According to the Bank Of America , mortgage rates in America tends to be between 3 to 4.5 %.
The average interest rate of US mortgage rate is 3 to 4.5% APR. Whereas in India the average bank lending rates are varied from 10 to 12% per annum. … In US most of the loans are for term of 360 months, means 30 years. But in India the termof normal mortgage loan is 20 years.–Source
Consider an average Indian and American. The Indian is earning 12 lacs a year and American is getting $56,516. Now , they both want to buy a house and the average house costs 40 lacs and $ 279,500 respectively. In India we have 20 years to repay loan and Americans have term of 30 years.
Now let’s look at the calculations
The Indian will pay
Down-payment of ₹800,000
Interest rate considered 8% on home loan which will cost ₹32,23,860
The Total Payment
(Principal + Interest) is going to be ₹64,23,860 (excluding house tax and other taxes)
He will be paying ₹26,766 approx, which is 26.7% of salary he earn every month.
The American will pay
20% down-payment of $ 55900.
Interest rate considered 4.2% will cost the interest to be $107,276.
So he will pay $ 330,876 (excluding the house tax and few more taxes. )
So he will be paying $1,378 per month, 29% of salary every month for next 30 years.
Note: We aren’t considering hike or promotions, and any bonuses or savings now.
So we can see that we Indians pay almost 50% (50.2) interest and 50%(49.8) principal amount. However the American pay 32.6 % interest and 67.4% principal amount which makes them pay less of extra money as interest by around 20% due to lower rate of interest.
But when seen according to the duration, we Indians pay 27% of our monthly income whereas Americans pay 29% which hardly matters. But still , in India, people handle loans more carefully. This is not because we are better in handling money, it is because we have to pay 50% of our earning as interest because of higher ROI.
Americans can handle this casually and can afford being a bit careless because of that 20% they are saving which we Indians aren’t.
#1 Difference because of developed and still developing stats.
The approach of Americans are not much relevant in India because as the developed country America has lower interest rates and there average earnings are more as compared to Indians (after including currency’s original value rare and expenses).
#2 Change in time duration and interest rates
Another reason for low rates stability is the long duration they get to repay loans. Americans are able to maintain low rates because of developed economy as to increase economy by enticing people to take more loans. However in India, reasons like population, shortage of land and all factors make difficult to maintain low rate of interest for stability and balancing.
#3 The average earning difference
The cost of living is 23% of the salary. And it’s 40% of the salary in India per year for a single person. This makes very clear that they earn more and spend less as compared to us. In india we earn less and spend more.
This stat shows that there is a need to save more and lessen the spendings for getting into a debt free life.
There’s a need to repay your debts soon enough so to save the interest amount and instead invest in for accumulation. For cutting the 50% loan interest down and getting debt free ASAP, these steps will help you out to reach the goal sooner.
Investment to pay early
We all heard people advising not to invest before you paid off your loan. But I consider other approach. Before telling about it, I suggest you to have an emergency fund and savings ready for normal cases along with the current account from which you’ll be paying the EMIs for the recent few years, your expenses for food, clothe, car and other necessities.(This expenditure is of a non-family member). Secondly, investing in stocks isn’t an option because it’s much risky.
Now when my parents bought a home in 2008. They paid ₹25,000 as EMIs every month and after deducting all the expenditure (4 person expenses, including student fees too). They were saving 40k and started putting 20k into SIPs for the next 10 years at the ROI of 12-14%. This meant, recently the SIP matured and investing 24 lacs made them get accumulated wealth of around 25 lacs resulting in 49 lacs. And they paid off the loan 10 years early by only paying 25% interest within last 10 years.
Hence, investment into Systemic investment plan even with lesser amount is gonna be beneficial and will help you lower down the interest charges by paying off debt early.
Avoiding vacations and putting every bonuses for saving
Vacations means fun! But it come with big bills , more credit debts, more stress if you haven’t planned as a minimalist. It’s not that you should save every penny for getting over debt. However you can minimise the vacation cost to minimum by :
- Planning short trips at the most affordable destination.
- Sharing the vacation with someone you know. (It’ll save you both on renting big house to stay, adventures and all)
- Go to friends and family to spend vacations.
As I talked about how my parents paid off debt 10 years early. You can understand how compound interest works. As being stated ‘it’s the eight wonder of the world’. SIPs will allow you to attain your financial freedom quick enough even when you will start them with ₹5000 monthly when you don’t save enough.
So if seen, if you’ll invest ₹5000 every month for next 10 years at the interest rate of 13% , you’ll invest 6 lacs in 10 years providing you wealth gain of 12 lacs. You can pay off the debt by 12 lacs and refinance the remaining loan amount at low ROI.
Before earning extra money for vacations or any other enticing activity. Let’s just focus on making extra to pay off debts soon for saving the interest amount flying off your pockets.
Extra income can be active or passive. Few ideas to earn extra includes:
- Starting a website ( just like this) and monetize via AdSense, join affiliate programme etc. Or start a commerce website.
- Rent a room to a known (or rent your 2-3 bhk to paying guests and live yourself somewhere affordable and fine. So that , when you’ll rent 2 bhk to 2 people at 10000 each. You are getting ₹20,000 and you are paying 12-15 k for your rents, saving yourself 5-8k which can be invested in SIPs.
- Teach in evenings. Instead of working part time at evening which is surely not possible in India because of long working hours. You can easily teach 1 ot 2 hours in evening and make good enough to save or invest.
It’ll not fetch you money but it surely will save you extra money. When you have to pay debts, you can’t afford to overspend. Plus point is that even when you don’t save enough for starting SIPs, you can still have money to pay off debt fast through budgeting. Budgeting will help you know your necessary household expenses after you paid off yourself the percentage of your paycheck as self-salary. So that the remaining can be saved in a separate savings account and allow you to not to overspend every penny you earn.
LSPT – Listing, Sorting, Prepaying, Tracking
List down all the loans even when they’re easy to remember and write the interest you are paying on them. Sort them out from highest paid interest to lowest paid. Now you see that credit cards are costing you the most. And this means you have to stop using them or minimize their uses and use your savings to get rid of it as soon as possible by prepaying. As when you have listed them , tracking will be easy for you. First: it makes the person totally aware of the loan balance. Second: As we start paying off the loans, tracking can further motivate the person to continue prepayments months after months.
Plus point: Indians don’t have students loan mostly
America has 71% of the graduates whi carry student debt according to report. However in India, children don’t start earning quick before getting a university degree. There funds for education comes from their parents pocket. So Indians basically don’t have big student loans unless they are into IIMs or MBBS.
The point where I am trying to mentioned is we only have housing, car and credit card loan. And it’s a relief to not to have a student debt.
Final words …..
The American debt paying methods are not much relevant to Indians because of different economic conditions. Still we can manange to cut down the loan interest by 50% as an average earning person by:
- Making a budget that prioritizes debt repayment
- Debt consolidation and refinancing to reduce your interest rate so more of your payments go to reduce the principal and you can become debt-free faster.
- Investing into SIPs or FDs when you got big savings and bonuses currently.
- Putting windfalls, such as bonuses and raises, towards debt repayment.