Cheaper loans for NRIS abroad?
It is fairly common for individuals or families that move overseas to continue to have loans in India, taken either for real estate purchases or education loans. In some cases, families take loans just a little prior to moving overseas, owing to significant relocation and set-up costs that they may not be able to fund out of their own savings or cash flow surpluses. These are relatively more expensive as they are taken in the form of personal loans or credit card debt.
Depending on the geography that one moves to, one might find that loan costs may be significantly lower than what was being paid for a similar loan in India. For example, a home loan in the UAE is likely to be available in the range of 4%-5% an annum, against a similar loan at 8%-10% an annum in India. An education loan in the US may be 3%-7% per annum, while a similar loan in India is likely to cost 10%-14% an annum. These differences are quite significant and therefore cannot be ignored if you want to have a robust personal finance strategy.
However, one needs to remember that in certain geographies, expressing interest rates in terms of a flat rate of interest is common i.e. the borrower pays interest on the original loan principal amount, which is most common in India. Here, the borrower pays interest only on the current outstanding principal. Thus a flat loan rate may sometimes appear much cheaper than it actually is.
Considering that the cost differentials are fairly significant, it is a good idea for NRIS to evaluate whether they should continue with their loans in India, or evaluate taking a loan overseas.
It is important to remember though that many countries look for good credit history and a credit record before they extend a loan, so one may not get access to loans in the country one moves to immediately.
It is critical for you to start building your credit history, through taking smaller loans, even though it may be a little more expensive initially. This will give you the flexibility to evaluate cheaper and larger loans going forward. In addition, if have a close family member who has been in that geography for a while and who is open to being a co-borrower/ guarantor on the loan, they may be in a position to get a lower interest rate on your loan, even though you have moved in recently.
One also needs to keep in mind that loans in most countries tend to be floating in nature, i.e. they go up and down on the basis of a benchmark, and thus the loan rate that is being offered today may not remain constant through the tenure of the loan. Thus, the outlook on interest rates is also an important parameter to keep in mind while deciding the repayment versus status quo strategy.
For example, in the current environment, where the US has been raising interest rates and India has also started to do so, one would expect that interest rates will go up for borrowers having floating rate loans in both geographies, though the extent and pace may vary.
When taking a decision, one needs to keep in mind the likely change in interest rates, rather than only the current interest rate differentials on loans in the two geographies under consideration.
Currency value changes i.e. how the Indian Rupee is expected to perform against the currency in which one is earning as an NRI and one is repaying loans in, is also an important factor, especially as certain loans can be long term. There is also a need to evaluate the remaining tenure of the loan and other incidental costs and operational convenience in making the shift. For example, if the loan in India has completed a large part of its tenure, most of the EMI component will be principal repayment and it may not be worth shifting, even if the interest rate is lower overseas.
Avoid using cheap loans overseas to invest in India, as adverse developments on the investment and/or currency can alter the outcome of the leveraged investment significantly.
It is critical to look at multiple factors before you finally decide on whether you wish to shift your loan overseas when you become a NRI.
Vishal Dhawan is a certified financial planner and the founder of Plan Ahead Wealth Advisors, a SEBI Registered Investment Advisor.