Smart Investor - An investment in knowledge pays the best interest: Loans

    • Saturday, July 11, 2020

    BUYING A FORECLOSURE PROPERTY IS GOOD OR BAD IDEA

    July 11, 2020 0
    BUYING A FORECLOSURE PROPERTY IS GOOD OR BAD IDEA
    Buying a foreclosed property is not at all bad idea and more over it can be tricky. Since you are not able to take a tour of the premises before actually investing in it, there is always a possibility that you might end up paying a hefty price for it. So, it is always advised not to follow the process blindly. It is always better to be cautious about an investment than be sorry about it.

    What is a foreclosure?
    Foreclosures happen when a lender takes a property from an owner who has defaulted on their mortgage and has fallen behind on payments. Lenders, in turn, will try to recoup as much of their investment as possible by selling a foreclosed home for slightly less than it might be worth.

    5 steps to buying a foreclosed home
    Here are some tips to prepare you before buying a foreclosed home:
    • Find an agent specializing in foreclosures.
    • Do not invest if the property is vacant for long
    • Plan your budget carefully
    • Bid competitively
    • Bid higher if other foreclosures are selling fast.
    • Be prepared to buy a foreclosure in “as-is” condition.
    • Get a pre-approval letter

    Find an experienced real estate agent:

    Before initiating the purchase, reach out several real estate agents and find the one whom you feel comfortable to connect with. Banks generally hire real estate brokers to look after their properties. Consequently, there are many such agents who might have worked with the banks on previous deals. Browsing through the list of foreclosure listings can give you a fair idea of the properties in your locality, and an agent can actually give you an insight about the deals that are about to come!

    Hire an agent who is knowledgeable about the foreclosure process to represent your interests and will keep the transaction moving. One strategy for finding the right agent is to visit websites with a database of foreclosed homes in your desired area. Look for Realtors who have specialized real estate training in this area, such as the Certified Distressed Property Expert (CDPE) or the Short Sales and Foreclosure Resource (SFR) designations.

    If you find an agent you want to work with to buy a foreclosed home, ask them to look out for foreclosure properties that meet your criteria. These listings can go fast, so be prepared to move quickly.

    Do not invest if the property is vacant for long:

    You must consider the amount of time the house has remained vacant. In majority of the cases, it has been found that longer the duration, the more the damages. The assets, including the plumbing, electrical, and air conditioning systems tend to depreciate over a period of time. The property, after a certain time, becomes more of a distressed property that would require major renovations.

    Plan your budget carefully:

    While investing in a foreclosed property, always keep in mind the additional expenses that you might have to bear. Carefully assess all the repairs and renovations that you want to make and enumerate the expenses accordingly. Before finalising the agreement, make sure you know the prevalent prices pertinent to plumbing, electrical, and other major repairs in the market. This, in turn, will help you avoid generating negative cash flow in the future.

    Bid competitively:

    While competing in a foreclosure, fix a limit for yourself keeping in mind your budget, the amount of additional expenses, and the means of financing that you would want to avail. An important point of consideration here is that the bank that is selling the property will not provide finance for the same. Therefore, you need to have your options in place beforehand. There are basically two things that you should always keep at the back of your mind. Firstly, the bank is not emotionally attached to the property and has no irrational expectations regarding the price. Secondly, the institute is losing money for every day the property is put on hold. 
    Bid the higher price if other foreclosures are selling quickly
    There’s no exact formula on what the bank’s bottom line will be, so if foreclosed homes in your area are selling quickly, it’s important to work with your agent to craft a strong offer, backed up by your preapproval letter. In many instances, foreclosures are already discounted so an offer that’s too low might be a non-starter for the bank.
    Keep in mind that the type of house and location matter, and some homes might sell faster than others. In competitive markets, you might need to offer asking price (or slightly more if there are multiple bids) and keep contingencies at a minimum.

    Be prepared to buy a foreclosed home in ‘as-is’ condition:

    When purchasing a foreclosure, the property is usually sold in “as-is” condition. This means that the seller can’t guarantee the property’s condition, such as whether it has termites, structural issues or lead paint, for example, and is unlikely to make repairs.
    Since a foreclosure is owned by the bank, there is no one to fix any current issues.
    Get a home inspection if you plan to buy a foreclosed home so you know exactly what you’re in store for. A home inspection isn’t required to buy a home, but it can identify major issues the bank isn’t aware of so you can decide whether to move forward with your home purchase — or to walk away from the deal if you included a home inspection contingency in your contract.

    Get a pre-approval letter:

    Unless you can afford to pay cash, you’ll want a mortgage pre-approval letter in hand when you make an offer on a foreclosure.
    “It separates the lookers from the buyers,” he says. Pre-approval letters detail how much money you can borrow, based on the lender’s thorough assessment of your credit score and income.
    Find a mortgage lender who understands your goals, and gather the necessary paperwork to obtain a pre-approval letter.
    It’s always good to be prepared, Having your proof of funds will make it an easier transaction.

    Is buying a foreclosed home a good idea?
    Buying a foreclosed home is a personal decision and it depends on a variety of factors, including your risk tolerance and potential reward, financing and ability to move quickly. You could reap big savings if the foreclosure is priced right, so don’t discount this type of listing in your home search. 
    1. Financial gains
    2. High return on investments
    3. Early due diligence
    4. Lower mortgage payments
    How to buy a foreclosed home: Get a loan or pay in cash?
    Foreclosures tend to get scooped up by real estate investors who often pay in cash. Don’t let that discourage you; many lenders will help you find the right financing to buy a foreclosed home. If you’re up against cash offers, though, make sure your offer is a competitive one.

    Your lender will require an appraisal to assess the home’s value so keep that in mind when making your offer. If there’s a shortfall between your offer and the home’s appraised value, you may have to make up the difference in price if the bank (the seller) doesn’t budge.


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    Sunday, February 9, 2020

    OPERATING STATEMENT: KNOW BASIC COMPONENTS

    February 09, 2020 0
    OPERATING STATEMENT: KNOW BASIC COMPONENTS
    An operating statement, also known as a profit and loss statement or an income statement, is a vital financial statement used by all Firms, Companies, Financial Institutions etc.,

    This statement shows a company's revenues and expenses and calculates a company's net profit or net loss for a specified period of time.

    In this statement, we come across various components which reflects the financial transaction and position of the firm / company.

    So today, we will see common components used in operating statement. 

    1. Gross Sales:
    Gross sales are total amount of sales reported by the unit in a financial year before allowing any discounts/ allowances/ sale returns etc.

    2. Net Sales:
    Net sales are defined as Gross Sales (-) Sales allowances/ discounts/ Returns (-) Excise Duty / Service Tax/ GST.
    If the difference between Gross sales and net sales is greater than the industry average, it is an indication that the company is giving huge discounts or there may be excessive returns.
    Net sales play a significant role in analysis as it gives the exact financial position of a unit during a financial year.

    3. Raw material consumed:
    This gives the amount of raw material consumed during a financial year.
    Formula for raw material consumed = Opening stock of Raw material + Total purchases – Closing stock of raw material.
    Unit may not be consuming entire raw material purchased by it during a financial year. Some part of raw material purchased during a particular financial year may be spilling over to next year, if not put into use in the same year. Hence, in order to arrive at the amount of raw material consumed which can be evidenced by the reported sales during a financial year, raw material consumption is an important factor.

    4. Depreciation:
    Every tangible asset, which is used in manufacturing/ trading activity has to be depreciated depending upon its useful life. Though, there is no outlay of cash in the form of expenditure, depreciation is calculated and is shown as an expenditure in profit and loss account statement, as it has a bearing on the life of the asset.
    Amortization: As depreciation is calculated in respect of tangible assets, amortization is calculated in respect of intangible assets.

    Both Depreciation and Amortization are important in analysis of operating statement as these are non cash expenses.

    5. Cost of Production: Cost of production refers to the total amount required for producing a particular commodity during a year.
    Formula for Cost of Production = Expenses incurred on raw material + Stores and Spares + Power and fuel + Direct labour + Other manufacturing expenses + Depreciation + Opening stocks in process (–) closing stocks in process.


    6. Cost of Sales:
    Cost of sale is the cost incurred in getting the finished goods into saleable state and it is required to be worked out to know the cost of units actually sold in the reporting period.
    Formula for Cost of Sales = Cost of Production + Opening stock of finished goods (–) closing stock of finished goods

    7. Operating Profit:
    Formula for Operating Profit = Net sales (-) Cost of sales (-) Selling, General and administration expenses

    It gives an idea to ascertain the profit making potential of the unit and is useful to compare with similar type of units for their margin generating capacities. Operating Profit is important as it enables the user to understand the amount of profit generated from core operations.

     Read: IMPROVE YOUR CREDIT SCORE

    8. Operating Profit after interest:
    Formula for Operating Profit after interest = Sales (-) Cost of sales (-) Selling, General and administration expenses (-) Interest (-) Bank charges

    It is to understand whether the unit is generating sufficient operating profit out of its operations to take care of interest and other Banking expenses.
    Apart from this, it also denotes the burden that is carried by the unit in the form of interest and charges on account of Bank/ outside borrowings.

    9. Non operating income:
    Income reported by the unit from its non regular operations has to be classified as non operating income.
    Ex: Interest on Unsecured Loans & Loans given to related parties, Income from Investments, Interest on Deposits, Forex gain, Profit on Sale of Fixed Assets, Profit on Sale of Investments, Insurance Claim, Prior period income, Liabilities written back etc.

    It is to understand whether the profit reported by the unit is contributed by income emanated out of non core activity or non operating income.

    10. Non operating expenditure:
    Expenses incurred by the unit on account of activities unrelated to operations.
    Example: Goodwill & Other Intangible Assets Written off, Preliminary Expenses Written off, Forex Loss, Loss on Sale of Fixed Assets, Provision for doubtful debt/ receivables, Advances written off, Provision for diminution in investments etc.

    It is to understand whether loss, if any that is reported by the unit is on account of non core activity or non operating expenditure.

    11. Preliminary Expenditure:
    Expenses incurred before incorporation of business are called as ‘Preliminary expenditure’.

    12. Preoperative expenditure:
    Expenses incurred after incorporation of business, but before commencement of commercial operations are called as ‘Preoperative expenditure’.

     Read: SAVE TAX (OLD)

    13. Cash Accruals:
    Formula for Cash Accruals: PAT + Depreciation + all non cash expenses

    This represents the cash profit generated by the unit on accrual basis as depreciation is a non cash expenditure. Higher the level, better is the comfort level for the unit to take care of repayment obligations and also future expansions, if any.

    14. EBIDTA:
    It is Earning before Interest, Depreciation, Taxation and Amortization. It gives an idea regarding availability of cash with the unit for payment of debt.
    The variables used in calculation of EBIDTA could be different for two similar types of units because of variance in debts (affecting interest portion), investment in fixed assets (affecting depreciation) and the level of intangibles (affecting amortization), resulting change in PBT and accordingly tax expenses.
    Formula for EBIDTA: PAT + Interest expenses + Deprecation + Income Tax + Amortization.

    Please post your queries / suggestion in comments below.
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    Sunday, July 21, 2019

    FOUR STEPS TO GET OUT OF DEBT (LOAN) TRAP

    July 21, 2019 0
    FOUR STEPS TO GET OUT OF DEBT (LOAN) TRAP
    Now, if you have already taken a loan, and you lose your job. Or are facing a medical emergency. Or for whatever reason, you are unable to make the regular EMI payments.

    Follow these 4 simple steps to come out of this debt trap:

    Don't Panic:


    Do not be harsh on yourself and do not react in an extreme fashion. Remember this is not a rare situation. Banks have customers who default on payments all the time. We understand it is a tough time for you but stay calm and find a practical solution.


    It might feel like you are alone, but you aren't. There's no need to feel like you have a great weight on your shoulders that you have to carry it by yourself. In fact, your bank will be the first entity willing to help you. Defaulting on your loan, even if it is a home loan, is not the end of the road.


    Contact Your Lender And Keep Your Documents Ready:

    Next step is to face the situation and contact your lender. Approach them and explain your current situation before matters get worse. Do not be scared and take charge of the situation.

    Call the lender and set up a meeting to calmly and rationally discuss your options. 

    And before you approach them create a file containing all your past EMI payment details, notices sent to you by the bank if any, details of the loan such as date of taking the loan, tenure, interest rate, EMI amount and so forth. Have this handy when you talk to your lender.


    Tell your lender the genuine reason(s) that have rendered you unable to pay the EMIs, state your intention to pay your loan back as soon as you can, and ask them what their options are.  

    If you have clean past loan records which you cleared on time carry them along. This in a way will help you gain their trust about your intention to pay the loan.

    Consider Your Options And Initiate A Dialogue With Your Lender:

    If you have paid your EMIs on time until now, the bank knows you as a genuine borrower, and will take this into consideration when working together with you to find a mutually feasible solution.

    'Genuine intent' to repay is the single largest thing that will work in your favour. Be sure to make it very clear to your bank that you do intend to repay and would like to work together to find a solution. 


    Genuine reasons that banks understand are loss of a job, illness, or an accident that may render you unable to work. You might also have multiple loans and find yourself in too much debt to handle.

    Secondly, the bank is not keen to repossess your assets, it wants you to pay the money owed, or at least most or part of it. If you default, the bank's NPA ratio (Non-Performing Assets) goes up. This reflects badly on the bank's balance sheet. Also, they lose out on the money you would have paid them. So, the bank will much prefer to cut you a deal.

    Wondering if the bank can repossess your asset i.e. your car or your home?

    Legally, yes, they can. But there are a couple of reasons why you don't have to necessarily worry about this. 

    Firstly, the repossession procedure in India (and in fact elsewhere in the world as well) is very lengthy and there are steps along the way where you and the bank can work together to come to a satisfactory deal. 


    Here are likely options for you to settle your loan:

    Refinance Your Loan:

    Bank will restructure your loan if the EMI is too high, if there is increase in overall interest rates, or an increase in your personal commitments, or a combination of these factors and others.


    If you are currently paying Rs. 10,000 per month for 3 years, and this is too high, the bank might offer you an EMI less than Rs. 10,000 per month, for a little more than 3 years.

    So, your EMI goes down, giving you some breathing room and the bank doesn't lose money because it will simply make it up from you over a longer period of time. Everybody wins on some level. 

    Keep in mind that the payments you now make will eventually cost you more in terms of total money repaid. But this can be the breathing room you need. However, the extension in tenure will be small, so the change in your EMIs will also be small.

    Grace Period:

    May be the problem is not that you can't pay enough or  you can't pay at all. If you are in a position where you feel that within a few months your financial situation will change, you will get a job and be able to start repaying your loan a little bit at a time, perhaps at a lower EMI, then you can approach your bank for deferral of your payments.

    The bank will grant relief, giving you a window of opportunity to calmly seek ways to increase your cash flows. 

    Once the window closes, your EMIs will restart (on either the same terms or your new negotiated terms), but will include late payment penalties, known as Delayed Payment Charges. These charges are applicable for payments made after their due date.

    In case some of your post-dated cheques (PDCs) have bounced due to insufficient funds, you will also be subject to cheque bounce charges.

    Lump Sum Settlements:
    This is something that for obvious reasons might not be feasible for a home loan, but it can work for a personal loan, credit card debt, or a car loan.

    On a case to case basis, banks are sometimes willing to go for one time or lump sum settlements of outstanding dues.

    They will waive some of the charges or some of the amount and charges, and you can pay the rest as a loan settlement. However, this is detrimental on your credit score.

    Getting a loan in the future, if you want one, will become either very difficult or very expensive, or both. 

    (If you are clueless about credit reports, here is All You Need To Know about credit report) 


    Liquidate your investments:

    Liquidation of assets can be your last resort.

    If none of the above options works, then you can liquidate your investments to service your debt. You can liquidate your deposits or mutual funds to pay EMIs.


    On the other hand, you can also use this amount to make part payments of your principal amount.

    Use PersonalFN's EMI Calculator to calculate your monthly EMIs now.

    What happens if you still can't pay EMI? 

    At this stage, your bank will seek repossession of the asset. The asset will be auctioned off within 15 days (for a movable asset like a car) or 30 days (for an immovable asset such as a home). During this period, you still have the option of buying back your own property provided the funds are available to you. 

    At no time during the process will the bank not give you the option to pay, in bits and pieces or via a reduced lump sum and maintain possession of your asset. 

    Here are additional steps you can take to manage your finances during a crisis, apart from negotiating with the creditors...
    • Reduce your expenses
    • Find additional sources of income
    • Make a list of your assets
    • Sell unwanted items
    • Consult an expert

    To live a healthy financial life, make sure you:

    • Maintain sufficient contingency reserves
    • Don't fall into a debt trap
    • Have adequate life and health insurance
    • Undertake financial planning
    i hope this article helps you to plan your loan repayments. Take a look before you 

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    PERSONAL LOAN - FACTORS TO CONSIDER IN PERSONAL LOAN OPTION

    July 21, 2019 0
    PERSONAL LOAN - FACTORS TO CONSIDER IN PERSONAL LOAN OPTION
    Before you opted for personal loan to get over from your financial needs, you must consider some factors to avail it.
    Here are some of the important parameters that any borrower should assess before signing on personal loan

    Read also: How to avail personal loan
    Personal Loan Interest Rate:
    When you take a Personal Loan, the interest outgo is one of the vital deciding factors.
    The interest rate you pay depends on a variety of factors: your age, income stability, whether salaried or self-employed, number of years of work experience (in the current job/business/profession) and total), your credit score, existing EMIs (if any), and your repayment capacity, loan tenure, among other things.
    The interest outgo determines your EMI and has a bearing on your budget and long-term financial well being. So, make sure you apply for best personal loan rates.
    It makes sense to compare personal loan interest rates across lenders and opt for a lowest interest personal loan.

    Loan Providers
    Personal Loan Interest Rates
    State Bank of India
    12.50% - 16.60%
    ICICI Bank
    11.59% - 18.49%
    Axis Bank Limited
     15.50% - 24.00%
    Bajaj Finserv
    11.99% - 15.50%
    Tata Capital
    11.99% - 19.50%
    UCO Bank
    11.20% - 11.45%
    HDFC Bank
    11.49% - 19.8%
    Andhra Bank
    13.05% - 14.30%
    Punjab National Bank
     10.95% - 14.70%
    IIFL
    13.50% - 18.00%
    (Please note this list is illustrative and not exhaustive)
    Loan Tenure:
    The maximum tenure for a Personal Loan is usually 5 years. But the shorter the tenure of a Personal Loan, the better it is.

    Loan amount (Rs)
    Interest rate
    Term of the loan (years)
    EMI (Rs)
    (rounded off)
    Total cash outflow (Rs)
    15,00,000
    15%
    1
    1,35,387
    16,24,644
    2
    72,730
    17,45,520
    3
    51,998
    18,71,928
    4
    41,746
    20,03,808
    5
    35,685
    21,41,100

    Processing Fee & Other ChargesA higher tenure can reduce your EMIs, making repayments comfortable, while opting for a lower tenure (of say 2 to 3 years) increases your EMI; you pay a higher interest cost on the Personal Loan.
    Taking a Personal Loan does not end with interest rates; there are processing fees and other charges levied by lenders.
    The processing fee is a one-time fee charged as a certain per cent of the Personal Loan amount, but subject to a minimum amount. It varies from lender to lender.

    Read also: Mutual funds Guide

    A higher processing fee impacts your total cash outflow while you apply for a Personal Loan.
    The other charges include: stamp duty, late payment fee, cheque bounce charges, duplicate interest certificate issuance charge, duplicate statement issuance charge, duplicate amortization schedule charge, issuance charge for photocopy of loan agreement/documents, prepayment charges (also known as foreclosure charges) and so on, all of which these should be examined carefully.
    Repayment Flexibility:
    Apart from the above crucial aspects, assess if the lender provides you with the flexibility to repay your loan sooner, and what will this cost you.
    This flexibility can help you prepay the loan ahead of time, as well as provide a relief in distressing times.
    However, it's best to adopt financial discipline in order to repay the Personal Loan on time and maintain your financial health in the pink always.
    Customer Service:
    When you avail a Personal Loan in times of need, you wouldn't want it to be an unpleasant experience, do you?
    Hence, ensure the customer service at the lender has high standards. This service can even help keep track of your loan, allow you to be in better control of your personal finances.
    Remember, while lenders will have varying customer service standards, there are some basics of good service that are universal.
    Salary:
    A salary highlights the repaying capacity of the borrower. A lender requests a borrower to furnish the latest salary slips.
    A salary is considered adequate based on the loan applied for, expenses, outstanding loans (if any), and the city of residence, etc.
    The Office / Company You Work At:
    Almost all Indian banks categorize employers based on size and popularity of the company.

    Read also: How control ATM fruads

    If your employer falls under the highest category, you may be eligible for a higher loan amount at a lower rate of interest and vice versa.
    Job Term:
    Banks and other lenders may analyse the time period you have been working at the current job and even the number of years of work experience.
    A higher time span in your present job may work in your favour while procuring a loan.
    Lenders may also visit your employer to verify your details.
    Your Current Economic Life Cycle:
    A bank may not be hesitant in granting you a loan if you are settled and future prospects of earnings are bright, plus if you are residing in your current house for long.
    Terms & Conditions:
    Make sure you read the terms &condition carefully to make an informed choice. This will avoid issues later and ensure a pleasant, hassle-free experience.

    These 10 factors play a crucial role in finalizing a Personal Loan. As highlighted above a personal loan charges a high interest rate. It should be opted only as a last resort.
    So take your decision with more cautious. please share and comment below with your suggestions / queries.
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