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Loan rangers should hold their horses

December 30, 2008 09:19 IST

Just two months ago, fixed home loan rates went to up to 14 per cent - the same rate HDFC was charging a decade ago in 1998, when there were only fixed rates.

In the last couple of months, however, aggressive indicative rate cuts by the Reserve Bank of India and a special package by the central government have ensured that liquidity conditions are slowly beginning to improve.

While the fall in rates is certainly a good signal, is it a great idea to take a loan to purchase a home or car? Most experts felt that this may not be the right time to do so.

"I would hold back on any asset creation, whether it is a car or house, for now. Conserving cash should be the motto," said Hitungshu Debnath, executive director (Wealth Management), Angel Broking.

Though interest rates have started slipping, there are hopes that they will fall further in the coming year. Given this premise, let's look at the different loan segments and what a consumer should be doing.

Home loans: Though financial planners do not like any loans, this is one loan of which they approve mainly because it saves tax of Rs 150,000 on interest payout and Rs 100,000 on principal payment.

A fortnight back, on the government's insistence, 26 public sector banks reduced the rate to 8 per cent for loans up to Rs 500,000. Loans up to Rs 20 lakh (Rs 2 million) will be charged 9.25 per cent. These rates could be fixed for five years. Also, there will be no processing fees and free insurance on these loans. For home-buyers in this price band, this is certainly good news.

However, for loans above Rs 20 lakh, more rate cuts could be on the anvil. According to experts, with the consistent fall in the inflation numbers RBI will be encouraged to cut rates. This, in turn, could encourage banks to do more.

"In the next three to six months, floating interest rates are likely to fall further. It could be a better time to buy a house," said Sriram Venkatasubramanian, head, FCH Centrum Wealth Management.

In addition, property prices are likely to fall some more. Many builders are already offering cash discounts. But more cuts are expected in the days to come, so it might be a good idea to be a little patient.

Auto loans: It is a lifestyle loan. If you are planning to upgrade or buy a first car, it's very important to gauge the overall financial situation first. The reasons are many.

Economies worldwide are already in a recession and there have been job cuts in different sectors. Already, most workers are not expecting salary increases. On the contrary there could be salary cuts. In such a situation, it may not be a wise decision to take an auto loan.

"Defer the decision because of both interest cost and car rates could come down further," said Venkatasubramanian.

There is good news though. Car companies, already under pressure from falling sales, have recently cut prices after Cenvat was cut by 4 per cent.

More importantly, if you are buying now, go for a floating rate instead of a fixed one to take advantage of falling interest rates.

If you buy six months later, however, look for a bank that offers a fixed rate because rates might turn around in a couple of years.

Personal loans: A strict no. If you are desperate, try loans against fixed deposits or your insurance policy. But personal loans should be avoided at all costs. The rates are anywhere between 25 and 40 per cent and sometimes even more.

The only justifiable reason to take a personal loan is to retire a credit card. In that case, make sure not to incur further expenses on that card.

An important point to remember is that while both the government and RBI are looking to kick-start the economy by increasing the credit flow, banks have turned very cautious.

That has led to a fall in the lower loan-to-value ratio, which is the percentage of the house value that is paid to the buyer.

Also, they are insisting on stricter due diligence of the customer before disbursing any loan. Rising defaults on credit cards and personal loans have not helped matters either.

Banks are expected to be quite cautious in 2009 due to the uncertain environment. Consumers, too, will have to careful. The idea is to conserve first, spend later.

Joydeep Ghosh in Mumbai
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