The ads are on the radio, television, the Internet, even in the mail. They refer to payday loans - which come at a very high price. Check cashers, finance companies and others are making small, short-term, high-rate loans that go by a variety of names: payday loans, cash advance loans, check advance loans, post-dated check loans or deferred deposit check loans. Usually, a borrower writes a personal check payable to the lender for the amount he or she wishes to borrow plus a fee. The company gives the borrower the amount of the check minus the fee. Fees charged for payday loans are usually a percentage of the face value of the check or a fee charged per amount borrowed - say, for every $50 or $100 loaned. And, if you extend or “roll-over” the loan - say for another two weeks - you will pay the fees for each extension. Under the Truth in Lending Act, the cost of payday loans - like other types of credit - must be disclosed. Among other information, you must receive, in writing, the finance charge (a dollar amount) and the annual percentage rate or APR (the cost of credit on a yearly basis). A cash advance loan secured by a personal check - such as a payday loan - is very expensive credit. Let’s say you write a personal check for $115 to borrow $100 for up to 14 days. The check casher or payday lender agrees to hold the check until your next payday. At that time, depending on the particular plan, the lender deposits the check, you redeem the check by paying the $115 in cash, or you roll-over the check by paying a fee to extend the loan for another two weeks. In this example, the cost of the initial loan is a $15 finance charge and 391 percent APR. If you roll-over the loan three times, the finance charge would climb to $60 to borrow $100.

Alternatives to Payday Loans

There are other options. Consider the possibilities before choosing a payday loan:

• When you need credit, shop carefully. Compare offers. Look for the credit offer with the lowest APR - consider a small loan from your credit union or small loan company, an advance on pay from your employer, or a loan from family or friends. A cash advance on a credit card also may be a possibility, but it may have a higher interest rate than your other sources of funds: find out the terms before you decide. Also, a local community-based organization may make small business loans to individuals.
• Compare the APR and the finance charge (which includes loan fees, interest and other types of credit costs) of credit offers to get the lowest cost.
• Ask your creditors for more time to pay your bills. Find out what they will charge for that service - as a late charge, an additional finance charge or a higher interest rate.
• Make a realistic budget, and figure your monthly and daily expenditures. Avoid unnecessary purchases - even small daily items. Their costs add up. Also, build some savings - even small deposits can help - to avoid borrowing for emergencies, unexpected expenses or other items. For example, by putting the amount of the fee that would be paid on a typical $300 payday loan in a savings account for six months, you would have extra dollars available. This can give you a buffer against financial emergencies.
• Find out if you have, or can get, overdraft protection on your checking account. If you are regularly using most or all of the funds in your account and if you make a mistake in your checking (or savings) account ledger or records, overdraft protection can help protect you from further credit problems. Find out the terms of overdraft protection.
• If you need help working out a debt repayment plan with creditors or developing a budget, contact your local consumer credit counseling service. There are non-profit groups in every state that offer credit guidance to consumers. These services are available at little or no cost. Also, check with your employer, credit union or housing authority for no- or low-cost credit counseling programs.
• If you decide you must use a payday loan, borrow only as much as you can afford to pay with your next paycheck and still have enough to make it to the next payday.

Securitised pools of two-wheeler loans and personal loans in India have been struck with rising defaults.  Global ratings agency, Fitch Ratings, said the 180 days past due (dpd) two-wheeler loans (loans where EMIs are overdue for over 90 days) have reached as high as 6 per cent of original principal outstanding in some pools compared with a maximum of 3.6 per cent in 2006, Fitch said in its reports on pools of securitised loans.  Securitisation of loans is a process where banks sell a pool of loan assets split into units of securities to investors.  Personal loan pools, Fitch Ratings said, have shown higher delinquency compared to other asset categories. The underlying pools of personal loans have shown weak performance, with about 5.5 per cent of the original pool being over 90 days past due delinquent.  Fitch said it monitors closely the key performance parameters for two personal loans-backed transactions originated by ICICI Bank. They include the 90-day past due and 180-day past due prepayments, collection efficiency and charge-offs.  These transactions have performed satisfactorily on account of their structures (e.g. charge-off at 120+dpd to minimise the cost of carry on account of defaulted assets), and adequately sized credit enhancements.  However, the underlying pool of personal loans has shown a weak performance, with about 5.5 per cent of the original pool being over 90-day past due delinquent. The 180-day past due portion of the pool comprises about 4.2 per cent of the original principal outstanding.  The ongoing transaction performance analysis forms an integral part of the ratings process. Clear and timely reporting is essential for assessing current performance and for forming an accurate credit view.  Hence, for active monitoring, Fitch has developed a surveillance process, where the impact of key performance indicators such as delinquencies, prepayment rates, collection efficiency, interest rate movements, and credit enhancement utilisation are examined.

Fitch Ratings says personal loan pools in India have shown a higher delinquency compared to other asset categories. The underlying pools of personal loans have shown weak performance, with about 5.5% of the original pool being over 90+days past due (dpd) delinquent. “Personal loans are unsecured lending; borrowers don’t usually specify the purpose for taking these loans. These are typically unproductive usage loans and usually do not generate an income stream,” says Peeyush Pallav, Associate Director at Fitch Ratings India. Fitch monitors closely the key performance parameters for two personal loans-backed transactions originated by ICICI Bank. They include the 90+dpd and 180+dpd prepayments, collection efficiency and charge-offs. These transactions have performed satisfactorily on account of their structures (e.g. chargeoff at 120+dpd to minimise the cost of carry on account of defaulted assets), and adequately sized credit enhancements. However, the underlying pool of personal loans has shown weak performance, with about 5.5% of the original pool being over 90+dpd delinquent. The 180+dpd portion of the pool comprises about 4.2% of the original principal outstanding. The ongoing transaction performance analysis forms an integral part of the ratings process. Clear and timely reporting is essential for assessing current performance and for forming an accurate credit view. Hence, for active monitoring, Fitch has developed a surveillance process, where the impact of key performance indicators such as delinquencies, prepayment rates, collection efficiency, interest rate movements, and credit enhancement utilisation are examined. The agency ultimately assesses the impact of such indicators on the timely repayment of interest and principal for the pass-through certificates (”PTCs”) on an ongoing basis, to ensure that the level of protection available to PTC investors is commensurate with the rating level assigned to the notes. The agency has formulated an Indian ABS 180+ delinquency index for various asset classes with loans, which are 180+ days in arrears. The index is based on the weighted-average delinquency rates.

State-owned banks are discouraging retail customers from taking personal loans despite a slowdown in loan growth and abundant liquidity. Higher provisioning norms on personal loans imposed by the central bank in January this year have prompted this move, according to bankers. Over the past few years, banks had seen a growth in personal loans, along with a rise in earnings of the organised workforce in a buoyant economy. However, once the Reserve Bank of India’s norms on provisioning kicked in, banks had to set aside two percentage as standard provision on personal loans. This means that for each personal loan of Rs 100 which is treated as a standard loan, banks have to set aside Rs 2 as a provision. This is deducted from operating profit. To discourage customers from seeking personal loans, banks have started to insert fresh clauses in loan documents which make it difficult for customers to avail of such loans. Some banks like Corporation Bank and Canara Bank have started asking customers to provide for an undertaking from their employers. “This is like seeking a guarantee from the employer which is not very easy to get,” pointed out a senior banker. Canara Bank is also insisting that the borrower should have a salary account with them in order to obtain personal loans without any collateral. “This is because we have noticed rising instances of loans without any security going bad. Thus, if the borrower has a salary account with us, the EMI is directly deducted from it which reduces the scope of default,” said a senior bank official. According to bankers, a substantial chunk of salary accounts, especially of private corporates, has been cornered by private banks. However, when it comes to locking in to loans, many employees prefer to access personal loans from PSU banks, mainly due to lower rates charged by them. While most PSU banks have pegged personal loans to the prime lending rate (12-14%) or a 100-200-basis point premium on big ticket loans, private and foreign banks charge as high as 16-21%. Further to discourage personal loans, some banks are insisting on third-party guarantees in case the loan value is very high, besides seeking a guarantee from the borrower. For instance, Bank of India has decided not to increase its target on its personal loan portfolio. This means that fresh loans will be given only to the extent of repayment of the existing loans. Similarly, with the upswing in property prices, banks are adopting a cautious approach to approving home loans. More and more banks are reluctant to approve home loans at a fixed rate. Banks like Canara Bank and Bank of India have stopped disbursing fixed rate loans while others such as State Bank of India, Punjab National Bank and Allahabad Bank have inserted a reset clause in their fixed rate loan documents. Recently, the Bank of Baroda board also passed a resolution to insert a reset clause at the end of five years for their fixed rate home loans. Sources said Central Bank of India, too, is considering inserting a similar clause in its fixed rate home loans. The decision will be taken after the bank completes its IPO by the end of this month. The reset clause protects the lender from fluctuations in interest rates.

Many consulters suggest that one should resort to personal loans for financing trips or vacations instead of other financial products like credit cards. Such suggestion is undoubtedly well founded but not everybody knows the reasons that justify the advice. The costs of financing should be measured both by comparing the overall amounts spent on interests but also by how the monthly payments affect the borrower’s budget. Personal loans present significant advantages when compared to credit cards for financing trips. However, there are many considerations to be taken into account, especially when there are certain promotions by credit card companies that can offer more benefits than paying the whole trip in cash and in advance. Therefore, there is no general answer to the question: should I pay with credit card or take a personal loan? It will all depend on the particular case.

The Interest Rate Issue

Personal loans tend to charge lower interest rates than those charged by financing unpaid credit card balances. While credit cards can charge up to 20% APR or even more, personal unsecured loans rarely exceed 10% or 12% APR. Thus, financing your trip by taking a personal loan will end up being significantly cheaper unless you repay your credit card balance within a short period of time. Many consulters suggest that one should resort to personal loans for financing trips or vacations instead of other financial products like credit cards. Such suggestion is undoubtedly well founded but not everybody knows the reasons that justify the advice. The costs of financing should be measured both by comparing the overall amounts spent on interests but also by how the monthly payments affect the borrower’s budget. Personal loans present significant advantages when compared to credit cards for financing trips. However, there are many considerations to be taken into account, especially when there are certain promotions by credit card companies that can offer more benefits than paying the whole trip in cash and in advance. Therefore, there is no general answer to the question: should I pay with credit card or take a personal loan? It will all depend on the particular case.

The Interest Rate Issue

Personal loans tend to charge lower interest rates than those charged by financing unpaid credit card balances. While credit cards can charge up to 20% APR or even more, personal unsecured loans rarely exceed 10% or 12% APR. Thus, financing your trip by taking a personal loan will end up being significantly cheaper unless you repay your credit card balance within a short period of time. Moreover, come either with a variable interest rate or a fixed interest rate. By requesting a variable interest rate personal loan you can get significantly lower rates. However, you need to bear in mind that variable rates can increase suddenly due to market variations and you might end up paying more than what you would have paid if you selected a fixed interest rate personal loan.

The Monthly Payment Issue

The advantage of personal loans when it comes to monthly payments is that the installments are fixed which is perfect for those with little discipline that always feel tempted to pay only the minimum payments on their credit cards and keep spending without control. This way you will know exactly how much you owe every month and you will be able to repay your debt sooner. Obviously, some will prefer the flexibility that credit cards provide. It all depends on how much self-control you have. But, besides the discipline issue, fixed personal loan monthly payments are a lot easier to budget and since as explained above, the interest rate is lower, smart borrowers will prefer it over credit card financing. The monthly payments can be easily included in the budget and calculated as an additional expense letting the applicant to make the necessary previsions to afford the payments without hassles.

There’s no doubt you’ll have heard plenty about debt consolidation loans - our TV screens are full of adverts promising freedom from financial worry, and the internet is positively flooded with solicitations to lock in a low rate with a refinancing package.If you’re having difficulties keeping up with your bills and credit repayments, or even facing the prospect of recovery action on overdue installments, then the idea of debt consolidation can be very seductive. By combining all your current debts into one single loan, the theory goes, you’ll be benefitting from both a reduction in your monthly repayment amount and a lifting of the stress caused by constantly having to juggle your finances.But is debt consolidation really as simple as all that? Of course there are benefits to restructuring your financial life in this way, and the adverts aren’t shy of pointing out the positive side, but before embarking on this course of action there are a few negative aspects you’d be well advised to consider. Only then can you make a fully informed decision on whether debt consolidation is right for you.Firstly, in order to secure a lower monthly repayment you either have to get credit at a lower interest rate, or spread your payments over a longer period. Most consolidation packages rely on a combination of both, but it’s almost certain that the deal will involve a lengthy loan term. This means that you’ll be paying interest on your debt for longer, and the total amount of interest you’ll be charged will in the long run be higher. You may feel that this is a price worth paying for reducing your monthly bills to a more manageable level, and you may indeed feel you have little other choice, but it’s a point to bear in mind.Another potential problem with consolidation is that, in a sense, you’re giving yourself a fresh start financially. You’re wiping out all those worrying debts and getting your finances back under control. This is of course a good thing - but you’ll be left with all your old credit card accounts with a zero balance, and all the temptations to spend that that may provide. If you’re not careful, you could end up in an even worse situation - having to pay back a large loan while running up new debts at the same time.This pitfall can of course be avoided by cancelling your card accounts at the same time as you clear the balances, and it is strongly advisable that you do this.The final problem to bear in mind is that by consolidating you will probably be shifting unsecured debt into a secured loan using your home as collateral. This means that if, in the future, you fall behind with your payments, you could risk losing your home as your creditor calls in the debt through foreclosure. This is a serious drawback, and if most of your current debt is unsecured then you might wish to explore every other possibility before tying it up to your home.So, is debt consolidation an altogether bad option for sorting out your finances? Not at all. It can be a very effective strategy for dealing with problem debts, but it shouldn’t be entered into blindly, no matter how attractive the advertisements may appear. Michael has been writing on personal finance matters for several years, and is currently working for LoanTime.co.uk where you can compare personal loans, secured loans and bad credit loans.

The bank offered him Rs 300,000 at a flat rate of 15 per cent for three years. He was rather surprised as he had been told that interest rates were on the rise and that he would have to pay at least 18 per cent interest or more for a personal loan. He patted his back for being lucky.Imagine his surprise when he was told by his chartered accountant that his interest rate was much more than the promised 15 per cent. That is, he was going to pay a total amount of Rs 435,000 at the end of three years. This amount would have been perfectly fine, if he had paid this entire amount in one go after three years. But here he was paying an equated monthly instalment Rs 12, 083. In other words, his principle as well as interest should be coming down every month, yet he had to pay the same amount for three years. Says Sajag Sanghavi, certified financial planner, “We advise our clients not to take loans on flat rates as it is the most expensive rate that the bank offers.” According to him, in a rising rate regime, personal loans are the most expensive and one should take them, in case of an emergency.So what are the option? Says Mukhesh Dedhia, director, Ghalla and Bhansali, “One should always ask for the reducing balance rate when offered a flat rate of interest.” Under the reducing balance method the principle gets reduced daily, monthly, quarterly or yearly. Also, as the principle amount gets reduced, the interest that you pay is on the reduced principle and therefore lower, as well. Obviously, the more often the balance is reduced, it is better for the consumer.Let us take Sanjeev’s example to work out the numbers. He has borrowed Rs 300,000 for 3 years at 15 per cent per annum. The EMI is Rs 12,083. But if one were to use the monthly reducing balance method, the interest rate would be almost 26 per cent per annum. Also, if he were to pay using the monthly reducing balance method, his EMI would work out to Rs 10,400. So in effect, he is paying Rs 1,683 more every month. That works out to Rs 20, 196 per year.As we can clearly see from the above example, there is almost a 10-12 per cent difference between reducing balance and flat rates. Ultimately, that has a huge impact on the cost of the loan.

Despite heady growth numbers, there are growing fears of overspending by individuals and households. In what indicates some nervousness in the personal loan market, India’s biggest rating agency Crisil has downgraded a securitised pool of personal loan portfolio issued by ICICI Bank.

This is the first time that a securitised paper has been downgraded in the Indian market. Crisil lowered the rating — series A1 and A2 by two notches from AAA to AA. Securitisation is a mechanism through which banks palm off loans from their books to another vehicle which issues pass through certificates (PTCs) or securitised papers to investors. PTCs are services from interest earnings on loans that the vehicle holds. The credit pool size at the time of issuance was Rs 314 crore of principal and about Rs 86 crore of interest component.

The issuer, ICICI Bank, provided 10.9% credit support and 3.3% of liquidity support, respectively. The credit support facility is a deposit made by ICICI Bank with another bank and it works like an insurance cover. In case of a default in the pool, the special purpose vehicle (SPV), which has issued PTCs to investors would draw money from the credit support account. PTCs were issued in July 2005 with a 56-month repayment schedule.

The downgrade is on account of ‘more-than-desired utilisation of the credit support facility’, said the rating agency. About 23% (Rs 9-10 crore) of Rs 43-crore credit support facility has been drawn, which is higher than anticipated by Crisil.

The pool has paid investors 58% of the due principal and the weightage average tenure left for PTCs to mature is 10.5 months. “Securitisation market is developing and this is a natural evolution to it. In the international market, this is a very common phenomena,” said Ramraj Pai, director of structured product, Crisil. However, market analysts say that many more downgrades will happen as the securitisation market develops. Investors, primarily banks, will have to take a knock on their bond portfolios.

HDFC Bank has increased interest rate on its (Non-resident Indian – external) NRE deposits, effective from July 1, 2007. Interest rate on NRE deposits for three to five years maturity will increase by 16 basis points to 5.45 per cent against 5.29 per cent earlier. Deposits of 2 to less than 3 year maturity, the increase is by 12 basis points to 5.43 per cent as against 5.31 per cent earlier.

The rate of interest for deposits maturing between one and two years is up by 3 basis points to 5.42 per cent as against 5.39 per cent earlier. The NRE rates were last revised by the bank on June 1, 2007.

The country`s second-largest public sector bank Punjab National Bank(PNB), is planning to cut exposure to personal loans including home finance, to bridge the gap between higher credit offtake and lower deposits, reports agency sources.

`The bank is concerned over widening gap between resource mobilisation and credit expansion and will soon take decisions on curtailing credit exposure by reducing personal loans,` PNB chief general manager, U S Bhargava said. The bank`s asset liability committee (ALCO), will meet later this week to decide on the issue, he added.

PNB`s, credit exposure is growing at 28% as against a growth of 20-22% in resource mobilisation. The bank, earlier indicated an increase in the prime lending rate (PLR) by 25 to 50 basis points and interest rates on all types of personal loans, including housing loans.

At present, PNB charges a PLR of 12.25% and the interest rate on personal loans is between 12-13%.

A number of lenders such as ICICI Bank and HDFC Bank, raised PLR by 100 basis points, while Bank of Baroda increased the rates by 75 basis points.

The move is in effect to the Reserve Bank`s decision, to increase repurchase rate at which it lends to banks and the cash reserve ratio, the deposits to be kept by all banks with RBI, to check high credit growth and tame inflation in the economy.

Bhargava said that, while loans for the first house of a borrower will be kept under priority area, PNB will take steps to discourage buying a second or third house.