Financial Literacy – Financing

Financing is the process of organising funds for a specific purpose. Generally financing is associated with raising finance for business purpose. Finance is also required to be raised for personal reasons like when one wants to buy a house/land, child’s marriage or may be child’s education. Whatever may be the reason, one needs money to do that particular task. So, in nutshell, financing or funding is always a need, be it for business purpose or personal. Financing is closely associated with banks or financial institutions, because, these are most common sources from where one can meet his/her financial needs. But today, there are other sources which are becoming popular e.g. Crowdfunding or Peer-2-Peer funding etc. Let us focus on financing. Funds are needed mainly for one of the following reasons:

Personal Loan

Vehicle Loan

Education loan

Home Loan

Vehicle, Education and Home loan are directly related to the type of loan one needs, but Personal loan needed for different reason in different times. 

Personal Loan:

Generally, Personal loan is taken when there is an immediate need, the amount needed is not much and it is for a short period. It may be for buying some costly house hold item e.g. computer, LED TV etc. It is necessary to check the details of the financier be it a bank or any other agency. It is also important that comparative chart must be prepared after getting all the required details from the financers.

One should not rush in finalising the source; rather evaluate the details from all the perspectives before arriving at the conclusion. Factors that must be kept in mind are Amount (Loan) to be taken, Interest rate, Period for which the loan is taken and the EMI (Equated monthly instalment). These factors will help decide which financer suits most.

Vehicle Loan:

When one wants to buy a vehicle, generally he needs loan. Here again one should be very particular about all the factors mentioned under Personal loan, plus some associated factors and some incentives that are being provided by the Vehicle vendor. Sometimes the vehicle vendor himself provides the loan/funds from their side or they have tie-up with some financing company from whom the funds may be made available. Whatever be the situation, one should always be vigilant enough to understand and critically examine all the terms and conditions. Be particular of any hidden point. So, again don’t jump on the conclusion take your time, examine each and everything and then decide. Factors like vehicle insurance, registration, warranty, free services etc. if any, must be looked at before taking the final decision.

Education loan:

Loan for Education is quite common particularly when one wants to study a costlier course and means of own resources are not adequate. Parents would always like to finance the child’s education from their own resources, but sometimes it may not be possible for parents to arrange the funds and have to go for taking loan. The factors mentioned earlier are definitely important and need to be kept in mind. In addition, one must find out whether there any kind of subsidy or lesser interest rates or even loan amount itself is arranged by Central/ State governments.

 If there is nothing like that possible then the interest rate on education loan becomes important. Banks are providing lowest possible interest rates for this purpose. It is better to get the details from the all the approachable banks and prepare a comparative chart. This chart will help you decide which bank one should go to for taking loan. Some banks also give the facility to start the loan repayment only after getting employment, so that the burden of repayment of loan is the responsibility of the child for whom the loan is taken.

    So having done your proper homework, one should decide for the education loan.

Home Loan:

It is an establish fact that making/building a home is not possible without taking loan. Very few examples could be seen where one does not need loan. Anyway, so if one decides to buy/build a house, the next thing that comes to mind is wherefrom the money will come. How funds will be arranged. It is always required to be clear whether one wants to build a house or he wants to buy a flat. It is quite likely that the cost difference between the two will be substantial and accordingly the finance needs to be arranged. Here also factors mentioned above are relevant and must be kept in mind, but this being larger investment, one should be little more cautious and vigilant. Having done all the necessary collection and evaluation, one should decide about the financer. Again since, the loan amount in question is quite hefty, the individual must take all the necessary precautions, before arriving at the final decision.

Refinancing:

Refinancing means replacing the existing loan with a better or cheaper loan terms. As interest rates are falling, one needs to take note of that, and have a relook at his repayment of loan amount. It is definitely a good decision, so that one can reduce his outflows thereby saving some money. Exiting the existing financer may cost a bit in the form of some penalty/fees but in the longer run the individual will be benefited by that decision. Some points that justify the refinancing are:

1.      To take advantage of a better interest rate

2.      To consolidate all the loans ( if there are multiple loans) into one

3.      To reduce the EMI (Equated monthly installment)

4.      Switching from variable interest rate to fixed interest rate or vice versa

5.      Long term benefit in every sense

Thus, one can easily understand the importance of Financial Literacy in this aspect of one's life.