State Bank of India, the largest bank in the country, on Wednesday slashed interest rates on car loans by 20 basis points. It has also cut the processing fee. SBI is the fourth bank after PNB, OBC and IDBI Bank to marginally lower interest rates for loans to buy automobiles and consumer durables. PSU banks have started cutting rates a week after the government announced its intention to pump in funds to banks so that they can lower rates to boost demand in certain sectors.
Sure, the interest rate cut is not much to speak about, but the hoopla surrounding festive offers still may land some impulsive shoppers in trouble, fear financial advisors.
"It is not going to make a significant impact on people's behaviour, because there is no dramatic change in interest rates. The 20-25-bps drop in rates will translate into a saving of only a few hundred rupees in EMI," says Suresh Sadagopan, principal planner, Ladder7 Financial Advisories.
"But it could prompt some people who were waiting to make some purchase for some time. They would see the advertisement or read the news and may decide to go for it," he adds. Kartik Jhaveri, director, Transcend Consulting, also doesn't believe that the move is going to make any significant change in buying decisions this season.
"Even in the absence of 0% finance schemes, customers have many options before them if they want to make impulsive purchases. For example, credit card firms offer the facility of paying in installments on big purchases," says Jhaveri. He believes that 0% finance schemes-banned by RBI recently- had much more influence on shoppers.
Planning for Goals
Jhaveri says the most modest purchases during the festive season can be taken care of, if the person is not a spendthrift. "We always have some 10-15% money marked for miscellaneous expenses. If the person doesn't blow up this entire money every month, he may have enough to take care of a purchase of a mobile phone worth 40,000 or a TV for 50,000," says Jhaveri. However, he says one can always plan for holidays and big shopping during festivals in a systematic fashion. "These expenses don't come every month. So, you can always set aside a certain amount every month in a liquid fund. If you do it in a systematic manner, you would have enough to take care of expenses," he adds.
However, financial planners insist that it is always better to plan for big-ticket items as it help individuals meet their various life goals in a systematic manner. "Some people really have a tendency for impulsive spending, and it seriously hampers their financial health. Such people should always be careful during festive season discounts," says a wealth manager, who doesn't want to be named. He shares the example of a client, who would land up in his office every three months with some financial trouble. "One day it would be an unplanned holiday abroad or it could be some huge purchase on another occasion. It took a while for the person to realise that his impulsive decisions have serious financial consequences. It took a while for him to get used to the idea that every big expense needs proper planning," he adds.
Financial planner says it is always better to plan for an expense of over Rs 50,000. For example, you want to upgrade your existing TV. You know that the one you want to buy would cost around a lakh. Instead of opting for loan immediately, you can postpone the purchase and start saving for it in the mean time. For example, if you can save Rs 20,000 in a month, you will be able to make the purchase within five months. If you find it difficult to save that much, take a look at your expenses and try to cut down on unnecessary ones, say experts.
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