Category: Personal Finance

What is CIBIL score

CIBIL Score is a three-digit numeric summary of your credit history. The score is derived using the credit history found in the CIBIL Report (also known as CIR i.e Credit Information Report).

A CIR is an individual’s credit payment history across loan types and credit institutions over a period of time. A CIR does not contain details of your savings, investments or fixed deposits.

CIBIL Score range

Score Band	Category
< 300	Poor Credit Score
300-550	Very Low Credit Score
551-620	Low Credit Score
621-700	Fair Credit Score
701-749	Good Credit Score
750-900	Excellent Credit Score

Why you should keep a healthy CIBIL score

Everyone will need a loan from a financial institution at some point in their life for high value purchases / spends which may include the following –

• Home Loan
• Education Loan

A good CIBIL score will help you get your loan approvals very quickly without any hassles.

Disadvantages of a poor CIBIL score

If you have a CIBIL score which is less than 700 , you may find delays in your loan approvals and may end up with additional paper work and end up paying more. Some additional costs that you may incur –

• For additional paper work, you may have to approach a CA who may charge you 2-4% of the loan amount.
• Banks may charge additional processing fees of up to 0.5%
• Banks may charge additional interest of 0.5 – 1 %

Let’s see if you have to pay these additional cost at the lower end, how much you may need to shell out from your pocket.

Additional cost category	Appx cost for a 20 year loan of 50 lacs
Additional paper work by CA @ 2%	1,00,000
Additional processing fees by banks @ 0.5%	50,000
Additional interest by banks @ 0.5% for a 20 year loan at 8.75%	~ 1,500 per month
Overall Additional Costs	8~10 % more for your entire loan term

Why banks will charge more

Banks lend based on risk profile of a customer. If the risk is more, banks will charge more.

It’s that simple.

For a customer with poor risk profile, probability of default is more.

Who will be happy if you have a bad CIBIL score

• CA’s – They get additional money for paper work
• Banks – They charge you additional processing fee and additional interest rate

How insurance agents get your number

You might be wandering how all insurance companies get your number? Possibly you have filled a lucky draw form/coupon at a mall.

You didn’t get lucky but the company which got your form was lucky to have sold your number to insurance brokers/agents for a small fee.

Type of Insurance

There is no dearth of types of insurance. Most sold ones include –

• Term Life Insurance
• Endowment Plans
• Health Insurance / Hospitalisation Plans
• Travel Insurance
• Fire Insurance
• and the list goes on….

What agents are going to tell you

Agents may usually take you for coffee or drinks when they try to sell you an insurance product.

They will start with the policy highlights which are usually all the good things. After hearing them, you might be tempted to buy one.

They won’t tell you bad things like exclusions, waiting period , pre existing illness etc

Common non claimable scenarios

Outcome : What is the most likely part that gets damaged - Wheels / handle - which are usually not COVERED

Why agents won’t tell you the bad part

• They get hefty commissions, losing a potential sale / client may not be beneficial for them
• They have sales targets to achieve. They may offer a small gift for buying an insurance which may further tempt you

What your should do next

1. If you have an insurance and have a policy document ready. Try giving it some time and try to understand the coverage. The problem is you will get it only when you buy the insurance.
2. Most insurance policies (by law) have a free look out period for 14 days or 28 days. Please ask it from your agent even before you buy.
3. Read the policy document carefully once you get it ( most of them are now digital copies which can be accessed through your insurance portal account or you might have received it in your mailbox as a password protected pdf file .
4. If you are not satisfied , inform the insurance company and they are obliged to refund you the initial premium back.

You have taken a home loan and it may take a significant amount of your take-home-salary to pay for it’s EMI.

Usual tenures for home loan are 20 years , 25 years and 30 years but the most common is 20 years.

There are times in life when you are looking at monthly bank statements and want to get rid of home loan EMI at the earliest.

Scenario – Let’s consider a scenario where you have taken a home loan for 20 years and half way through it’s tenure, you think that you are in a position to repay the remaining amount.

High Level Loan Details

Loan Amount	1 CR
Loan Tenure	20 years
Loan EMI	88,371

Amortization Schedule

Interest paid in the FIRST 10 years

From the above amortization schedule, you can see that although 50% of the loan tenure is over but principal repayment is only 30%.

Please note that in the initial years, most of the EMI goes towards interest payment.

Intrest paid in the first 10 years in 70 lacs.

Interest to be paid for last 10 years

Interest paid in the last 10 years is APPX 42 lacs.

Scenario

Let’s look at the original scenario again –

1. You have paid EMI’s for 10 years
2. You have 75 lacs cash and want to repay the home loan fully

Assumptions

For the sake of simplicity, I am making the following assumptions

1. Since you have sufficient cash to repay the remaining home loan of 75 lac, I am assuming that you can still pay home loan EMI for the next 10 years
2. Home loan rate remains at 8.75% through the 20 years and FD rate remains same at 7% for next 10 years

Consider booking a FD?

Final Word

Before making a decision to repay home loan, consider safe investment option only which give guaranteed returns.

Do not be tempted by mutual funds or other capital market instruments lime stocks , futures and options.

I have used HDFC Home Loan calculator and FD calculator. You can play around with the numbers based on your current situation.