Plastic peril

Avoid loans on recognition card, usage it prudently and never revolve over your balance, states Srikumar Bondyopadhyay

Those who are in bondage to plastic money and easy handiness of collateral-free credit, beware! Failing to comprehend the cost deductions of using recognition card game — beryllium it for purchases, hard cash backdowns or taking a loan — tin acquire you mired in debt.

The job is so agonizing that early last hebdomad the State Depository Financial Institution of Republic Of India launched a political campaign to educate people about the fiscal hazards of high involvement rates on recognition cards.

All over the human race people have got fallen into this debt-trap clip and again. There were large-scale payment defaults by recognition cardholders in Hong Kong in 2002, in Korean Peninsula in 2003 and in China in 2006.

The United States also was plagued by a similar state of affairs during a nest egg and loan crisis in the late 1980s. In recent times, the sub-prime mortgage job in the United States is spilling over to recognition card payments.

According to the Modesty Depository Financial Institution of India, Banks and non-banking fiscal establishments have got issued 2.59 crore recognition card game till November last year. Between April and November, payments worth Rs 48,746.17 crore had been made through recognition cards.

Although disbursement by using the plastic is only 2.7 per cent of the sum personal ingestion expenditure, retail recognition have gone up to one-third of the sum depository financial institution recognition in the country. This agency people are now saddled with fiscal liabilities and are more than prostrate to fiscal risks.

Therefore, it can be black to utilize the plastic injudiciously without a proper apprehension of how involvement rates for debts on recognition card game are calculated and of one's refund capableness after service other loan liabilities.

Intricate calculations

Card issuers often make not explicate Byzantine involvement calculations to customers, adding to their misery.

Tapas Kumar Deb, a 55-year-old occupant of Beleghata, throws an SBI recognition card for the past eight years. In December 2006, he finally yielded to relentless phone calls from SBI Recognition Card telemarketers for a personal loan at a monthly involvement charge per unit of 1.5 per cent that the depository financial institution had pre-approved considering his good refund history. Debutante needed the money for a bosom surgery.

His incubus began a few calendar months after he started repaying the equated monthly episodes (EMIs) for the loan.

"They charged me an EMI of Rs 2,481.11 for the Rs 58,000 loan that I took for three years," Debutante said. "Even at an yearly involvement charge per unit of 18 per cent, the EMI should have got been Rs 2,097. When I enquired, they said it was a "flat" involvement rate. Anyway, I decided to prepay the loan."

Deb's prepayment will not be painless. He will have got to pay a 3 per cent punishment on the outstanding loan.

Flat rate

With a level involvement rate, the EMI is arrived at by calculating the simple involvement on the loan and then dividing the amount (principal plus interest) by the figure of calendar months for which the loan was taken (see tabular array 1).

It is of import to observe that in this method the involvement is calculated on the full loan amount and for the full loan period. It makes not see the principal repaid during the refund period. Therefore, under the level involvement calculation 1 goes on to pay involvement on the principal that have already been repaid.

Reducing balance

However, if you take a loan from a bank, involvement will be calculated under the reducing balance method (see tabular array 2). This means, you will not have got got to pay involvement on the principal being repaid and on the same loan you would have to pay an EMI of Rs 2,097 instead of Rs 2481.11 under the level rate.

Penal interest

In lawsuit of a recognition card loan, if you neglect to pay your measures on time, you will be charged with a penal involvement charge per unit and a late payment mulct that a depository financial institution loan generally doesn't attract. Cash backdowns or loans on recognition card game pull a higher charge per unit of involvement than purchases on the same card.

Do not go around debt

Till the clip you make not go around debt on your recognition card, it is deserving using. But if you make up one's mind to pay the lower limit owed to be paid against a recognition card bill, you will be in a soup.

For example, if you pass Rs 50,000 on a recognition card that complaints a monthly involvement of 2.85 per cent and pay only the lower limit 5 per cent of the owed every month, it will take you around 12 old age to fully refund the dues (See tabular array 3).

Moreover, the involvement you volition pay will be nearly Rs 58,000 — more than than what you had originally borrowed!