PROUD OF THE PAST, PLANS FOR THE FUTURE

Interesting Read

Accounts for Medical Profession
Loan Planning
INTRODUCTION

Loan, as defined by the dictionary, means something lent or furnished on the condition of being returned. Loans can be broadly classified into two categories. The first being when someone loans a specific article to be used for a period which is returned and the second being a financial loan where the money transaction is involved.

In this article, we have tried to explain the latter type and the related issue that an individual must keep in mind before taking a financial loan. Loans have given us the ability to acquire things which would otherwise have been beyond our reach. There are various type of loans that are availed these days by student to pay for their education. Then there is the age –old housing loan, besides loans for professional for the purpose of setting up a business, working capital loans, personal loans etc.

In a survey conducted by FICCI, it was reported the mortgage to GDP ratio (ratio of outstanding home loans to GDP)of developed nations are the range of 40-50%, showed that with lowering of interest rates the home loan disbursement in India have jumped by almost 100%. Lower interest rates mean individual can now acquire material comforts on borrowed money much faster than our parents could. With the growing trend of consumerism, it is important to understand some basic concepts about loans than to treat it like a product that one is taking off a shelf.

A loan could be a simple money lending activity for someone who understand the financial terms and conditions attached to it, or it could also turn into a nightmare of never ending payments and the loan taking charge of your life. To avoid the latter it is important to plan before taking loan.

To make loan planning simple let us split it in 4 steps.

Step 1: Understanding the basic concept related to loans.

Step 2: Determining your need and type of loan required.

Step 3: Searching for the right financial institution giving the loan suiting your needs and requirement.

Step 4: Taking the loan.

Step 1: Understanding the basic concept related to loans.
Loans are composed of several factors. The first step is to acquaint oneself with the glossary of terms and then understanding the important factors that are related to loans. All loans most important factors.

    • Principal Amount
    • Interest Rate
    • Time/ Tenure of the loan


What is the principal of a loan?
The total amount borrowed is referred to as principal of the loan. Regardless of the amount of cash that you get in hand, you need to be aware of the amount of you borrowed. But the principal is only one factor in determining the amount of monthly payment and the total amount of the loan that you pay.
What is interest rate of a loan?
The interest rate is the number of percentage points used to calculate the amount of interest included in the payments of your loan.

What is the importance of time with regards to loan?

Time is the third factor which contributes to the amount of interest that you pay. All loans are based upon the “time value of money” principle. Simply stated the time value of money theory says that Re 1 now worth more than Re 1 later.
That means it is better off to pay the loan as fast as possible.


What are the various types of interest?

Fixed Interest / Flat rate : Fixed interest is fixed by the contract that you used to borrow the money. In a scenario where interest rates are on a rise it is best to opt for a fixed interest loan as the person pays the same interest rate throughout the tenure of the loan despite the interest rates being raised.

Variable/ Floating Interest  :  Variable interest is related to some economic figure such as the 30years municipal bond rate, or some other rate you can read in the paper and which changes regularly. The variable rates are recalculated according to a schedule outlined in the original loan documents.

Is has now been more than a year since the interest rate honeymoon ended for Indian borrowers and banks. While the interest rate government securities has since edged up by about 1.5 percentage points, that on home loans has not gone up by as much – about 0.25 percentage points for most borrowers. This could, however, rise further. Those who opted for floating rates will have little option but it grin and bear it. There are no effective hedges against rising home loan rates. In addition, the option of conversion to fixed rate loans does not appear attractive. Given the conversion fee and the higher interest payable on fixed rate loans, conversion will be attractive only if interest rate rise beyond 9.5 per cent and that too, quickly.


What other cost that are involved in a loan other than the interest payment?           

Loan origination fees, mortgage company fees, lenders fees, or any fee that is calculated by multiplying a fixed (and sometime variable) percentage figure times the principal is the amount of interest that you pay in advance of receiving the money. The charges involved are

a   Interest Tax  :   It is the tax payable on the interest paid on a home   loan and not the principal. This tax is sometimes included in the interest rate of the loan, or may be charged separately as interest tax.

b   Processing Charge  : It’s a fee payable to lender on applying for loan. It is either a fixed amount not linked to the loan or may also be a percentage of the loan amount.

c   Prepayment Penalties  : When a loans is paid back before the end of the agreed duration a penalty is charged by some banks / companies, which is usually between 1% and 2 % of the amount being prepaid .

d   Commitment Fess  : Some institutions levy a commitment fee in case the loan is not availed of within a stipulated period of time after it is processed and sanctioned.

e   Miscellaneous Costs : It is quite possible that some lenders may levy a documentation or consultant charges.


What is Moratorium period?         

It is the authorized period of delay in the performance of an obligation. Moratorium period for any loan the period after taking the loan and before the first installment can commence.



What is EMI?          

EMI or Equated Monthly Installments refers to the fixed sum of money that you will be paying to the housing finance company every month. The EMI comprises both interest and principal repayment. The size of the EMI depends on the quantum of loan, interest rate applicable and the term of the loan.



Can I repay my loan ahead of schedule? 

Yes. You can pay your loan ahead of schedule. However it must be noted that housing finance companies charge a fees for early redemption of loan. This fee can vary between 1-2% of the loan amount being prepaid.


What happens in case of default in re-payment of Loans?

Default can be two types.
Default in single EMI payment:
The primary applicant will have to pay penalty interest for the month of non-payment.


Default in payment of full amount of loan:

A co-applicant has as much responsibility as the primary applicant and is equally liable to the finance company from which the loan taken. The guarantor on the other hand promises to pay the bank in case the applicant(s) default on the payment. Both the co-applicant and the guarantor are liable for re-payment and the financing agency has the right to collect from either of them.



Step 2: Determining your need and type of loan required.

Most financial institutions have started catering to the unique need of professional such as doctors, charted accountants, lawyers etc for the purpose of setting up business, housing & car finance.

Doctors can avail loans for the purpose of:

    • Setting up clinic
    • Equipment purchase
    • House purchase
    • Vehicle purchase

    1. Specialist loan for Doctors for Setting up clinic: financial Institutions have developed specialized loans to cater to doctors for the purpose of setting up his clinic. Loans can be availed for the following purpose

    a. Setting up clinic, clinic-cum-residence, X-Ray clinic, Nursing homes Pathological clinic, polyclinics etc

    b. For buying equipment

    c. For drug stores

    d. For purchase of vehicles, ambulance, computers, etc

    e. Expansion / renovation / modernization of existing premises

    f. Any other activities related to medical profession

The eligibility criteria to avail for the special doctors’ loans are

  • Individual/Partnership/Ltd.Co./ Trust
  • Promoters should have minimum MBBS/ BAMS/ GAMS / BDS/ BHMS & registered practitioners.
  • Key promoters should be qualified doctors

Prevailing interest rates

 a.   Size of the limit
Up to Rs 25,000/-
Working capital
9.0%
Term loan
9.5%

b.   Size of the limit
Over Rs. 25,000&  upto Rs. 2 Lakhs.
Working capital
10.00 %
Term loan
10.50%

c.   Size of the limit
Over Rs.2 Lakhs
Working capital
11.50%
Term loan
12.00%


2. Housing Loans: Housing loans can be availed by anyone and are not specific to any profession. There are a variety of housing loans currently in the market and they are given below.
 

  • Home Purchase Loans: This is a basic home loan for the purchase of new home.
  • Existing home improvement Loans: These loans are given for implementing repair works and renovations in a home that is already owned
  • Home Construction Loans: These loans are available for construction of new house
  • Home Extension Loans: This is given for expanding or extending an existing home. For example, addition of an extra room etc.
  • Home conversion Loans: This is available for those who have financed the present home with a home loan and wish to purchaser and move to another home for extra funds are required. Through a home conversion loan, existing loan is transferred to the new home including the extra amount required, eliminating the need for pre-paymentof the previous loan.
  • Land Purchase Loans: This loan is available for purchase of land for both home construction or investment purpose
  • Bridge loans: Bridge Loans are designed for people who wish to sell the existing home and purchase another. The bridge loans help finance the new home, until a buyer is found for the old home.
  • Balance Transfer Loans: Balance transfer loans help to you to pay off an existing home loan and avail the option of a loan with a lower rate of interest.
  • Refinance Loans: This loan helps you pay off the debt you have incurred from private sources such as relatives and friends, for the purchase of your present home.
  •  Stamp duty Loans: This loan is sanctioned to pay the stamp duty amount that needs to be paid on the purchase of property

Home loans are generally provided for in the range of 75% -85% of the asset value. The amount of loan varies from institution and it may vary from Rs. 1 Lakh to Rs. 1 crore

Tax benefits available are as under: (a) Exemption under sec 80C of IT Act (Rebate) for payment of principal up to Rs. 1,00,000/-. (b) Deduction under sec 24 of IT Act For interest payment on housing loans upto Rs. 1,50,000/-(in respect of self-occupied house property acquired or construction whereof is completed before 1.04.2001. Tax benefits vary in case of rental.

The loan can be availed in joint name and tax benefit can be enjoyed by both holders on a pro rata basis.
 Given below are the Interest rates available in the market

Tenure :
Existing Interest Rate Structure w.e.f 01.01.2004
Revised Interest Rate Structure w.e.f, 29th Nov 2004

Floating Rate of Interest
Upto 5 years (Short Term* Housing Loan Scheme )
                                                                  7.50 % p.a.
                                                                 8.00 % p.a          

Above 5 years and upto 15 years*
                                                                  8.00 % p.a.
                                                                 8.50 % p.a          
Above 5 years and upto 20  years*
                                                                  8.25 % p.a.
                                                                 8.75% p.a.    
Fixed Rate of Interest
Upto 5 years
                                                                  *8.00 % p.a.
                                                                 8.50 % p.a          

Above 5 years and upto 15 years*
                                                                 * 8.75 % p.a.
                                                                 9.00 % p.a          
Above 15 years and upto 20  years*
                                                                  9.00 % p.a.
                                                                 9.25% p.a.

3 Vehicle Loan : Car Loans can be availed by any one. One can avail the loan either for the purchase of new car or second hand car.

Given below are the Interest Rate available in the market.

1.New Vehicles

A.Floating Rates(table)

Repayment Period
Up to 3 years
>3yrs and upto 5 years
1.50% below SBAR i.e. 8.75%p.a.

Metro/Urban Brs
Rs. 8 lakhs & above :2.75% below SBAR i.e.7.50% p.a.or
Below Rs. 8 lakhs: 2.25% below # SBAR i.e. 8.00%p.a.
2.00% below SBAR i.e. 8.25% p.a.

Rural / Semi urban Brs
Below Rs, 8 lakhs : 1.75% below SABR i.e. 8.50% p.a.
1.50% below SBAR i.e. 9.00 p.a.


 2.Used vehicles

Up to 3 years: 0.25% above SBAR i.e. 11.00% p.a.

B.Fixed Rates
Fixed rates will be 50 basis points higher than the corresponding floating rates.
Loans up to Rs. 5 lakhs- both on fixed or a floating rate basis
Loans above Rs. 5 lakhs- only on a floating rate basis.

Step 3: Searching for the right financial institution giving the loan suiting your need and requirements.
 The loan is given on the basis of where the clinic is to be set up, i.e. is it for Rural & Semi Urban or Urban.

The institutions giving these loans can be segregated into three categories

  • Public Sector
  • Private Sector
  • Banks

Step 4: Taking Loan
After you have decided for what purpose you need to take a loan it is important to prepare the document for the purpose of getting the loan processed. All banks and financial agencies providing personal loans will require a complete set of document prior to sanctioning of your loan. The list of documents varies from bank to bank and also on the borrower.

It is also important that you arrange for guarantor for your loan or the collaterals that may be required while you take the loan.

Though the list of document given below may be in excess of what an average financing agency may normally require, it is advisable to keep these handy, only so as to prevent any delay in the disbursement of the loan.

For Salaried Doctors

  •  Application Form
  • Latest Salary Slips / Form 16

For Self-Employed Doctors

  • Income Tax Returns for the 2 years
  • Computation of Income
  • Bank Statement for last six months

Proof of Identity
Any of the following

  •  Passport copy
  • Driving License
  • Voters I D
  • PAN Card
  • Photo Credit Card
  • Employee ID Card

(Govt. Employees/Public Ltd.Co.)

Proof of Residence
Any of the following

  • Passport
  • Ration Card
  • Utility Bill
  • Voters I D
  • LIc Policy Receipts
  • Driving License
  • Proof of Co-Provided Accommodation
  • Employer’s Certificate

Proof of Qualification

  • Degree Certificate
  • Certificate of Registration

Proof of Continuance

  • Certificate of practice
  • Membership Certificate
  • A Photograph
  • Post-Dated Cheque
  • Signature Verification

 


Getting a Guarantor for your loan.

Every  loan requires a guarantee before it can be passed. Guarantees are binding agreements that involve three parties, the credit provider (lenders) the debtor (borrower) and the guarantor. For the person who is giving the guarantee for the loan it is firstly important to understand what are the clauses attached to a guarantee. Guarantee, guarantors and co-borrowers are some time required by credit providers because before they agree to lend money they need to have evidence that their loan / credit can be recouped (the money will be repaid). This is particularly relevant for people under 25 years when they are contemplating credit and loans-someone will often be needed to act as a guarantor pr co-borrower.

The prospective guarantor or co-borrower will have to think carefully before signing the contract. Explanation of the role of a guarantor:
By signing the contract as a guarantor, a person is in fact promising to repay the loan if the debtors refuses to pay or is unable to do so. In other words the guarantor must take over the repayment on the loan or credit contract. A guarantor can be liable for the repayment of debts even if the debtor has been declared bankrupt.

The basic rights and features of being a guarantor are :

  1. Co-borrowers or co-debtors are each jointly responsible for the debt, (loan, finance, credit card etc) from the very start. This means a credit provider can sue each person signing the contract singly or together if they default in payments.
  2. According to the law a guarantor receives no benefits from the contract made between debtor and credit provider. However the law maintains that a person written on the contract as a co-borrower, shares the benefit of the loan, credit, finance or lease which was provided.

What are Collateral Securities Taken by the Housing Finance Companies?
HFCs usually take some additional securities which are called collateral securities. These may be in the form of guarantee from one or two persons, assignment of life insurance policies, deposit of shares, and units or other securities. These additional securities are taken with hope that if a loan is not paid back recourse may be taken such securities instead of depending upon the mortgage of the property which is the last resort. Guarantors, when alerted, become very effective persons in prevailing upon the borrowers to fulfil their obligation.

INSURANCE

It is extremely important to take insurance coverage when you purchase a house. The most important factor is that it gives you and your loved ones peace of mind, in the form of financial security if an unfortunate event should occur.

The House Owner/ Fire Insurance policy: This policy provides coverage for your property against natural disaster such as flood, fire riot, strike, and malicious damage. This is necessary so that the financial institution is aware that the property has been insured and will not buy another fire insurance on your property. In such case, you will be required to assign your rights under the policy to the financial institution.

The Mortgage Life Assurance : This type of policy provide for full settlement of the outstanding balance of the housing loan with the financial institution, in the event of total permanent disability or death of the borrower. Premiums can usually be included in the loan amount, the repayment period of the premium is usually spread over the loan tenure. The premium is only incurred once. There are no monthly or yearly premiums to be paid. In the event of early termination of housing loan, you will generally have the option to request for refund of the premium for the balance of the unexpired period or to continue the insurance coverage.

CONCLUSION
The article should have helped you in understanding the various financial terms that are related with a loan. However, before availing a loan, it is important to first compare the interest rates that are prevailing in the market and the benefits derived if the loan is taken from one institution as compared to the other. It is important to remember what the principal amount of my loan is, how long is the term of my loan and what is the interest I am paying.
         
    

  • In the beginning of the career, every doctor needs to look for loans either for clinic, equipment, residence or vehicle.
  • In today’s consumer-oriented market, it is important to understand some basic concepts about loans than to treat them like products one takes off the shelf.
  • With the opening up of the banking sector and reduced interest rates, there are many options available for loan planning.
  • While taking loans one needs to study carefully various hidden charges and catchy statements like “conditions Apply”
  • During loan planning , it is advisable to have a chartered accountant’s opinion from the tax planning point of view .
  • Searching for the right financial institution offering a loan that suits your needs essential.
  • In today’s materialistic world, the concepts of acquiring material comfort on borrowed money is picking up.