“Zero EMI" By Ra Ma. Palaniappan

Zero EMI by Ra Ma. Palaniappan is an insightful book on financial planning and debt management. It is essential to know what not to do as how it is important to know what to do. The book comes up with a lot of intricate information on what not to do when it comes to debt. I have summarised some parts of the book as below.

Good Debt vs Bad Debt

If you are taking a loan for an item that would grow in value, then it's good debt. It includes housing loans, business loans, and educational loans. These are essential and good loans that would grow in value over time.

If you take a loan for an item, that would depreciate, then its bad debt. It includes home appliances, mobile phones, and cars. People buy many home appliances like fridge, washing machine, air conditioner through no-cost EMIs. No-cost EMI is the main stimulus behind many purchases today. Although we pay zero percent interest for the EMI, we end up paying multiple EMIs as this is an added one. Similarly buying lavishing mobile phones and opulent cars by opting for loans is not prudent.

Debt Trap

Any activity or campaign that incites us to make impulsive decisions is a trap and its highly dangerous. It is pivotal to evade unessential spending, such as buying a costly mobile phone by opting for a personal loan or going on a vacation by taking a personal loan. All of these make us fall into a debt trap.

Say No to Personal loans and Credit card loans

In western countries, a credit score will be an influencing factor when it comes to the interest rate of personal loans if the credit score is higher, then lesser the interest rate. But in India, credit scores are seen as eligibility criteria alone and does not decide on the interest rate. The interest rate of personal loans will be as high as 14 percent to start with, compared to a 8 percent home loan rate, and a 11 percent educational loan rate. Also, another drawback is tenure is always fixed with personal loans, even if we wish to prepay and close the loans as in housing loan, we won't be able to.

Three sought after reasons that make people make an impulsive decision on personal loans and fall into a trap,

1. Personal loans will be disbursed quickly within 48 hours.

2. There is no need to provide any collateral or say any reason for getting the personal loan.

3. Personal loan interest rate is lesser than the credit card loan rate.

Similarly, credit card loan is an expensive one if not handled properly. Credit card is the best lucrative source of a bank and provides multiple ways for a bank to make money.

Some of the fees as part of a Credit card loan are

1. Membership Fee: Some banks charge an annual membership fee for a credit card.
2. Over-limit Fee: This fee will be charged when the credit limit is exceeded.
3. Transaction Fee: This will be charged while transacting on different currencies.
4. Balance Transfer Fee: When we transfer the outstanding balance from one card to another, the balance transfer fee will be charged.
5. Late Fee: It is charged when we fail to pay the full amount on time.

Another stumbling block with a credit card is the interest. If we fail to pay the entire bill amount on time, then the interest will be charged on the outstanding amount and interest is usually high, as high as 36 to 48 percent depending on the bank.

It is better to avoid using a credit card, and in case we are using it, Some of the wise ways to use a credit card are

1. Do not use more than one credit card, as it will be difficult to track the expenses of two cards.
2. Always pay the dues in full.
3. Keep track of your credit card expenses.
4. Read the monthly statement carefully, just to find if there are any errors in the statement.
5. Do not ever withdraw cash from a credit card, because the interest will be charged from the next day. It is always judicious to make a purchase.
6. Do not take another loan to repay your credit card loan

How to reduce loans:

There are three ways in which we can reduce loan and have Zero EMI,

1. Repay
2. Prepay
3. Restructure

1.Repay:

It is about repaying the EMI regularly month on month as per Bank’s amortization schedule. If we do this promptly, our loan will be closed by the stipulated time.

2. Prepay:

Many banks allow you to make part payments apart from your regular EMIs and this amount will be reduced directly from the outstanding principal amount.

3. Restructure:

Restructuring a loan is a way of reducing the EMI amount payable per month by increasing the tenure. The bank will release the new repayment schedule after the restructuring process. This approach will come in handy when a person is going through an absolute cash crunch and is unable to pay the monthly EMI. But to get our loan restructured, it is not a lucid process, we need to approach the bank first and if bank rejects our request, we can request the banking ombudsman further.

How to avoid Loans:

1. Create a budget: Take stock of your income and expenses, you can use an app to manually enter and track your expenses every day.
2. Cut down expenses: At the end of the month, see what impulsive unessential spending you can get rid of in the future. Be frugal, it is different from being stringent.
3. Get organized: Collect all the important financial documents, health insurance documents, passbooks, and put them in a folder, it becomes easy to manage and track expenses and reduces the stress.
4. Build an emergency fund: It is good to have savings so that we could deal with trying times such as recession/job loss. It is good to have an emergency fund of your monthly expenses multiplied by six. Keep a deadline and start working towards building an emergency fund.
5. Stay away from loans: Stay away from loans, especially credit cards and personal loans.

It is important to know how to control finance rather than letting finance control us. The book emphasizes more on financial wellness and having smart financial goals. The book has fruitful information when it comes to money management, financial planning, and debt management. I strongly recommend this book to everyone to ensure that we avoid loans and lead a healthy and stress-free life.