Convert to lower rate to reduce loan EMIs ::Business Line

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I took a loan by pledging my property last February from HDFC at a floating interest rate. The loan amount was Rs 15 lakh, with an interest rate of 12.5 per cent. The EMI is Rs 18,245 for 15 years. Last month, with my surplus, I repaid a sum of Rs 3.75 lakh. After this, the loan tenure has been reduced from 202 to 100 months. But currently I am at 13.25 per cent interest rate.    

I want your suggestion as to whether I should maintain the same level of EMI or reduce it as my outstanding has come down to Rs 11 lakh. Is it possible to convert (shift within the bank) the loan to lower interest rate?

— Chandru

If you reduce the EMI, the number of months or tenure will go up. Since it is not a home loan (and hence does not enjoy tax rebate), repay the loan as and when you have a surplus.

If you reduce the EMI, the total interest outgo will be higher .Moreover the present EMI of Rs 18,245 is only marginally higher . Even at this rate your approximate total interest outgo will be Rs 7.3 lakh.

Regarding the conversion, the current interest rate offered for loan against property is 13.25 per cent. Since you are at the lower end of the interest rate band, you will not have the option for conversion.

I am 25 years old. I started my career six months back.My monthly salary is around Rs 21, 000. Apart from this I don't have any other income. An education loan of Rs 3.5 lakh at 12.50 per cent was taken by me. My EMI outgo is Rs 6,000. I also took a vehicle loan, for which the EMI outgo is Rs 2,000 with a balance tenure of 17 months. My investments, started recently, include Rs 500 in recurring deposits and SIP of Rs 1,000 in mutual funds. I would like to reduce my monthly EMI towards education loan to Rs 5,000 and invest the excess amount in equity or mutual funds. My idea is that within 3-4 years I should get good return from these investments and pay a lump sum to fully repay the education loan.

Is such a move advisable?

— Pradeepa. Y.S

Before settling any loan you should understand the tax efficiency.

Tax deduction benefit is available for a total of eight years or till the principal and interest amount have been repaid, whichever is earlier.

If your loan tenure exceeds eight years, no deductions can be claimed under Section 80E beyond that period. The benefit under this Section is over and above the regular tax benefits under Section 80C. As your vehicle loan interest rate is likely to be higher than that for the education loan, increase the monthly contribution towards that. You can even stop your RD and redirect the same towards the vehicle loan. Recurring deposit will not offer interest beyond 9.5 per cent and the interest earned will also be taxed. So your effective returns will come down.

Regarding MF investment, if you invest Rs 1,000 a month, for 36 months and if its earns return of 15 per cent your accumulated value will be Rs 45, 111. The effective return is Rs 9, 000 and it will be equal to the interest outgo for the vehicle loan. So, it better to pay a higher EMI towards your vehicle loan rather than taking investment risk on mutual fund investments.

I took a home loan (Dual rate) of Rs 30 lakh from HDFC for a period of 10 years in July 2010. The interest rate was 8.25 per cent till March 2011 and nine per cent till March 2012. It will be reset to a floating rate of 11.75 per cent from April 2012 according to the existing interest rates. There will be a significant increase in the EMI amount. HDFC is ready to shift my loan to floating rate one offered to new customers. This is at 10.5 per cent on a one time processing fees of 0.5 per cent on the principal outstanding amount after April 2012. Do you think this isthe best deal under the circumstances?

— Vivek

Take the deal offered as it will be beneficial to you. The outstanding principal at the end of March will be Rs 25.86 lakh. If your interest rate is reset to 11.75 per cent, your EMI will jump from Rs 37,900 to Rs 41,690.

If you opt for conversion at 10.5 per cent interest rate, your EMI will be Rs 39,942 and it will translate to net effective saving of Rs 20,976 a year.

Even, if you pay 0.5 per cent as one time processing fees, you need to shell out just Rs 12,935.But you can recover the same within eight months.