Buy Now, Pay Later

Buying a house is still a big deal, but the process of buying it isn’t. Instead of accumulating money for a lifetime to self-finance their big buy, individuals are buying houses on credit early on in their working life. The cost of housing is still prohibitive—a new house in a Mumbai suburb will cost upwards of Rs 20 lakh. But with cheap credit available easily, 30-somethings like Prateek can think off staying in their own house rather than be tenants, and pay an EMI instead of rent. It’s not unusual any more to see people barely a few years into their professional lives acquiring houses of their own.

Home loans have emerged as the largest source of financing for individuals looking to own houses. Over the past three years, over Rs 1,00,000 crore worth of home loans have been disbursed, with an average loan size of Rs 8-10 lakh. Lenders provide multiple and flexible repayment options over a 20-year period—the longest among all kinds of retail credit options. Harish Sadani, 30, recently moved into his own house in Mumbai suburb Borivali. Although a big chunk of Sadani’s salary goes towards his EMI, he says it’s a minor sacrifice. “I am willing to live with the interest cost to have the feeling of ownership and freedom,” he says.

Housing loans have always been there, but they weren’t always affordable. They became a viable financing option when interest rates started tumbling around 1997. From a high of 14 per cent, home loan rates fell to 8 per cent, shaving 42 per cent off interest costs. On a 20-year, Rs 15 lakh loan, that works out to a saving of Rs 14.6 lakh in interest costs. Also, the terms and conditions have become far easier. Gone are the days when bankers asked for at least two guarantors over and above the mortgage of a house. Even the paperwork is today simpler and less time-consuming.

Generous tax breaks on a home loan—interest payment of upto Rs 1.5 lakh and principal repayment of upto Rs 1 lakh a year on a home loan taken towards a self-occupied house can be claimed as a tax deduction—have sweetened the deal. In the highest tax bracket, a home loan repayment reduces the total cost of the house by as much as 30 per cent— assuming, of course, that the current tax breaks stay over the loan tenure. Such savings and convenience have nudged many into acquiring that asset early on in their working life. In the absence of funding and tax breaks, they might have dithered, but now they are striding in confidently.

The cut-throat competition among lenders to get their custom has meant more flexibility, more options for prospective home buyers. Using a loan, Linus Chettiar, 35, has moved from a 450 sq. ft one-bedroom apartment to a 950 sq. ft three-bedroom apartment in Borivali. Says Chettiar: “It feels really nice to move to a spacious apartment. It encourages us to spend more quality time at home.” And, knowingly in Chettiar’s case, or unknowingly sometimes, the biggest personal finance decision for any family is thus secured.

Don’t Even Tell Us Why
A marriage in the house is as much a matter of stress as it is of joy. Ask Sanjay Pachauri, an accountant with the Jasubhai Media Group. Just as he had taken stock of his savings and begun to celebrate that he had enough to finance his sister’s wedding, Pachauri learnt that the projected expenses had overshot the initial budget by Rs 48,000. Suddenly short of cash, and too proud to ask family and friends, he approached Citi Financial for a personal loan. Within two hours, after establishing his identity and repayment capacity with a salary slip, he had the loan, at 15 per cent. Pachauri still has six instalments to go, but is at peace, knowing he came through the ordeal with grace.

As recently as a decade ago, financial emergencies such as this would have meant making uncomfortable calls or giving in to the exorbitant demands of local moneylenders. The bank has since replaced the traditional moneylender, even for needs that can’t be pigeonholed into the many loan categories that banks have. Any loan need—absolutely anything—that doesn’t sound like a familiar retail finance category can today be serviced through a ‘personal loan’. Weddings, travel, purchase of goods, budgetary shortfalls, medical emergencies, you name it.

Personal loans allow people to be ambitious, to dream big, to chase outlandish ideas, to covet—and get—the good life, without letting temporary shortfalls of money get in the way. They require neither any assets to be offered as collateral security nor any uncomfortable disclosures on the end-use of funds. Individuals who meet the minimum credit norms of a lender can easily get a personal loan of 10-12 times their monthly income. The cost of that convenience, however, remains prohibitive. Says Harsh Roongta, chief executive officer, Apnaloan.com: “The personal loan market is expected to be Rs 18,000-20,000 crore this year, up 50 per cent from Rs 13,000 crore last year.” As credit assessment procedures become more organised, this number is bound to increase, as more and more Indians fall back on personal loans to bankroll life.

Plastic Power
In the days when cash was the only way to complete a transaction, some people wore innerwear with pockets that could safely stock a wad of notes. It wasn’t the prettiest sight to see them slip their hands under their shirts to pay for a lavish dinner, but such was the need of the day. Today, the really well-heeled don’t carry any cash on them, and those hands whip out instead a 3.25”x2” piece of plastic that fits neatly in their wallets.

Credit cards have made life simpler. They have done away with the need to stash away huge sums of money in the house, or walk around with enough money to fill an ATM, or plan shopping excursions in advance. People can now go to a foreign country without carrying their bank account with them. They can make impulse purchases. At the click of a mouse, air tickets can be booked and flowers delivered to girlfriends studying in foreign universities halfway across the world. ‘Buy now, pay later’ is the mantra of the day.

Credit cards came to India in the 1980s, grew steadily till the mid-90s, and then all exploded. From 1.9 million cards in circulation in 1995, the numbers had grown to 13 million in 2004. And they hadn’t—haven’t still—even scratched the surface of the potential demand. Says Vijay S. Mehta, chief consultant of the Udaipur-based Credit Card Management Consultancy: “We have 250 million in the middle-class who can afford this service.”

In order to sign up that potential customer base, card issuers are now offering reward points, waiving annual fees for life, and offering freebies like free insurance. Most credit cards now offer free accident or medical insurance cover. Just before his marriage, Hansraj Taunde, a software engineer, broke his right hand when a speeding car jumped a red light and rammed into his bike. Luckily, his credit card gave him Rs 50,000 worth of medical cover, which he used to pay for the surgery. “I had to assure my wife that she could trust me to safeguard her from all perils. And I don’t think she would have got the message if I had a few dents in my body,” he quips. Plastic rules.

Go, Take A Ride
Rush hour traffic is evidence of the growing tribe of women drivers, moving forward with varying degrees of self-confidence, declaring their independence from public transport and the darker sex. Part of this empowerment has to do with women breaking gender barriers—actual and imaginary. Part of it has to do with the means to that end being within easy reach. As early as in their first jobs, women can now think of buying a car, paying a few thousand from their salary as EMI.

Even for the average middle-class family that is climbing the income ladder, owning a set of four wheels isn’t a painful, long-winded exercise in saving anymore. Last year, the four-member Patiwar family turned in their overburdened two-wheeler and bought a Santro, thanks to a five-year car loan. They now like to cruise the roads outside Mumbai on weekends. Says Manisha Patiwar, 35: “Travelling in a two-wheeler with two children was simply not possible. Often, we had to leave the children behind. Now that we have a car, we can spend more time with them and do more things together.”

About 85 per cent of new cars sold today are bought on credit. Car financing, as a commercial proposition accessible to all with a capacity to repay, coincided with the opening of the automobiles sector in the early 90s and the smart increase in disposable incomes. As more manufacturers came in and more models were launched, bank after bank moved into the car-lending business. Gradually, car loan rates started coming down—from 18-20 per cent in the mid-90s to 9-11 per cent today. Lenders stepped out of their high-rise offices into car showrooms, struck deals with dealers and direct selling agents to bundle a loan with the car purchase.

The number of people who can spare Rs 7,000 a month for five years is far, far more than who can put down Rs 3 lakh on the table. That, essentially, explains why buying a car on loan is such a powerful idea, especially for first-time buyers, who are celebrating the freedom to commute at their own pace and convenience. The same convenience is driving families, who have the need and can afford it, to go in for more than one car. Time saved, energy saved, money saved. Peace of mind gained.

Self-Made Is Sweeter
Guneet Aulakh was 23 when he wanted to go abroad. With a bachelor’s degree in electronic engineering in hand and some dollar dreams, he applied to the University of Cincinnati in the US for his Master’s, and was accepted on a full scholarship. Aulakh, the fiercely independent type, didn’t want to ask his folks for money to travel and sundry living expenses. So, in 2000, with his father as guarantor, he took a $6,000 loan from Punjab National Bank at 12 per cent. “I was grown up and was keen to move out, but it had to be on my own terms. That was the big push to take the education loan,” recollects Guneet, who now works as a business analyst with SAP in Germany. From Faizabad to Germany, it’s been a long journey for this go-getter, who decided early in life that he would make it big on his own steam.

Remarkable as his story is, Aulakh is no lone face in the crowd. Every year, thousands make similar journeys. Some have wealthy folks to part-finance them. Others take education loans. Although definitive, consolidated figures for all banks are not available, isolated statistics tell a story of independence and empowerment. In 2004-05, 9,552 Indian students took loans from nationalised banks for higher studies, in India and abroad—more than three times the 2,881 who did in 2003-04. The short point is that there is now a system that sees business sense in recognising talent, and is willing to back it. It’s a sea change from the days when missing out on a full scholarship usually meant missing out on the education of choice.

Today, there are as many as 33 banks offering education loans, but with the government reducing subsidies, education is also getting costlier. Hence, the need for institutional funding has increased in the past six to eight years. The rates of interest are still on the higher side—from 12 per cent (PSU banks) to 17 per cent (private banks), compared with 4 per cent in the US. Still, Aulakh doesn’t mind. Four years on, his Master’s done, he’s earning a five-figure dollar salary. Repaying the $6,000 should be a breeze.