Module 1 Fundamentals of Personal Finance PDF

Module 1: Fundamentals of Personal Finance 6 hrs  Financial planning: Need vs Want, Income and Expenditure  Budgeting and Financial Goals: Stabilising, Saving, Spending and Investing  Banking and transactions: Types of bank accounts, Digital banki...

Module 1: Fundamentals of Personal Finance 6 hrs  Financial planning: Need vs Want, Income and Expenditure  Budgeting and Financial Goals: Stabilising, Saving, Spending and Investing  Banking and transactions: Types of bank accounts, Digital banking (NEFT, RTGS, IMPS, UPI), Credit & Debit cards  Time Value of Money and Inflation o Simple and compound interest rate o Rule of 72, Rule of 70, Rule of 50-30-20, Rule of 10-5-3, 3X Emergency Rule  Planning and Debt Management: Interest rate, Tenure, Penalty, Cs in loan sanction o Personal, Vehicle and Education loan o Rule of 40% EMI Financial Planning: Financial Planning is a process of planning and managing your money (current finances) to meet your life goals. You would need to plan and manage your current income (the money you earn today) and your future income (money you can expect to earn in future) according to your life cycle needs. Having your own money in your hand every month does not guarantee you the lifestyle you deserve throughout your life. Circumstances and needs always keep changing. Today’s sound financial situation does not guarantee an equally sound future. And hence, no or improper financial planning can be disastrous. A loss of income, even temporary, can eat into your savings or can lead to debt. An uninsured loss can wipe out your accumulated wealth. Insufficient savings can force a reduced lifestyle during retirement. Frequent or unplanned borrowings can leave negative money i.e. debts for future. Also, poor tax planning can result in paying higher taxes than what you are liable to pay. All this, combined with changes in your life cycle needs and/or external economic changes can make you and your future generations financially vulnerable. Need vs Wants The first step in managing money successfully is being able to differentiate between Needs and Wants. Needs are a must have whereas Wants are good to have. Wants can be postponed and acquired later. When we learn to identify our Wants and inculcate the habit of postponing those wants, we should be able to achieve most of our financial goals. Prioritisation Urgent Not Urgent 1. Urgent and Important 2. Important but Not Important Important Action: Need to do now Action: Plan to do it later 1. Urgent and Important 1. Urgent and Important Not Important Action: Do it if cash flow allows Action: Ignore Class Activity: Mr. and Mrs. Bhat have following family demands to meet: Discuss the demand and prioritize them on the basis of importance and urgency and recommend necessary action. 1. Purchase a shawl as it is winter for Mr.Bhat’s mother as a present on her birthday 2. Elder son Sahil is demanding a Cycle to commute 3. Younger son Rohan is demanding a latest Video game 4. Gift for the marriage of a common friend and Mr.Bhat is planning to buy a gold gift 5. The couple also wants their house to be decorated by an interior decorator Demand Urgent Important Action Shawl for mother Yes Yes Buy Sahil's Cycle No Yes Plan for later Rohan's Videogame No No Don’t buy Marriage Gift Yes No Buy a less expensive gift which cash flow permits House decoration No No Ignore Income and Expenditure What you earn and how much you spend determine how much money you have on hand after meeting your needs (and some wants). This balance is an important indicator of your financial position. Income: Money earned from various sources like salary, business profits etc Expenditure: Money spent on various items which includes essential and non-essential items. Savings are the surplus of income over expenditure. A healthy positive balance every month indicates a trend towards a good financial position and a zero or negative balance most of the months corresponds to a weak financial trend. Assets and Liabilities The amount of assets (items of value you hold) is a precise indicator of your current and future financial position. Assets tend to add to your income. Ex: investments in gold, silver, deposits, stocks, mutual funds, art/antique, land etc. Items that you own and have economic value are your assets and items which you owe to others or have borrowed from others are your liabilities. For example, if you save and then invest in a fixed deposit, it is your asset. On the other hand, if you borrow funds/take a loan from a bank or any individual, it is your liability. More assets and less liabilities help you strenghten your financial position. Class Activity: The information furnished below is of Mr.Pawar, calculate his net-worth by identifying the following into assets or liabilities. Item Amount Asset Liability Savings bank account balance 55,000 Shares of listed companies 1,00,000 Car 7,25,000 House 35,00,000 Furniture 15,000 Air Conditioner 12,000 Microwave 10,500 Laptop 22,000 Gold Jewellery 80,000 Life Insurance Premium 15,000 Car Loan Outstanding 3,50,000 Home Loan Outstanding 13,00,000 Money lend to a Friend 30,000 Payment to be made to Maid 2000 Total Assets Total Liabilities Net Worth = Total Assets – Total Liabilities Net Worth of Mr. Pawar is Rs. ___________ Budgeting and Financial Goals You may now appreciate that your financial position is determined not from your income alone. It constituted from income, expenses, assets and liabilities. How you manage these four together will decide your financial health. Budgeting is the art of balancing income and expenses to ensure that expenses are always less than income. Making and following plan to put your money to optimum use. A plan that would enable you to reduce liabilities, to spend wisely, to save and to invest and add to your income. 1. Stabilizing a. Emergency Fund b. Insurance 2. Saving a. Savings Account (Start Now! Save First! Save Regularly!) 3. Spending a. Envelop Budgeting (Spend on Needs First! Wants Later! Waste Never!) 4. Investing Record Keeping: Timely recording of expenses and meticulous keeping of important documents and records; bills, receipts, tax documents, statement of savings, investment and credit cards, warranty/guarantee cards. Saving: Building reserves to be able to face financial emergencies and invest and build assets. Financial Goals Have you ever wondered why many of our goals are delayed or worse not fulfilled? Well, simply because we are wishful about our goals and we have no definite PLAN to achieve these cherished goals. Lifegoals could be higher education, vacationing in island, planning for retirement, saving for se0marriage, buying a house, children’s education etc. The starting point to achieve any goal is to have a Plan for it. Our lifegoals also be SMART goals. SMART Incorrect Approach Right Approach I need to pay my college fees in a year’s I will have to save Rs.50,000 to pay my Specific time college fees In the next six months, I will return Rs.3000 Measurable I will pay off my debts to my friends to my two friends for lending me their money I will save Rs.2000 each month by cutting Achievable I will save money down on eating out and partying If I save regularly, need not borrow more money, I can pay off my debts by next year Realistic If I save money I will be rich and will have enough savings till I begin to earn I will save Rs.3000 every month to buy a Time-Bound I will buy a scooter sometime in the future scooter in next 2 years Right time to Start Financial Planning The moment you get to know about financial planning or realize that you need to have a plan, is the right moment to start financial planning. The earlier this moment arrives, the better it is. Allocation guidelines: Spending -------------------- 50% of income Saving towards goals -------------------- 20% of income Stabilising finances -------------------- 20% of income Investing -------------------- 10% of income Banking and transactions Life’s needs keep changing, with growing age and changing life stage. It is best to be aware and prepared for these changes – in your needs and your income. Saving is one such way that allows you to face such changes with little financial impact. Savings mean the funds that you keep aside in safe custody (like banks). The Saving Mantra: Start Now! Save First! Save Regularly! If you do not have a savings account, open one NOW! Visit a branch of private bank, state bank, cooperative bank or post office, whatever is closer and convenient. What you may need for opening a savings account? 1. Fill up an account opening form and attach a passport size photograph 2. Provide proof of identification/residence 3. A minimum deposit amount (student’s zero balance account) What you may get to operate your savings account with? 1. An account number --- that is unique to you. 2. A cheque book (withdrawal slips) on request 3. An ATM/Debit card with a PIN (Personal Identification Number – password) 4. A User ID and password for internet banking How do I transact or deposit in Bank? Saving Account, Current Account, Recurring Deposit, Fixed Deposit. Saving Account: 1. It can be opened by one person or jointly 2. Savings account can be opened by a minor (under 18) through his/her natural or legally appointed guardian. Minors above the age of 10 years are allowed to open and operate savings bank accounts independently, if they desire. 3. Nominal interest rate is paid on an account balance 4. Some accounts may require maintenance of minimum balance 5. Compared to other deposits, this will fetch low interest rate but highly liquid 6. Suitable to inculcate the habit of saving Current Account: 1. Meant for business entities such as proprietorships, partnership firms, public and private companies, trusts, association of persons etc 2. No restrictions on number and amount of deposits and withdrawals as long as the account holder has funds in the bank 3. No interest is paid on the account balance Recurring Deposit: 1. It is popularly known as RD 2. A certain fixed amount is accepted every month for a specified period and total amount is repaid with interest at the end of the period. 3. Deposits can be opened for periods ranging from 6 months to 10 years 4. RDs are suitable for those who do not have a large amount of savings, but are ready to save small amount every month 5. No withdrawals are allowed. However, the bank may allow the account to be closed before the maturity period. Any default in payment within the month attracts a small penalty. 6. Earns higher interest rate than saving bank account. Fixed Deposit: 1. FDs are opened for a particular period, ranging from 7 days to 10 years 2. The interest rate depends on the amount and term of the deposit 3. Interest is usually paid as a lump-sum at the end of the term. However, there are also options to receive interest at periodic intervals 4. Deposits can be withdrawn prematurely provided the account holder has opted for it. Home Work: Identify the rate of interest offered by any one public sector and one private sector bank. Understand the changing rate of interest w.r.t type of account, tenure and amount. Rate of Interest for General Public Rate of Interest for Senior Citizen Saving Account Recurring Deposit Fixed Deposit Demand Draft Demand Draft or DD is a negotiable instrument issued by bank i.e. the instrument guarantees a certain amount of payment mentioning the name of the payee. It cannot be transferred to another person in any situation. It can be compared to cheques but these hard to counterfeit and more secure. The drawer has to pay before issuing a demand draft to the bank whereas cheque can be issued without ensuring the sufficient funds in your bank account, therefore cheques can bounce but drafts assure a safe and on-time payment. Digital Banking Living in this era, where all of us are knowingly or unknowingly making transactions almost all the time, money transfer has been one of the most common and important things to do. Using digital banking i.e electronic banking services for the execution of financial and banking transactions through electronic devices are growing rapidly. With the facilitation of services like UPI, online banking (transactions over website), mobile banking (transactions over mobile phones), the old-school methods of physically transferring money from one person’s bank account to the other’s through cheques, cash deposits at banks etc have been completely eliminated. Let’s look at some of the most common ways to transfer money. IMPS: Immediate Payment Service The transfer of fund is completed immediately. You can transfer money 24/7. It can be done using internet banking or mobile banking. Depending on the bank, the transaction charges may vary. NEFT: National Electronic Funds Transfer You can transfer funds from one bank branch to another bank branch that is participating under the scheme. NEFT transactions take longer time compared to IMPS. RTGS: Real Time Gross Settlement Method It is mostly used for transactions of high value that requires immediate clearance. Category NEFT RTGS IMPS Min Transfer Value Rs.1 Rs.2lac Rs.1 Depends on customer Max Transfer Value No Upper limit Rs.2lakh segment One-on-one One-on-one Type of Settlement Batches settlement settlement Speed of Settlement 2 hours Immediately Immediately Service Availability 24/7 24/7 24/7 Online/Offline Both Both Online Internet Banking: For the security purpose, Internet or Mobile banking require Login Password and OTP. Further, for fund transfer internet banking requires Transaction Password and OTP. How do I use it?  Login to your internet banking/mobile banking  Visit and click on ‘Fund Transfer’  From the drop down menu, select NEFT/RTGS/IMPS  Note that you need to Add Beneficiary to the list of beneficiaries by providing beneficiary’s information like name, bank account number, IFSC*  Click on confirm/add and authorize with OTP sent to your registered mobile number  It will take 4 hours hours to add beneficiary  Once the beneficiary is added to your account, you need to select the beneficiary details from your list of beneficiaries.  Enter the amount to be transferred, confirm and approve with transaction password and OTP Note: *IFSC (Indian Financial System Code) is 11-digit code written in an alphanumeric format that helps in transferring funds online. The code can quickly identify where the funds are coming from and where they are going. It helps in identifying the bank branches where people have their bank accounts that participate in various online money transfer options like NEFT, RTGS, IMPS, UPI. NPCI: National Payments Corporation of India, an umbrella organization for operating retail payments and settlement systems in India, an initiative of Reserve Bank of India.  The company is focused on bringing innovations in the retail payment systems through the use of technology like o RuPay (indigenously developed Payment system) o AePS (Aadhar Enabled Payment System) o IMPS (real time payment system) o UPI (revolutionary product in payment system) etc. UPI: Unified Payment Interface It is an immediate real-time payment system that helps in instantly transferring the funds between two bank accounts through a mobile platform. Ex: GPay, PhonePe, Paytm etc Debit and Credit Cards Debit cards are issued by banks and are linked to bank account. Credit cards are generally issued by banks and a couple of non-banks, but can also be issued by other approved entities. The debit and credit cards are used to withdraw cash from an ATM, purchase of goods and services at point of sale terminate or e-commerce (online purchase). While they are used domestically, the international usage is also allowed if requested by the card holder. They can be used for domestic funds transfer from one person to another subject to prescribed limits and conditions. Tokenisation Tokenisation refers to replacement of actual card details with an alternate code called the “token”, which shall be unique for a combination of card, token requestor and device. A tokenized card transaction is considered safer as the actual card details are not shared with the merchant during transaction processing. Example: Earlier, if customer were to buy a product in Amazon, the customer was requested to enter card details like card number, cvv, expiry date, name, PAN number etc. All these details were stored by the company. In September 2021, the RBI prohibited merchants from storing customer card details on their servers with effect from January 01, 2022 and mandated the adoption of card-on-file (CoF) tokenization as an alternative to card storage. Time Value of Money Time value of money shows the value of money that you have now is not the same as it will be in the future. Time is an influential factor when it comes to investments as well. The return on your investment depends upon the time you enter and exit. As time passes, you will realise that if 10 years back you could afford to purchase a full lunch for a particular amount of money, then today you could afford to get only a portion of the lunch in that amount of money. This means that the value of a five hundred rupee note would be higher today than after five years. Although the note is the same, you can do much more with the money if you have it now because over a period, you can make the money grow by earning interest on the money. By receiving Rs.500/- today, you can increase the future amount of your money by investing the money and gaining interest or capital appreciation over a period of time. Inflation and Investment Inflation refers to gradual rise in prices of goods and services. Over a period of time, as the cost of goods and services increases, the ability of a unit of money, say one rupee, to buy goods and services keeps declining. The purchasing power of money i.e. ability to buy anything, decreases. It is important take note of inflation on your investment during financial planning. Inflation can reduce the value of your investments. How can you avoid adverse effect of Inflation? Determine the real rate of return i.e. return you can expect after factoring the effects of inflation. To reduce the risk of decrease in the value of money, you should invest the money available to you today at a rate equal to or higher than the rate of inflation. Simple Interest Rate With simple interest rate, you can earn interest only on the principal amount that you initially invested. It is quick and easy method to calculate interest on original principal amount with same rate of interest rate for every time cycle. Simple Interest = P x i x n where P = Principal amount n = Time period i.e. number of years i = Rate of interest (% per annum) Ms. Tisha has deposited Rs.1000 in the bank and the rate of interest is 5%. What would be the simple interest be if the amount is deposited for one year? Similarly calculate the simple interest if the amount is deposited for 2 years, 3 years and 10 years. Year Principal Amount Rate of Interest Return Earned Maturity Value 1 1000 5% i.e. 0.05 (1000x0.05x1) = 50 1000+50 = 1050 2 1000 0.05 (1000x0.05x2) = 100 1000+100 = 1100 3 1000 0.05 (1000x0.05x3) = 150 1000+150 =1150 10 1000 0.05 (1000x0.05x10) = 500 1000+500 = 1500 Compound Interest Rate Your investments can give you better rewards when savings/investments are compounded over longer horizons. Compounding, in short, is earning interest on previously earned interest. Ms. Isha has deposited Rs.1000 in the bank and the rate of interest is 5%. What would be the compound interest be if the amount is deposited for one year? Similarly calculate the compound interest if the amount is deposited for 2 years and 3 years. Year Principal Amount Rate of Interest Return Earned Maturity Value 1 1000 5% i.e. 0.05 (1000x0.05x1) = 50 1000+50 = 1050 2 1050 0.05 (1050x0.05x1) = 52.5 1050+52.5 = 1102.5 3 1102.5 0.05 (1102.5x0.05x1) = 55.13 1102.5+55.13 =1157.6 Note:  Principal + return from the first year collectively becomes the principal for the second year  Principal + return from the second year collectively becomes the principal for the third year and so on. The above can also be shown as below 1st year = 1000 + (1000*0.05) = 1000 + 50 = 1050 2nd year = 1050 + (1050 * 0.05) = 1050 + 52.5 = 1102.5 3rd year = 1102.5 + (1102.5*0.05) = 1102.5 + 55.10 = 1157.60 If the deposit is made for longer period, the compound interest rate can directly be calculated using the following formula: Compound Interest = P (1 + i)n where P = Principal amount i = Interest rate n = Number of years Compound Interest = P (1 + i)n =1000 (1+0.05) 3 = 1000 (1.1576) = 1157.60 Ms. Misha has deposited Rs.1000 in the bank and the rate of interest is 10%. If the interest rate is compounded for five years, what would be the value of her deposit at the end of fifth year? Solution: Future Value of Rs.1000 for 5 years at 10% Fn = 1000 (1+0.10)5 Fn = 1000 (1.1611) Fn = Rs.1611 The table below shows you how a single investment of Rs.500 will grow at various interest rate. Interest Rate Years 5% 10% 15% 20% 1 525 550 575 600 5 638 805 1006 1244 10 814 1297 2023 3096 15 1039 2089 4069 7704 Maturity Value Calculator https://sbi.co.in/web/student-platform/maturity-value-calculator Major Rules for Financial Discipline 1. Rule of 72 (Double Your Money) 2. Rule of 70 (Inflation Effect) 3. Rule of 50-30-20 (Allocation of Income to Expense) 4. Rule of 10-5-3 (Return Expectation) 5. Rule of 100 minus your age (Asset Allocation) 6. 3X Emergency Rule The Magic Rule of 72 (Double Your Money) The Rule of 72 is a quick formula used to estimate the number of years required to double the invested money at a given annual rate of return. 72 T= 𝑅 where; T = Number of years/Time Period R = Rate of interest State Bank of India offered an interest rate of 8% on deposits. Mr.Patil has deposited Rs.3000 and wants to know when his money would double. 72 T= 8 T = 9 years Proof: Future Value of Rs.3000 for 9 years at 8% = 3000 (1+0.08)9 = 3000 (1.999) = Rs.5997 ~ Rs.6000 Mr.Patil’s deposit of Rs.3000 doubles to Rs.6000 in 9 years if the interest rate is 8% Interest rate is the magical key: If the interest rate is higher, the money grows to double in a short period. If the interest rate is lower, it will take longer time for the money to double. 72 Rate of Interest Formula T = Years required to double your money 𝑅 72 10% T = 10 7.2 years 72 12% T = 12 6 years 72 20% T = 20 3.6 years Alternatively, Rule of 72 can compute the annual rate of compound return from an investment given number of years it will take to double the investment. 72 Years to Invest Formula R = Interest rate required to double your money 𝑇 72 6 R= 12% 6 72 9 R= 8% 9 72 4 R= 18% 4 Rule of 70 (Inflation Effect) Divide 70 by current inflation rate to know how fast the value of your money/investment will get reduced to half its present value. 70 Inflation rate of 7% will reduce the value of your money to half in 10 years. 𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑅𝑎𝑡𝑒 Rule of 50-30-20 (Budgeting your Income) Allocation of your income to expenses: The in-hand Income (post-tax income) should be divided and allocated in the following manner: 50% = Needs (Groceries, Rent, Paying bills, EMI etc) 30% = Wants (Entertainment, Seasonal shopping, Vacation etc) 20% = Savings and Investment (Equity, MFs, Debt, FD etc) The minimum savings allocation must be 20%, you can also save more! Rule of 10-5-3 (Return Expectation) This rule tells you how different asset classes gives you different kind of returns. One should have reasonable returns expectations from his investment. 10% Expected Rate of return from Long term Equity instruments (Shares of the companies) 5% Expected Rate of return from Debt instruments (Bonds, debentures, promissory notes etc) 3% Expected Rate of return from Saving Account Equity may give you higher return but it is riskier as compared to other options, while debt instruments will be comparatively safer with moderate returns. Savings account gives you liquidity to meet immediate needs. Rule of 100 minus your age (Asset Allocation) You can subtract your age from 100 to find out, how much of your portfolio should be allocated in equity stocks. Suppose your age is 25yrs, then 100 – 25 = 75 So, 75% of your investment should be in Equity and 25% of investment in Debt securities i.e. 75:25 is your Equity Debt Ratio. Suppose your age is 40yrs, then 100 – 40 = 60 So, 60% of your investment should be in Equity and 40% of investment in Debt Securities Note: 1. Investment in Equity securities is highly risky. 2. Investment in Debt securities is less risky and returns are guaranteed. 3. You can take more risk at younger age (you have a lifetime to make it up) but as you grow old, your investment should be in a safer avenues (guaranteed return). The older you get, the less risk you can tolerate. Simply, one will not have the time to lose and replenish the capital base. 3X Emergency Rule Always put at least 3 times of your monthly income in Emergency fund to be prepared for unforeseen expenses due to loss of employment, medical emergency etc. It is advisable to own an emergency fund at least three times your current monthly income which is bare minimum. Emergency fund can be in Savings account or any other easily liquidifiable asset. Planning and Debt Management: Borrowing is an act of taking money and paying it back over a period. In financial goals, in case the savings are inadequate, one resorts to borrowing. Borrowing provides the flexibility of repaying in small installments over a period of time. Credit, Loans and Debt Loan: A loan is an arrangement with a bank or other lending agency, where, you get a lumpsum of money from the lending agency on a promise to pay it back with interest rate within a given time. Debt: By taking a loan, you create a debt. Debt is that which is owed. But many times, in personal finance, the words ‘consumer loans’ and ‘debt’ are used interchangeably. Credit: It is a lending agency’s belief or confidence in your repayment abilities and intent. Based on this, a lending agency—be it a bank or any other, will decide whether to sanction you a loan and how much. Debt management is a way to get your debt under control through financial planning & budgeting. The goal is to use strategies to help you lower your current debt & move toward eliminating it. Positive Debt Cycle Vicious Debt Cycle Borrow Unplanned Future Borrowing Income See Better Increase in Dip in Wealth Future Build Assets Future for Income Outflow Repayment Save Money Earn Return Difficulty in Loss of Assets and Invest on Assets Repayment Timely Repay Build-up of Interest & Interest Debt (Debt) Things to consider before taking loans  Interest Rate: Interest is the fee paid to the lender on borrowed money. For loans, the interest rate will tell you how much more than the original loan amount you will have to pay back. In general, interest rates are fixed for a length of time.  Loan tenure/Repayment pattern and Instalment amount: This will help you plan your finances better and also to check whether you are borrowing as per your expected future income or are going beyond it. o The number of months/years you will take to repay the loan in full. o What amount you would be required to pay at a time, and o Whether you need to pay it on a monthly/quarterly/half-yearly/yearly basis.  Other charges and Penalty: Banks and other lending institutions generally charge a nominal one-time processing fee and a service tax. o Foreclosure or pre-closure charges: It is the extra amount that lenders charge you for closing the loan before the tenure is over. Many lenders have a lock-in period, during which you can’t foreclose the loan. Note: You may wish to resort to foreclosure to avail loans at lower interest rate from some other bank. Foreclosure charges are generally applicable on your outstanding loan amount and may be around 2-3%. Types of Loans: 1. Personal Loan: It can be used for any purpose which is usually taken for marriage expenses, vacation expenditure and emergencies like medical expenses etc. No collateral security is required for this type of loan. The interest rate is higher on such loans  2. Auto/Vehicle Loan: It is provided for the purpose of buying vehicles. The vehicle is hypothecated to the bank and in case of default of the loan, the bank may take possession of the vehicle. Note: Hypothecation is a practice where you pledge an asset to a bank when applying for a loan. The bank keeps the vehicle as a collateral or security until you pay back the loan. 3. Home Loan: Housing loans are taken by people for a variety of house-related purposes such as construction of a house, house renovation, extension of house, buying of property or land etc. 4. Consumer Durable Loans: These are the loans which may be availed for purchasing of consumer durables like television, refrigerator, washing machine, dishwasher etc. 5. Education Loan: Banks offer education loans to students who want to pursue higher studies. Once the student completes his/her courses and starts earning, he/she can repay the loan. Students should have an admission offer from an institution before applying for education loan. 6. Agricultural Loan: To cater to the needs of farmers, banks offer loans to farmers to buy seeds, insecticides, tractors and other equipment needed for agriculture. List of documents required for obtaining Loans:  Proof of Identity: Passport/Aadhar card/Driving license/Voters ID/PAN card (ANY ONE).  Proof of Residence: Aadhar Card/Leave and License Agreement/Utility Bill (not more than 3 months old)/Passport (ANY ONE).  Latest 3 months bank statement (where salary/income is credited)  Salary slips for last 3 months  2 passport size photographs  Collateral proofs Note: Collateral is a property or other asset that a borrower offers as a security to the lender in exchange of availing the loan. If the borrower stops making the promised loan repayments, the lender can seize the assets financed and the collateral to cover its losses. Cs in Credit: The banks generally follow a conservative approach for processing the loan request of the borrowers and use the following five elements to understand the risk of potential default and gauge the creditworthiness of borrowers.  Capacity: The prospective lender will want to know exactly how you intend to and what is your capacity to repay the loan. Lenders compare your income against recurring debts and assess the borrower’s debt-to-income (DTI) ratio. Many lenders prefer an applicant’s DTI to be around 35% or less before approving an application for new financing.  Character: Lender will form a subjective opinion as to whether or not you are sufficiently trustworthy to repay the loan or generate a return on funds invested in your company. Banks check the credit history and reputation for repaying debts. This information appears on credit report/credit score.  Capital: Capital is the money you personally have invested in the business and is an indication of how much you have at risk, should the business fail. Borrowers who can place a down payment on a home, for example, typically find it easier to receive a loan. Down payment amount can also affect the rates and terms of a borrower’s loan. Larger down payments may result in better interest rates and terms.   Collateral: Banks insist on taking a security in addition to that is created out of loan proceeds. Collateral is any personal asset that the borrower pledges in order to support the loan. The collateral can be your house property, land, equipment, inventory, real estate, accounts receivable, or any other item holding monetary value in the market.  Conditions: Conditions can refer to how a borrower plans to use the money. Banks analyse the intended purpose of availing the loan like will the money be used for purchasing of house/vehicle or in case of business is it for working capital, additional equipment or inventory etc. Steps to Avoid Excess Debt With today’s heightened cost of living, debts become a usual thing. A number of people apply for personal loans, car loans, mortgage loans, and a whole lot of others. There seems to be a loan for everything. Often, financial troubles begin as a result of too large debt.  Set debt limits: Decide how much you can afford to be in debt. Then, make sure that your total debt is below this amount.  Shop carefully for debts: Always understand how much you will pay for your loan in interest and look for the lowest interest rates and the most affordable debt you can find.  Don’t give into temptation Companies may start sending you credit card offers and your lenders may offer you additional credit products. Only take out a loan or credit service when you really need to.  Automatically have money go towards your bills: This can be a great way to ensure that your bills get paid promptly. Rule of 40% EMI Never go beyond 40% of your income into EMIs. By following this simple rule, you will ensure your liabilities don’t exceed your income and that you are still comfortable in your position to repay the loans or debts along with the interest. If you earn Rs.50,000 per month, your EMI should not be more than Rs.20,000pm. ************************************