The economic uncertainty caused by Covid-19 has severely impacted the livelihood of many. Uncertain times like this demand prior financial planning and adequate emergency fund for up to 9-12 months of monthly mandatory expenses including EMIs and insurance premiums. However, those lacking them can still tide over their restrained cash inflows by following some smart money moves.
The first logical step would be to take soft loans from friends or relatives. This will help save interest cost and avail greater repayment flexibilities than any institutional lender might offer. If that too proves insufficient or infeasible, then follow these options with a step-by-step approach to deal with income disruptions and liquidity mismatches.
Redeem your fixed income investments
The first step is to consider redeeming existing investments not linked to any crucial financial goals. As investments in equity-oriented schemes would be in red by a significant margin, redeeming them will lead to losses. Investors should start the exercise by identifying fixed income instruments, like bank fixed deposits recurring deposits or debt funds for redemption. The interest amounts earned from these instruments are usually lower than the interest rate charged on even the cheapest loan options.
Avoid redeeming your fixed income investments to make loan prepayments as the current economic scenario requires greater priority for liquidity than making savings on interest cost.
Avail moratorium for term loans
Reserve Bank of India has allowed all banks, NBFCs and HFCs to offer a 3-month moratorium to their term loans and working capital loans borrowers. Hence, existing borrowers unable to meet their loan repayment commitments due to cash flow disruptions and inadequate surpluses can consider availing the loan moratorium. Remember that the interest on their outstanding dues will continue to accrue during the moratorium period.
Opt for EMI conversion forcredit card dues
Card holders unable to repay their credit card dues should avoid the moratorium to the extent possible. The interest rates on unpaid credit card dues can be 23-49% per annum. Instead, they should try to convert their unpaid dues or big ticket expenses into EMIs. Such EMI conversions cost much lower interest rates than the finance charges levied on unpaid dues. They also come with tenures of up to five years, which will help in making comfortable repayment in smaller tranches in the form of EMIs.
The interest rate of EMI conversions would vary depending on the card issuer, the credit profile of the card holder and the tenure opted for.
Withdraw from your EPF corpus
The government has allowed EPF subscribers to withdraw up to 75% of their EPF balance or three months of basic and dearness allowance, whichever is lower. However, try to avoid withdrawing from EPF as it delivers one of the highest tax free returns with sovereign guarantee.
Take loan against investments
Once you have exhausted all the above mentioned options, you can consider availing loan against your market-linked investments to mitigate your short term liquidity mismatches. Loan against securities are offered in the form of overdraft. Interest is charged only on the drawn amount till the time it is repaid.
Interest rates are usually lower than those of unsecured loans. However, the loan amount will depend on the type of securities offered as collateral and their LTV ratios fixed by the respective banks. Remember that any fall in the market value of the underlying collateral will have to be made good by pledging more securities or by paying upfront the difference amount.
The writer is CEO & co-founder, Paisabazaar.com