It’s been a torrid time for loan seekers. Banks and financial institutions have raised their retail lending rates by more than two percentage points over the last two years. Given the latest inflation rate of 6.73 per cent, the Reserve Bank of India may further increase its key policy rates to tame the price rise. This will only force banks to raise their lending rates further.

While the current interest on retail loans — housing, personal, car, consumer durable, mortgage loan and loan against securities — are still lower than what they used to be 10 years ago, one must start taking stock of his or her debt position and consolidate it to avoid any pitfalls in future.

Credit craze

Traditionally, credit has never been a way of life for Indians — it was a social taboo and the borrowing rates were also prohibitive. But now, more and more people — particularly the young — have chosen the credit route to fund their expenses.

Consequently, we have seen a tremendous growth in credit cards, personal, consumer durable and housing loans, sparking an all-round surge in demand for goods and services in the country. Experts say the growth in domestic demand helped the country head off the pains of a global recession in 2000-2003.

Price pressure

But when inflationary pressures from external sources started building up (primarily due to rising global crude prices), the RBI started increasing its key rates one after another. The rates on retail borrowing rose in tandem.

The greatest casualty was in the home loan segment. Many of those who borrowed funds three to four years ago, saw their repayment tenure extended beyond their retirement age! For many others, the equated monthly instalment went up to 70 per cent of gross monthly salary. The incidence of loan default increased — sticky assets in home loans, which was less than 3 per cent in 2002-2003, were more than 5 per cent last year.

The increase in the number of defaults in credit card payment and personal loan became so alarming that even the RBI took cognisance of it during the monetary policy review on January 31. It raised the provisioning requirement of banks against personal and credit card loans. Defaults in credit card payment were as high as 8 per cent.

Those who could get a fixed rate deal may be saved for now. But not many banks are giving fixed rate loans for a long period of time. Many have already included a rate reset clause in their home loans. In case of other loans that are available at a fixed rate, such as personal, car or consumer durable loan, are for three years at the most.

Don’t borrow now

So, think twice before you take a loan at this juncture. Ask yourself, do I really need it now? Can’t that expenditure be put off till a later date? If possible, postpone it. An increase in the interest rate on credit will dampen demand and hence prices. So, by postponing your big purchases now, you will not only be able to get the article at a lower price but also have to pay less on the borrowed amount.

Even if you want to take a loan, shop for the best rate of interest. The rates for most retail loans are linked to the lending bank’s prime lending rate and the latter varies from bank to bank. The discount or premium at which the retail lending rates are pegged to the prime lending rate also varies from bank to bank.

While the public sector banks publish their rack rates for different retail loans, private and foreign banks do not and often charge a higher rate.

Use your savings

However, if some expenses have to be made now, fund it out of your savings lying in a savings bank account. In fact, you are losing money if you have a large amount of cash lying in a savings bank account. While banks give only 3.5 per cent interest on savings account, the inflation rate is 6.73 per cent. That means, the money you have kept in a savings account is losing value at the rate of 6.31 per cent because of the inflation, while you are getting an interest of 3.5 per cent. So, your savings is actually losing value at the rate of 2.81 per cent.

Those who have already outstanding debt positions should start taking stock of it and consolidate it into few loans.

For example, if you are using more than one credit card, transfer the outstanding balance of all cards into a single card that charges a lower interest rate and offers zero balance transfer facility.

It’s high time you prepay your floating rate loan.