Now, EMIs can be covered on Job Loss

The global economic downturn has created uncertainty in employment in India as well. In such a situation, what if one has a couple of EMIs to pay, say home loan and auto loan, when the retrenchment strikes?

Like it exists in other developed countries, ICICI Lombard has introduced in India, a cover that will pay three equated monthly installments (EMIs) on any individual loan when the policy holder faces job loss. Considering the severity of the economic situation, ICICI Lombard is even reviewing the possibility of increasing the three month EMI cover.

The job loss cover is sold as an add-on cover with the company’s critical illness policy. However, one thing to be noted is that the policy does not cover retrenchment due to underperformance, voluntary resignation or early retirement. But then, it’s a great product that came at a crucial time.

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How is EMI calculated?

The Equated Monthly Installment (EMI) of a loan is calculated according to the following formula.

EMI =
(P x i) (1+i)ⁿ
(1+i)ⁿ - 1

Where,
P is the loan amount
i is the monthly interest rate (i.e. the yearly interest rate divided by 12)
n is the loan tenure in months

For example, if you have a Personal Loan of 5 Lakhs (500,000) for an yearly interest rate of 13% and a tenure of 5 years, then,

P = 500,000
i = (13/100)/12 = 0.010833
n = 5 x 12 = 60

EMI =
(500,000 x 0.010833) (1+0.010833)⁶⁰
(1+0.010833)⁶⁰ – 1
= 11376.54

Thus the EMI of the loan is Rs. 11,377

Educational Loans

The global economic recession and subsequent job loses allow for a good time (I’m not sure I should be saying as curtly, but it depends on how you look at it) to advance on one’s career by upgrading their educational skills by joining a good institution for higher studies. In such a situation, the expenses are well met through student loans; if you don’t have enough savings.

Private student loans are handy for the knowledge seeker in the sense, they generally have no collateral requirements, have an interest rate that’s fairly manageable and may need to be paid back once the applicant secures an employment (or may be six months from the time of course completion, as the case may be) once he/she has completed his/her studies.

College loans have always been a helping hand for the aspirers of knowledge. Most of the times, the availability of the loan depends very much on the institution in which one has secured an admission. It also allows students to not depend on their parent’s worth for pursuing higher education.

Advantages of investing in Real-estate

Investing in real-estate, or more specifically, on a house or flat, is something that interests the salaried class very much. Though the scenario appears bleak due to the recent CRR and Repo rate hike by RBI (which could lead to an increase in home loan rates), buying a real-estate is something that is still worth pondering.

Real-estate has certain advantages that other investment options don’t have. Let’s have a look at few of those advantages and see why investing in real-estate is still a better option.

Advantages
1) Property prices, in general, don’t show a downward trend, especially if selected at a location where there is ample scope for development. In such cases, it becomes a safer investment.
2) The rate at which real-estate prices increase sometimes even beat the stock market.
3) Inflation generally doesn’t affect real-estate (house/flat) returns because the costs of construction materials increase every year (with inflation). As a result, the cost of buying a house/flat is always going to increase with time. Hence properties will most probably be available at a higher price tomorrow.
4) Investing in a ready to occupy house/flat could save the money that you spend on a rented house. Till selling the flat, you can live in the flat and save on the rent amount.
5) If you are taking a home loan for buying the house/flat, the EMI could be afforded with 1) the money you otherwise pay as rent and 2) the tax savings (hence increased take home salary) you get on home loans.

Tax Savings
When you take a home loan, there are two ways with which you could save tax.
1) The principal component of the EMI is eligible for a deduction of up to 100,000 under Section 80C of Income Tax Act 1961. This is the same section under which Provident Fund, Insurance Premiums etc. are claimed.
2) The interest component of EMI is exempted up to 150,000.
3) If both husband and wife are working, then both can claim these exemptions for the same property, provided they have taken a joint loan and divide the principal and interest component of EMI among each other.

Increase in debt waiver for farmers

The government has hiked debt waiver for farmers to Rs. 71,680 Crore (1 Crore = 10 million).

As reported by rediff,

Under the modified scheme, all farmers, including big ones, in 237 identified districts will get a debt relief of 25 per cent of the outstanding amount or Rs 20,000, whichever is higher, Finance Minister P Chidambaram told reporters after a meeting of the Cabinet, which approved the guidelines.

In a time when farmer suicides are rampant, this move from the government would be a great relief for farmers who are in debt and whose hopes have come to an end.

Sub-prime woes haunting the US

While the US bleeds of sub-prime wounds, most of the mortgages taken through sub-prime borrowing are now facing foreclosure. People who have taken such loans to build/buy houses are vacating it subsequent to court verdicts.

The gravity of the situation comes out clearly in this news reported by the New York Times. Quoting them,

The problem of vacant homes is all the more striking when considered against predictions by economists that a couple of million more homes will enter foreclosure in the next two years, said Cheryl Lang, president of Integrated Mortgage Solutions, a company based in Houston that contracts with Mr. McCallister and Mr. Law on behalf of mortgage companies.

With the consequent economic decline leading to more and more layoffs/job cuts, I guess the situation in the US is going to spiral out in the days to come. Feel like the sub-prime crisis had much more in its store than expected!

Personal Loans and debt traps

I get marketing calls from various banks each day which informs me that due to my good credit history with the bank I become eligible for a preapproved Personal Loan for my disposal and is available at the nod of my head. Already bearing the burden of a Personal Loan, I know for sure that it’s the last thing I shall go for and I reply them that I am not interested.

Personal Loans are collateral free loans given out by banks. It’s an unsecured loan and hence banks charge exorbitant interest rates for it. Since the money borrowed using Personal Loans is less compared to other loans, the EMIs appear lesser (else banks will make the tenure higher and make it appear less) and hence people generally don’t think much about the total money they pay to the bank through EMIs over the tenure. There are few things one should know about Personal Loan and these are also the reasons why Personal Loan shall be the last thing one shall resort to while in need of cash.

1. The interest rates banks charge is typically in the range of 20%! Just think about a Gold Loan where the interest rate is around 7%

2. Most Personal Loans come with an initial processing fee of around 2%. Consider a Personal Loan of 1 Lakh, where the processing fee itself will take 2000 bucks off you

3. Banks charge a pre-payment penalty when the Personal Loan is closed before its tenure, which again take money out of you

Thus, despite having a very high interest rate, even more money is extorted by Personal Loans making it one of the costliest of all the loans and thus a debt trap. Hence go for Personal Loans only if there are no other options in front of you.

Educational Loans become more affordable

Currently, when a student avails an Educational Loan to pursue his/her studies; the interest amount charged during the period of study gets added to the principal amount or he/she can pay the interest amount during the studies. This makes the educational loan repayment a costly business. To ease this burden on students and to prevent brain drain from the country, the Government plans to take over interest on Educational Loans during the period students pursue their education and have not begun earning.

This is available to those students who come from families having an annual income less than 2.5 Lakh. Banks in general deny loans to students from the lower strata on the risk of repayment. With this move, banks will have more assurance on repayment and would give more loans to the needy, as the government is paying the interest amount during the education period which would otherwise get added to the principal, making it huge for repayment, leading to possible defaults. Donno whether it is applicable to online degree programs.

More details here.