I am planning on buying a two wheeler. Is it better to go for a loan or to use cash?
Hi,I have listed down few pros and cons to know before buying a 2wheeler on cash or loan. Pros:No Interest Rates: The biggest pro of paying cash foryour bike is that you won’t have to pay any interest rates Pay the Exact Price: When you pay cash for your bikeyou know exactly how much you’re paying. In contrast, when some individualsborrow money to pay for a bike they’ll focus on the monthly payment they’reobligated to pay and whether that monthly amount is affordable, rather thanlooking at the total amount they’ll pay over the life of the loanFlexibility on Insurance Coverage: When you borrowmoney to buy your bike, the loan provider that you got your loan from will havea lien on the bike. As such, you’ll be obligated to maintain a certain level ofinsurance on the bike for as long as you have a loan balance outstanding. Incontrast, if you own your bike outright you’ll be able to choose exactly howmuch coverage to and potentially save money by choosing a lesser amount ofcoverageCons:High Interest Rates. Depending on what’s being offeredby auto manufacturers and local dealers, you may be able to borrow money atvery low rates when purchasing a bike. Even though you’ll be responsible forpaying that interest, being able to make payments over time provides you withgreater financial opportunities because you can put the cash you would haveused to purchase the bike to other uses instead.Using Your Cash Towards Other Priorities: If you payfor your bike over the course of few years, you’ll have more money available –money that you would have to buy cash for the bike – to build upyour emergency savings fund or to pay down any higher interest debtyou may have.Greater Selection: If you decide that you wantto pay cash for your new automobile, you might find yourself limitedin your choices. Depending on your budget, you might only be able to afford topay cash for a bike that doesn’t quite meet your needs or which will requiregreater maintenance costs over time. Taking out a bike loan shouldn’t be usedas an excuse to buy the most expensive bike possible, of course, but it willgive you greater options. I personally feel getting a car loan would be a better idea.Also, there are not only banks but NBFC also nowadays give your great offersand good interest rates. You can check with Mahindra Financethey offer bike loans at fancy interest rates with minimum documentation. Mostof all homework is a must before getting any loan. Cheers until next time!!!
How do chit funds work? What exactly goes on behind the scenes when a chit fund is run? Who gets paid how? What exactly is the pattern of money flow?
In simple terms, a chit fund is a savings cum borrowings scheme, wherein a few people (known as members or subscribers) come together and invest a fixed amount every month for a fixed period.To best explain its working, here's a simple example:Let’s assume there is a chit fund ->with 10 members ->each contributing Rs. 3,000 per month ->for 10 monthsThus total monthly collection in this chit fund = Rs. 30,000.Suppose in the 1st month, 2 members need funds and participate in the bidding. Member 1 bids for Rs. 27,000 Member 2 bids for Rs. 26,000Thus, Member 2 becomes eligible to draw the money for the month as his bid is lower than the first member’s bid.*If there is more than one member bidding for the same amount, which happens to be the lowest amount, a lottery is drawn to determine which of the members will be eligible for withdrawing the amount.The chit fund scheme is managed by one of the members, who is known as the Foreman. He is responsible for collecting the subscription amount from the subscribers, recording details of members and conducting the auctions. For these duties, he is paid a fee, which is generally 5% of the amount collected.Thus, Foreman’s fee = Rs. 1,500 ( 5% of Rs. 30,000)Member 2 can now withdrawRs. 26,000 – Rs. 1,500=Rs. 24,500The remaining Rs. 4,000 (Rs. 30,000- Rs. 26,000) is distributed equally among all the members, ie: Rs. 400 each.So in effect, during the 1st month, each member contributes only Rs. 2,600 (Rs 3000 - Rs 400)This process is repeated every month for a total of 10 months.On the completion of 10 months period, each subscriber would have withdrawn a bulk amount once, in addition to getting the monthly nominal amount.This monthly amount works like a dividend for the money invested.Hopefully you got the idea with this example. In case you want to know more about chit funds, this link might prove helpful -> Is a chit fund good for you?!If you have any other Personal Finance queries, you can follow and tweet out and I'll be happy to answer them for you - Adhil Shetty (@adhilshetty) | Twitter
What is CRR and SLR?
Cash Reserve Ratio: Banks in India are required to hold a certain proportion of their deposits in the form of cash. However Banks don't hold these as cash with themselves, they deposit such cash with Reserve Bank of India , which is considered as equivalent to holding cash with themselves. This minimum ratio is stipulated by the RBI and is known as the Cash Reserve Ratio or CRR.For example: When a bank's deposits increases by Rs. 100, and if the cash reserve ratio is 9%, the banks will have to hold Rs. 9 with RBI and the bank will be able to use only Rs 91 for investments and lending, credit purpose. Therefore, higher the ratio, the lower is the amount that banks will be able to use for lending and investment. This power of Reserve bank of India to reduce the lend-able amount by increasing the CRR, makes it an instrument in the hands of a central bank through which it can control the amount that banks lend. Thus, it is a tool used by RBI to control liquidity in the banking system.Statutory Liquidity Ratio: Apart from keeping a portion of deposits with the RBI as cash, banks are also required to maintain a minimum percentage of deposits with them at the end of every business day, in the form of gold, cash, government bonds or other approved securities. This minimum percentage is called Statutory Liquidity Ratio or SLR.For example: If you deposit Rs. 100 in a bank, and assuming CRR to be 9% and SLR to be 8%, the bank can use 100-9-8= Rs. 83 for giving loan or for investment purpose.RBI is empowered to increase this ratio up to 40%. An increase in SLR also restricts the bank's leverage position to pump more money into the economy.Current Rates:CRR: 4%SLR: 21.5%