1. Take credit lines / working capital instead of Term Finance / EMI Based payments. – Any business need day-to-day working capital which can be sufficed by Line of Credit. The interest of Line of Credit is calculated on a daily basis. Whatever you use, you pay only for that. How much you use, you pay only for that. This is very opposite to term finance or EMI based finance, which requires a fixed EMI, whether you use it or do not use it. Apart from this, working capital or Line of credit has only interest attached to it. There is no pressure to repay the entire principal on a month – on – month basis. So it is very light on your cash flow. However, term finance or EMI based finance has fixed monthly commitment on your cash flow. So define your usage and take as per your requirement and save lots of interest.
2. Do not take Top-up from same lender, if they are not proposing the enhancement as a separate Loan account. – If you take out a new loan before repaying an existing one with a lender, ensure that additional capital is given as a separate loan account (if it’s a Term finance) or else it will be treated a fresh loan account even for the existing loan on which we have already paid interest (assuming it is on a reducing balance method), which is like stabbing on our own back.
For example, a business owner who still owes Rs.10,00,000 on a loan may take out a second loan for Rs. 25,00,000. The Rs. 10,00,000 could be rolled into the new loan so he or she only receives Rs. 15,00,000 of new capital. However, if this individual is charged interest on the full Rs. 25,00,000 amount, he or she would have effectively been double charged on the outstanding Rs. 10,00,000 amount.
3. Calculate your APR (Annual Percentage Rate) to compare between different Loan offers. – The annual percentage rate or APR is a financial term that is used by lenders to let you know how much interest you are being charged on a yearly basis for your loan. For example, on a Rs. 10,000 car loan at an 8 percent APR you would pay approximately Rs. 800 in one year in interest for the loan.
Application fees, annual costs, service charges, origination fees — you have the right to know the total cost of any loan you are offered so you can easily compare it to other offers and make the right decision for your business.
Unfortunately, financing has traditionally been sold with pricing that can be confusing or misleading — and the true cost of a loan is often not disclosed. Instead, some lenders quote “rates” that are calculated a little differently from a true interest rate, so their products appear cheaper.
Read moreOne of the best ways to do an apples-to-apples comparison on loan products is to calculate the APR (annual percentage rate), a figure that tells you all the costs for one year in a single equivalent interest rate. It’s the true cost of your loan because, unlike an interest rate, an APR also takes into account additional fees and charges often hidden in the fine print, and also normalizes for how frequently you’ll need to make payments. A good lender will always be willing to help you calculate an APR, so that you can accurately compare your options.
4. Increase your Credit rating – Is your credit rating a little lower than you’d like?
Good credit ratings allow people to easily borrow money from financial institutions or public debt markets at low rate of interest. At the consumer level, banks will usually base the terms of a loan as a function of your credit rating; this means that the better your credit rating, the better the terms of the loan typically are. Companies that have high credit rating for their debt instruments will get funds at lower interest costs from the lenders, financial institutions and capital market.
5. Get your working capital enhanced rather than going for Temporary Over-draft (TOD) – TOD, being the extra cash, helps cover short-term financial shortfalls. It lets you access extra funds through your bank account for a shorter duration. It is a way of arranging temporary working capital for a particular order or paying any unexpected unplanned expenses. But many a times, we a business owners, take it for granted and use on a month on month basis. The very nature of TOD is that it comes with 2-4% p.a. rate of interest, over and above existing rate of interest. So the availability is easy, but it also costs some money. So to avoid the same, enhance your ongoing working capital facility with your regular banker rather than applying for TOD and save interest.
6. Keep Tenure as short as possible – Its really simple maths. The longer the tenure, the lower is the EMI, which makes it very tempting for a borrower to go for a 25-30 year loan. However, it is best to take a loan for the shortest tenure you can afford. In a long-term loan, the interest outgo is too high. In a 10-year loan, the interest paid is 57% of the borrowed amount. This shoots up to 128% if the tenure is 20 years. Sometimes, it may be necessary to go for a longer tenure. A young person with a low income won’t be able to borrow enough if the tenure is 10 years. He will have to increase the tenure so that the EMI fits his pocket. For such borrowers, the best option is to increase the EMI amount every year in line with an increase in the income.
Eg: – If you take a Rs 50 lakh loan for 25 years, you will pay Rs 83.5 lakh (or 167%) in interest alone. “Taking a loan is negative compounding. The longer the tenure, the higher is the compound interest that the bank earns from you”.
7. Substitute high-cost loans – If you have too many loans running, it’s a good idea to consolidate your debts under one omnibus low-cost loan. Make a list of all outstanding loans and identify the high cost ones that can be replaced with cheaper loans. For instance, an unsecured business loan that charges 18-20% can be replaced with a loan against life insurance policies.
A loan against property can be used to repay all other outstanding loans. You could also consider other options like Loan against Life insurance policy, gold loans and loan against bank deposits. It is also a good idea to prepay costly loans as soon as possible. Divert windfall gains, such as big order from a customer, tax refunds and maturity proceeds from life insurance policies towards repayment of these high-cost loans. Borrowers sometimes avoid ending loans because they offer tax benefits. But this tax benefit alone should not be the reason to keep a loan running. True, the tax benefits bring down the effective cost of the loan. But you are still incurring an expense that can be avoided by ending the loan as soon as possible. Unless the money can earn you a better return than the effective cost of the loan, use it to prepay the outstanding sum.
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