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Early Payment: How to use your surplus money optimally

Individuals should utilize their surplus money to prepay long-term debts such as credit card balances, personal, vehicle, and mortgage loans at a time when fixed income products are yielding lower yields and stock markets are still exuberant.

use your surplus money

Experts advise that if a person can earn a better post-tax return than the current interest rate on a home loan. In this case, he should invest the extra cash. They claim that equity the valuations inequities are stretched and the returns may be muted. Furthermore, investors who begin investing in equities now should not expect substantially higher returns. Before prepaying loans that will help you grow an asset in the long run. Be sure you have enough emergency money to cover a year’s worth of expenses, as well as enough life and health insurance. Otherwise, if the person faces any financial instability it might push them for a personal loan; which has a significantly higher interest rate than a home loan.

However, it is preferable to pay off a vehicle loan with extra cash because a car loan has a higher rate of interest than a home loan. It has no income tax benefits, and, finally, a car is a depreciating asset. Whereas a house is normally an appreciating asset.

Prepay home loan

In cases where equity investments have produced higher returns, earnings can be booked and a portion of the home loan can be prepaid. According to experts, the best strategy in this bull market is to stay invested while taking partial profit bookings. As well as transferring some earnings to fixed income or prepaying higher-interest loans. Prepaying a house loan is perfect now that interest rates have fallen in the last two years; as a jump in the interest rate will burden the borrower even more.

use your surplus money

If a person is unable to make a lump-sum payment, experts advise that they take a systematic withdrawal plan from their mutual fund assets. Then the user shall use the surplus monthly income to increase the EMI. Users can request an increase in their ongoing EMI, at any time; it is generally free of any fees. Stepping up the EMI for a salaried employee also helps as the borrower advances in his profession. Furthermore, they receive better pay packages, resulting in more disposable cash.

Clear credit card dues

Any surplus money must be utilized to pay off credit card dues. Rolling the credit by paying the minimum amount due is not a good idea; as banks charge an interest rate between 35% and 45% per annum depending on one’s spend, payback, and utilization patterns. In fact, rolling credit is a lot more expensive than even a personal loan, which can be availed at 13-15% per annum. For more such updates, keep watching this space!

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Secured Loan – What it is and When to take it?

Secured Loan

A loan against collateral or Secured loan is a type of loan where the borrower takes debt against collateral. In other words, the borrower pledges a valuable asset as a security to the financer. This type of loan is called a Secured loan because it provides security to the financer for their money.

loan

In most cases the borrower use secured loans to finance a commodity like a house, vehicle, etc., here the borrower pledges the purchased commodity as collateral. Alternatively, the borrower can take a loan by pledging their stocks, property, jewelry, fixed deposits, etc.

Why Secured Loan?

From Borrowers perspective Secured Loan offers greater flexibility, longer repayment tenure, and higher loan amount than an Unsecured Loan.
For lenders, it offers more security and lowers the risk of default by borrowers. In case the borrower fails to pay the loan, the lender can recover their money by selling the asset pledged.

Types of Secured Loan

  • Mortgage loan
  • Home loan
  • Vehicle loan
  • Secured Business Loan

Eligibility Criteria for a secured loan

  • Applicant must be an adult (above 18 years of age)
  • Some Financers expect you to have an annual income greater than a prescribed amount. Although the income can come from business, regular salary, or non-salaried resources.
  • Applicant must have an asset whose valuation matches or exceeds the loan

Pros and Cons of Secured Loan

Pros

  • Lower Interest Rate than an unsecured loan.
  • More Flexible repayment options.
  • Can offer Longer repayment tenure.
  • Faster Loan Approval
  • Loans are Customizable to cater to specific needs.
  • Can be availed by a non-salaried person.
  • Offers Higher Loan amount than an unsecured loan
  • A guarantor is not required
  • Can be availed even at a low CIBIL score. Moreover, it improves the CIBIL score when the loan is fully paid.
  • Lenders have more confidence and security for their money.

Cons

  • Seizing of collateral in case of default in repayment of the loan.
  • The money borrowed can only be used for a specific function as per the loan agreement.
  • It involves Heavy Paper Work more complex than an unsecured loan.
  • It expects that the applicant has full ownership of the collateral pledged.
  • Longer repayment tenure also means a greater total amount in repayments
  • Even after the bank seizes the collateral, any income you generate will go straight to the bank. More often than not, applicants keep paying only the interest and fines whereas the principal amount remains the same.
  • Default on the repayment can heavily reduce your CIBIL Score.

Even with many advantages of a secured loan. It is always wise to plan your finances because defaulting on a secured loan is very brutal for your financial health.

How to compare Secured Loan?

compare loan

Before making any purchase, a good rule of thumb is to compare what other options are available in the market. A secured loan is no exception to this rule, and hence it is important to compare every proposed offer against your assets. While making a comparison among secured loan look for the following factors:

  • The type of collateral required to secure the loan.
  • Minimum and Maximum loan amount.
  • The interest rate for the loan
  • Any additional fees charged by the lender, such as processing fees, prepayment penalties, etc.
  • Credit Score and Income requirement of the loan.
  • Proper analysis of the loan agreement and whether or not it suits your financial aspirations.

Secure or Unsecured, taking a loan is no joke and has many risks involved, so before taking any type of debt you must ask a few questions to yourself.

  • Do I really need this debt, and what other options are available to me.
  • How this debt will affect my life in the best and the worst-case scenario.
  • How much loan I can afford and how little do I really need.

 

For more such updates, keep watching this space!