Keep your festive purchase decisions aligned with your present as well as future cash flow needs
Many households wait for months ahead of the festive season for purchasing a house, office space, car, gold and more during the auspicious month of Kartik.
According to the Retailers Association of India’s (RAI’s) Festive Shopping Index, 94 percent of Indian shoppers are eager to shop this festival season as against 80 percent last year. The UK-based YouGov reported that 51 percent of Urban Indians are looking forward to investing in real estate during the Diwali Season. Clearly, despite COVID-induced disruptions, business activities and consumer sentiments are high in the ongoing festive season.
Some exclusive festive loan offersAn overwhelming choice of loan interest rate offers and processing fee waivers are available from top banks & NBFCs. Furthermore, real estate developers & property dealers are also actively partnering with financial service providers to woo interested buyers. Not to forget, the multifarious festive seasonal offers on credit cards, offered both by banks as well as consumer brands.For example, you can get the lowest home loan interest rate from Kotak Mahindra Bank at 6.50 percent p.a. For the first time ever, SBI has opened up the lowest home loan interest rate starting at 6.70 percent for all loan amounts and profiles, including self-employed home loan applicants. SBI has also waived home loan processing fee for a limited period. Similarly, HDFC Bank home loans are available at 6.70 percent onwards for all profiles and at flat Rs 3,000 processing fee. Personal and car Loans are also available at the lowest ever rates, starting at 10.25 percent and 6.80 percent, respectively this festive season.
Furthermore, there are very many attractive deals for purchases on EMIs, available on credit and debit cards for consumer electronics & FMCGs. Also, buyers can save upfront by swiping cards at retail and ecommerce platforms. Some of the popular offers include flat 10 percent instant discount on purchases made during Amazon Great Indian Festive Sale with HDFC, Kotak, ICICI & Rupay debit & credit Cards. Filpkart too has a similar line of offers with Axis, Citi, ICICI Bank and Kotak credit & debit cards along with additional 5 percent saving with co-branded Flipkart Axis Bank Credit Card.
Should you opt for festive loan and credit card offers?
With multiple deals on the table, you should definitely consider taking advantage of the available bank offers. However do not overspend. Here is a festival season borrower’s checklist:
Borrowing for needs vs. wants
Do not let exuberance overpower decision making. Your purchase decision should primarily be determined by the needs and not merely wants. For example, buying a car could be a need, while buying the latest model is essentially a want. You should know how to draw a distinction between splurging and buying. Be vary of mounting debt beyond your repayment capacity. Also, whatever be the amount of saving on a purchase deal, it is important to read the fine print.
Right mix of credit optionsCredit card spends are higher than usual during festive times. Herein, it is important to keep a tab on the type of liabilities you are getting into.
Always have a good mix of secured and unsecured credit options. Home and car loans are examples of secured loans. They involve low repayment risk for the lender and thus are affordable loans. However, credit card dues, personal loan, gold loan, and electronic purchases on EMI, have a higher interest cost. Too many unsecured bills can add a red flag to your credit report. So, make sure you use a right mix of credit options.
Fixed Obligation to Income Ratio (FOIR)
As a rule of thumb, your fixed monthly payments like credit card bills, car loan/ home loan/ personal loan EMIs & insurance premiums should not be over 50 percent of the net take home income. Keeping your Fixed Obligation to Income Ratio (FOIR) under 40-50 percent of Net Monthly Income (NMI) will protect your credit score. Also will help you breathe easier.
Picking up lowest ROI offer
It is a no-brainer that a purchase decision should be carried out with the lowest interest rate offer. You should compare available bank deals and EMI offers. Choose the one bringing you maximum saving. Also, ensure that EMI of a loan is calculated on reducing balance method. Or, you will end up paying higher EMIs despite low ROI quotation.
Be wary of zero interest credit card offers
Zero-cost EMIs make the deal look overtly affordable. However, you may actually be shelling out a high interest cost. First, you sacrifice the cash discount available on the upfront purchase. The brands mostly waive the flat discount while calculating the EMIs for purchase. Next, it is also a common practice to make the customer purchase with 2 EMIs as down payment. So, the effective RoI is higher than the displayed ‘No cost EMI’. So do understand the value of the offer, before opting in.
Do not roll over credit card balancesYour credit card is the best purchase buddy as long as you use it for the free credit period. Do not swipe the plastic, if you do not have adequate repayment capacity for the upcoming billing cycle. Rolling over credit card balance will kill free credit limit on your card, attract very high interest rate 24-36 percent p.a., late fee penalty and mount up debt trap within a few months.
Financial health
Last but not the least, a loan decision should always be made according to your present cash flows and not on the basis of the expected bonus or opportunities. It is pertinent to understand that a bank loan is a financial commitment for years to come. Always opt-in with adequate repayment. It is a good practice to also keep your credit card spends below 30 percent of the approved credit limit. This ensures that the monthly fixed payments such as EMIs are manageable always.
Final WordsKeep your festive purchase decisions aligned with your present as well as future cash flow needs. It will help you protect your credit score and also achieve your financial goals with utmost ease and in a happy frame of mind.
