The pandemic has had a catastrophic impact on the revenues of Indian corporates. Vikas is a senior professional in the hospitality sector, which has been the worst hit. His company has decided to downsize in an effort to stay afloat. Vikas has an ongoing home loan and uses credit cards extensively to make lifestyle purchases. He likes to dabble in equity investments and has a decent-sized portfolio. Since his industry is reeling under the impact of the slowdown, another job may be very difficult to come by. Vikas realises that he needs to make a few fundamental changes in the way he manages his finances. He wonders if he should avail a pre-sanctioned personal loan to meet some large and urgent household expenses and invest some of his savings in the equity market in order to take advantage of the reasonable valuations. Or should he repay the home loan first from his savings to ease his monthly expense burden?

Prepaying a long-term loan might make sense in a normal scenario. However, these are unprecedented times. Therefore, Vikas should not rush to foreclose his low cost home loan. Moreover, the interest repaid on a home loan is also eligible for deduction up to Rs 2 lakh under Section 24. This reduces the cost of this borrowed capital even further. The tax benefit may not amount to much if a person has become unemployed and hence has little or no income. Even so, Vikas must not prepay his home loan.

On the other hand, repaying highcost credit card debt should take priority. Any moratorium discussion with the bank may certainly be tempting, but should be the last resort. Vikas could also try and liquidate some non-essential assets to raise funds. Moreover, he should exercise restraint while availing the quick personal loans on easy terms and conditions. A collateralised loan like gold loan, loan against shares/investments/insurance will be cheaper than a personal loan. Several enquiries for loans from many lenders may have an adverse impact on his credit score.

Another critical financial commitment, especially during the pandemic, is insurance. Timely payment of insurance premiums needs to be a top priority. He may be tempted to invest in equity and make some quick gains. However, he must refrain from taking any such risk with his funds in the present situation. Vikas must sensitise his family about leading a no-frills lifestyle and recast his household budget by knocking off all unnecessary expenses, including unnecessary subscriptions, forgotten video games, restaurant memberships, and other discretionary items. He can use this interim time to upskill himself, preferably using an affordable if not free online course or certification programme for better job prospects. Meanwhile, he should also try and look for ways to monetise his skills and hobbies through freelancing, consulting, tutoring etc.

Difficult times call for tough decisions. It depends on how pragmatically Vikas deals with them. A sound planning would help him and his family to come out of this crisis with minimum damage.

(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)

Read more: EconomicTimes

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