the EPF account for buying and closing the loan of a house. The PPF is not so flexible with letting go of your money. ULIPs and the postal deposits can be closed only after the stipulated 3 years of lock-in.

Ways to repay your debt quickly:

There are ways to come out of the EMIs and make your loan tenure shorter:

1.    Partial pre-payment

2.    Switching to a lower rate

3.    Increasing the EMI

Now let us look at the options in more detail. The best part is that, the options do not in any way add to your existing budget.

Partial Pre-Payment

This is the easiest way to close a housing loan faster. The method is to make use of any one-time income like a bonus, salary arrears, gifts from friends/relatives, any wind fall gains from shares, property sold, deposits closed, tax saving investments maturing, closure of savings that are giving you lesser returns than the housing loan, etc to partially close the housing loan.

The effect is that the one-time payments help to reduce the principal balance in the loan. And when the EMIs continue, they have lesser of the principal to cover. So the same EMIs need a lesser time to close the loan. More earlier and more frequently the partial pre-payments happen the faster the loans close.

Banks generally allow partial pre-payment starting from Rs.10,000/-. There are no charges for partial pre-payment of housing loans.

Switching To a Lower Rate

The interest rates current are in a rising trend. There are times when the interest rates start going down too. Based on the interest rate reset period, different banks will reduce their rates at different times. If the reset interest band of your lender is a wider band, you may be at a higher interest rate for a long time after other banks have started to reduce their rates.

Switching to a lower interest rate will shave off a few years from your housing loan. Care however has to be taken about not jumping too many times or with low interest rate differences. This is because there is a charge for switching loans, i.e. prepayment penalty, which the RBI has been stressing, should be removed from the system. While some banks have already done away with it, some still charge if you do not pay from your own sources. However, it could just be a matter of time till it is totally removed from the system easing the cost burden for the loan borrower further!

Do remember that property verification and other legal paperwork will have to be done afresh in the case of a loan transfer. Also, for a loan transfer to be effective you should have a clear track of having cleared all the EMIs on time, every time.

Increasing the EMIe

This is another option to close the loan faster. If you can spare a portion of an increment to increase the EMI, considerable saving could be made. For example a Rs.30,00,000/- loan for 20 years will need an EMI of Rs.28,950/-. If you can spare an additional Rs.2,300/- per month, the loan can be closed in 15 years itself.

The EMI can also be increased by making use of money that was going into an endowment insurance plan or a recurring deposit in a post office.

Increasing the EMI can be done at any point during the tenure of the loan. There are generally no charges for increasing the EMI.

Summary

Only after closing the home loan does one really become the owner of the house. Closing the loan as soon as possible not only relieves the mental strain of carrying a debt but also releases more money into the family budget.

What is the loan amount I am eligible for? Can more than two of us take a joint home loan? BankBazaar.com answers all your queries.

I along with five others plan to buy a plot of land and construct apartments for us. We are considering a joint loan. I would like to know if:
1. We can get a joint loan?
2. Will there be any legal problem in obtaining such a loan?
3. Will we all get tax benefits for the loan amount?
– Arnav

Yes, it is possible for a group of six people to take a joint loan. Banks allow anywhere between two and six persons to take a joint loan, depending on their respective credit profiles.

However, banks as a rule do not allow friends or even siblings to take a joint loan. A joint home loan can be taken by a married couple or a parent and child. In some instances, brothers are allowed to take a joint loan. Just in case the six of you include a father, mother and four brothers, you can be assured that a loan will be sanctioned by the bank you approach.

b. There is no legal problem with six people opting for a joint loan. However, banks insist that all co-owners of the home must be co-borrowers in a joint home loan, though the reverse is not stressed.

c. Section 80C and Section 24 grant income tax rebates to people with home loans. However these tax deductions are capped at Rs 1 lakh for the principal repaid and Rs 1.5 lakh for the interest repaid for each individual. Another added advantage of jointly taking a home loan is that all the borrowers can simultaneously avail these income tax rebates, thus maximising the tax benefits of the home loan.

I work as Manager of Sales with a Multi National Company. My monthly take home is approximately Rs 30,000 per month, which comes to Rs 6 lakh per annum including all benefits. I want to buy a property in Indrspuram (Delhi NCR), which costs Rs 32 lakh (Rs 30 lakh for home and Rs 2 lakh for registration). How much loan should I take from a bank?
– Pushpam Kumar

You are eligible for a maximum of Rs 13 lakh at 20 year loan tenure, which is the maximum tenure given by most banks. The loan amount is based on your income of Rs 6 lakh per annum. You need to have funds to make a down payment of Rs 19 lakh to purchase that property you have identified.

The Equated Monthly Installment will be approximately Rs 15,000 per month assuming an interest rate of 13 per cent that is prevalent in the market, today.

You can consider a joint home loan if you fall short of funds for the down payment. The advantage of applying for a joint home loan is you can combine your income and a family member’s income to be eligible for a higher loan amount.

Also remember, banks generally fund a maximum of 85 per cent of the cost of the property you plan to buy, hence it is essential to have at least 15 per cent of the cost of the property as down payment.

To understand how a home loan works one needs to understand what a rest means. A rest is the interval at which the remainder of the loan amount is recalculated as you repay the loan. This is relevant only in the case of a reducing balance loan as opposed to a flat rate interest loan. These regular intervals or Rests can be yearly, monthly or even daily.

Financial institutions have various parameters surrounding the loan amount detailing the manner in which the loan is repaid. A “Rest” is nothing but the regular interval at which the loan amount balance is recalculated and also refers to the periodicity of compounding. This can be possible only in the case of reducing balance loan amounts.
These regular intervals or Rests can be yearly, monthly or even daily.

A yearly rest or an annual rest would mean that even when you pay EMIs on a monthly basis on your loan, the loan amount based on which you pay the interest, will be recalculated only at the end of the year(12 months). This means you would continue to pay interest on the entire loan amount , even when the outstanding loan amount reduces each month.

In the case of a monthly rest, the balance loan amount is recalculated and decreases every month. Hence it is to the advantage of the loan consumer to take up rest that more closely matches the frequency of his loan repayment. So if you are repaying your loan amount on a monthly basis, take up the option of a monthly rest. Banks generally charge an “annualized” interest rate, which is converted accordingly to a monthly rest or daily rest.

Here is a simple illustration that shows you that the interest rate on a monthly rest is lesser than that of an annual rest. Take two instances, where you borrow Rs. 20 lakh at a 10% annualized interest rate (which is obtained by multiplying the rate per rest period into the number of rests per year), where in one case the rate has annual rests and in the other case it has monthly rests.

To compare loan offers from multiple banks, you need to calculate the total amount of interest you would pay for each offer. Knowing the annualized rate quoted by each bank will help you calculate the interest rate you pay at different rest periods and enable you to compare offers even if their interest rates are quoted differently.

Try to lower your interest rate. Negotiate with your bank. One other way is to convert your credit card debt into a personal loan debt. It will definitely be lesser than the credit card interest rate. Calculate your net worth and see if any of your investments could help you prepay a part of your loans.

Akash was an IT employee who was well settled in his career. With a take home that more than met his needs, Akash decided to invest in his future. Let us see how he managed his finances. He applied for a car loan and a home loan. The car was worth Rs.10 L, a bit of an indulgence but then he had always wanted to own the brand. He then invested in a premium  upmarket 5-bedroom apartment. His spouse Sheela tried suggesting that they should not be so extravagant but to no avail.

She had recently given up her job to take a break and spend more time with her one year old child. With no bulk savings for the immediate future she was worried about the manner in which Akash was spending the sole income they had. To top it off he invested all the money that remained from spending on the EMIs and  his monthly expenses, in stocks. This was the year 2007. They were managing fine till Akash’s stocks started tumbling in 2008. Instead of choosing another avenue, Akash started buying more stocks as they were cheaper during this period. The real shocker came when Akash was laid off when the global recession hit and his company had to cut back on resources to counter the effects.

How did Akash cope? How did he manage to pay his EMIs?

Akash did one smart thing though. He decided to approach a debt counseling centre for his financial hassles. They showed him the right way to manage his finances. They also mediated between him and his bank.

Luckily for him Sheela had an ancestral home back in her home town, which was bequeathed to her. She also had some fixed deposits and some gold that she had invested her savings in when she had an income. Based on the debt counselors’ advice, she obtained a loan against her property. She then helped Akash pay  a portion of the money towards his home loan and another portion towards his car loan as part prepayment. He also obtained written consent from the bank that he would resume repaying his loan once he got a job. In such situations banks do oblige you if you manage to repay most of the money or part of the money if not all as it was a better deal than no money at all.

Sheela whose industry was not so badly hit by the recession went back to  her old job while Akash took a break and got to spend more time with his son. Fortunately for him, his peace of mind was restored thanks to Sheela’s timely aid and the debt counselors’ help.

Six months later he managed to land a good job with a reasonably good pay, though about 20% lesser than his previous pay. He resumed his EMI payments and as banks were slashing interest rates he again negotiated with his bank for a lower interest rate. As it timed with the pressure from RBI on banks for lowering interest rates for existing borrowers also, he managed to come to an understanding with his bank. Agreed, not all can get as lucky as Akash. It was a pretty close brush with fate for him and he could have fallen in a abyss of debt! Yes…he got very very lucky indeed.

However, Akash learnt a valuable lesson for life. He started following simple but smart methods to avert a future disaster.

a. He put aside three months of his pay into a separate account meant to serve as an emergency fund. He planned to put aside 3 more months of pay into that account.

b. He ensured that his current EMI did not exceed 40% of his current income. He manage prepay his home loan at regular intervals to bring this under control.

c. He with the help of Sheela managed to keep his monthly expenses including his loans within 60% of his income and put aside the rest as savings and investment

d. When he invested now he took care to diversify his portfolio and not stick to equities alone to survive a future stock market crash.

Here are some suggestions if you are stuck in debt and do not know how to cope.

- Try to lower your interest rate. Negotiate with your bank. One other way is to convert your credit card debt into a personal loan debt. It will definitely be lesser than the credit card interest rate.

- Calculate your net worth and see if any of your investments could help you prepay a part of your loans.

- Make a contingency plan for the immediate future. Talk to your bank along with your debt counselors and explain your situation and see if you can resume your loan at a later date but do make an effort to prepay some amount.

- If it is a double income household try and see if your spouse can support you in the event of a job loss in the short term before you land a job, in case you are suffering from a lay off.

- Manage your current finances judiciously to battle through the current situation and emerge wiser.

Remember it is not a wise thing to keep applying for a loan without any rhyme or reason. If your loan application gets rejected, this is also recorded in your CIBIL record. So weigh the pros and cons before you apply for a loan simultaneously to different banks. Wait till you receive an offer before you apply to another bank. This will give you a chance to rectify errors or update your credit record in case there is an issue with it before you approach another lender.

When you apply for a loan, banks judge your ability to repay the loan on various counts including your age, income, job stability and primarily based on your credit report - which is a reflection of your true credit worth. Here are some reasons you need to watch out for and guard yourself against to obtain a loan without any hassles.

#1 Your residential address is on the defaulter list!

If you live under the same roof as someone who has slipped up on a loan payment or credit card dues and hence been reported to CIBIL, Banks probably will have the address stored in their defaulters database. In such as case, the probability of your loan application to be rejected is likely to be high. The reason being your residential address will find a match with the one on the defaulters list.

#2 Poor track record of credit card or loan repayments

You have been accumulating credit card dues over the years resulting in a huge pending payment, which is well past the due date. Or it could be that you have slipped up on a few EMIs. In these instances, your name would have been reported to CIBIL. When a bank looks up your credit card or loan repayment track record  – it would have a strong reason to reject your loan. Also, telephone bills and insurance premiums are likely to join this list, so do keep a strict vigil on all your bill and credit repayments.

#3Too many previous loans and too little income

If you are juggling too many loans already, then your income minus the ongoing credit repayments is what will be considered as your real income. If another loan is likely to cause a severe strain on this income or make it unlikely for you to be able to repay effectively, then your loan will be rejected.

#4Loan guarantor to someone who didn’t pay up!

When you sign the dotted line to be someone’s loan guarantor do exercise a lot of caution.  You must make sure the applicant you are vouching for has the ability to repay the loan without hassles. Unless and until you have strong reasons to believe so, do not rush to sign for them as if they fail to repay for any reason you will be accountable to repay the loan on their behalf. In such circumstances, where you have been unable to repay their loan, you will be reported to CIBIL and this will reflect in a bad credit report.

# 5Co-applicant has a poor CIBIL record

It is important for all the loan applicants to have a good credit repayment record. If you have a clean record but your co-applicant has a credit card issue reported for instance, then your loan application may not be considered.

#6You are a compulsive impulsive job hopper

Banks place a lot of importance on job stability and certain banks even insist that an applicant needs to be employed with a particular concern for three years or more to be eligible for a home loan. Also, in instances where a reputed company’s future appears unstable, the bank can reserve its right to provide a loan to the applicant from that company.

# 7 You want a joint loan with your sister or friends

Though some banks might consider providing a joint loan to brothers who are co-applicants, banks as a rule do not provide loans to sisters or a brother and sister or friends, who wish to be co-applicants. However, you can choose to opt for your parents as co-applicants for the loan.

# 8 Your loan application has been rejected before!

Remember it is not a wise thing to keep applying for a loan without any rhyme or reason. If your loan application gets rejected, this is also recorded in your CIBIL record. So weigh the pros and cons before you apply for a loan simultaneously to different banks. Wait till you receive an offer before you apply to another bank. This will give you a chance to rectify errors or update your credit record in case there is an issue with it before you approach another lender.

Here are some pointers to be prepared for your loan before you apply for it:

a. Gauge your repayment ability. Calculate your net worth and evaluate if you are ready for a loan commitment.

b. Get a copy of your credit report from CIBIL and other bureaus, where your records can be found. Analyse them and figure out if there are any concerns in the report, which needs to be addressed. For instance if you have paid all your credit card dues but this is not reflected in your CIBIL record, then you need to approach the bank in question and get proof for the repayment. You will then need to submit the proof to CIBIL and get the information updated.

c. Ensure you have back up funds to pay your EMI for a bunch of months, for emergencies like a job loss etc.

d. Make as much downpayment as possible and prepare well ahead to close the loan as quickly as you can, to continue a good repayment track record. Moreover closing off a debt when possible, will free up your resources for other uses or even for a new loan if the need arises.