Home »  Magazine »  Queries
OLM Desk - 28 April 2022

Check Prepayment Penalty Clause Before Taking A Loan

M. Sreevalsan

I want to prepay my car loan, but the non-banking finance company (NBFC) lender will levy a penalty for doing that. Is there indeed a penalty for prepaying a loan?

These are the foreclosure charges, which can be 1-3 per cent of the outstanding principal amount or more. Check with your NBFC if there are any part prepayment charges. Part prepayment means that the borrower will pay some extra amount, in addition to the regular equated monthly instalment (EMI), to reduce the loan. Sometimes, there are no charges or penalties on these.

While taking a loan, one also needs to check all aspects of the loan, such as penalty on foreclosure and/or part prepayment, floating or fixed rate of interest rate, and so on. One can also negotiate with the bank or NBFC to waive these charges. Apart from these, some lenders also offer multiple options such as no penalties after one or two years of the loan, reducing balance, and others. In each case, do your math and see if the facility is indeed beneficial for you. Only if you are satisfied and have fully understood all the aspects should you go ahead and take the loan; do not hurry up or rush while approaching a lender for a loan.

If your loan is nearing completion, i.e., only a few instalments are left, then it’s not advisable to pay charges and foreclose it, as by now, you would have already paid majority of the interest payment. Instead, divert your funds towards other high-interest debt if you have one such as credit card. Alternatively, you can start investing in mutual funds through the systematic investment plan (SIP) route based on your financial goals and risk appetite.

 Hina Shah CFPCM Financial Coach, LUHEM

Vedant Mishra

Over the years, I have invested in too many mutual funds. I want to trim my portfolio. I have about 15 funds, of which three are thematic funds (IT sectors-focused), five are large-cap funds, two are index funds, and the others are mid- and small-cap equity funds. I do not have any debt funds. How should I decide which funds to keep and which to remove?

To trim your portfolio and bring it to a manageable size, start with identifying your financial goals, for instance, planning for your child’s higher education or your retirement. These may be goals that you have been investing for all this time.

If you are still to identify your goals, then do that before resizing your mutual fund portfolio. You may take the help of a financial expert if you are unable to put together a plan.

Once you have clearly identified the goals, you should align and map your large-cap, index, mid-cap and small-cap funds to your respective financial goals. Doing so will make the process of filtering the funds much easier—you will be able to decide which funds to retain and which to discard.

Reducing the risk of the overall investment is also important. High exposure to a particular sector through thematic funds should be avoided as these funds fall in a higher risk category. Besides, the other category of funds in your portfolio have reasonable exposure to different diversified sectors, including IT, so overall exposure to IT will remain.

Suhel Chander CFPCM Handholding Financials

Trina Khalkho

I have read that real estate rental yield is low in India. How is rental yield calculated?

The gross rental yield in India is in the range of 2-4 per cent per annum for residential properties, which is indeed low. Moreover, when you consider the additional expenses, such as maintenance charges to the society, repairs, painting, annual property tax and income tax on rent, the net rental yield gets further reduced.

The formula to calculate gross rental yield is as follows:

(Annual Rental Income / Property value) x 100

If rent received is Rs 30,000 per month, the annual rental income would be Rs 3.6 lakh per annum. The market value is Rs 1 crore.

Gross rental yield = (3,60,000 / 1,00,00,000) x 100 = 3.6%

Similarly, to get the net rental yield, one needs to first deduct all related expenses (as described above) from annual rental income.
The formula to calculate net rental yield is as follows:

[(Annual rental income – annual expenses) / property value] x 100.

Uma S. Chander CFPCM, Handholding Financials

Talk Back
Social Media Provides Superficial Knowledge On Insurance