With the ongoing coronavirus pandemic distress, we seem to be inhabiting a world that was completely unknown to us just a month ago. All of us have been impacted in some way or the other but reality has hit harder for those who have experienced pay-cuts and job losses.
The gig economy workers or those with a variable unpredictable stream of income have taken the biggest blow of all. Also, those who work in sectors like aviation and hospitality are more impacted in comparison to those in fast-moving consumer goods or essential goods.
Though the Reserve Bank of India has announced a three-month moratorium on term loans and credit card dues as a relief measure, one needs to make an informed choice in availing such perks.
The moratorium
Customers must take into account the fact that if they opt for the moratorium, the interest on their loan will continue to accrue, which will lead to increased EMIs or additional installments at the end of their loan, or both. This is why, only those people who have significant cash flow constraints currently, should opt for a moratorium.
Further, it must be noted that the interest burden varies for different loans and credit cards. It is thus, advisable to wisely choose the loan on which the moratorium is to be availed. So do not opt for a moratorium if you can arrange the EMI amount. The higher costs involved in terms of moratorium interest isn’t worth the benefit.
Money management
Managing your personal finances prudently is extremely critical in these times. In case of insufficiency of funds to meet the multiple loans EMI requirement, one must choose wisely and prioritise payments as below:
- Credit card dues carry interest rates that are generally 2.5-3 times of those on terms loans. Credit card dues should be the first and top priority to be cleared.
- Personal and other unsecured loans are 6%-7% more expensive compared to secured loans. These must be on second priority to be paid. Opting for the three months EMI moratorium, on an average will add 1-2 extra EMIs, in an unsecured loan of 36-48 months tenure.
- For secured term loans like home and property, not paying EMI for three months, may add up to 24 months to the overall loan tenure depending upon the current loan tenure left. Unpaid EMIs would lead to a huge interest burden over the life of the loan. The flexibility, however, is that you could always pay lumpsum amount anytime, unlike unsecured personal loans.
Additional cash needs
While opting for a loan EMI moratorium is one thing, how do you take care of any additional cash requirements that you may have?
The RBI has introduced a cut in cash reserve ratio, repo rate, and reverse repo rates to help banks tide over their liquidity crisis and enable them to deploy funds for lending. But given the circumstances, banks are bound to be extra cautious in determining who they are lending money to.
In addition to the lending startups which offer micro-loans at a very high-interest rate, let us explore other credit options available to you:
- Pre-approved personal loans: Often offered against bureau history, good repayment of past loans, active and clean usage of credit cards, these loans are available across multiple marketplaces and offered directly by banks to their salary account/credit cardholders. These are highly recommended for those who have availed loans in the past and repaid without any defaults.
- Mortgage loans: People who have invested in fixed assets and have debt-free property, can avail mortgage loans at attractive interest rates by offering their assets as collateral
- Advance against financial assets: Loans can be availed against financial assets like stocks, mutual funds, and traditional insurance products like endowment plans
- Overdraft/credit cash lines: While micro, small and medium enterprises are offered this against stock, invoicing, and contracts, among other things, salaried customers are offered the line as a multiple of their monthly income. The best features of these products include attractive rates of interest – around 14%-21% – interest accrual for each day of usage and flexibility of repayment.
It is important to note that lately, most of the households have had almost zero discretionary spending like eating out, shopping, entertainment, or fuel, leading to a significant saving in expenses. It is important to prioritise your expenses, focus on the ones which are an absolute must, and postpone any discretionary ones until the lockdown is revoked.
One must also realise that the world order, economic activity, and above all, our thought processes will change significantly once the current crisis ends. So let us brace ourselves for a new world with rekindled faith.
Adheer Dhar is vice president- consumer fintech and partnerships at Clix Capital.
This article first appeared on Quartz.
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