Should I take one loan to repay another?

I would like to take a top-up for my home loan and settle the credit card balance. I end up paying nearly Rs 4,000 every month as the minimum payment.

- Siva Shankar

It is not clear to me how the bank will allow you to take a top-up loan for your house and use it to settle your credit card bill. The bank will monitor the end use of the loan and I would think that such an 'adjustment' is not possible.

Very clearly, your debt is high, given your current income and repayment capabilities.

Following these suggestions might help.

- Be frugal in your spending and attempt to save as much as possible.

- Make it a priority to clear all your debt except the home loan, which anyway is a long-term loan.

- The fastest and surest way to end the credit card loan is to repay it -- the minimum balance payment will not do.

Talk to your bank and ask the outstanding amount on your credit card be converted into a loan with Equated Monthly Instalments (fixed amounts you will pay every month). Many are willing to do that though at a high interest. But it could still be worthwhile.

Monthly income: Rs 20,000

Expenses: Home loan EMI (Rs 7,114), society monthly payments (Rs 1,725), monthly expenses (Rs 5,000).

I am single and have no other commitments. How must I save the rest?

- Nishith Doshi

Before you embark upon an investment plan, consider your large spends in the next five years.

If you plan to get married, you may not be able to manage with the level of expenses you have indicated. You may have to incur expenses on a car, durables for the household and so on. It would be necessary for your spouse to be employed -- so both of you can enjoy a good lifestyle and save as well. 

Since I clearly see an increase in spend for you, and given your home loan, I would suggest you create some bank deposits for yourself, even if the interest rate is low and taxable.

If you are comfortable with mutual funds, you could consider a short-term plan in which you can invest around 60% to 70% of your savings. You should be able to access this money when you need it, and you should not suffer capital loss on it.

The remaining 30% of your savings can go into equity. Use a Systematic Investment Plan of a mutual fund, and invest in a diversified scheme (not sectoral funds). You can increase your equity component gradually, as your income goes up, and your commitments are fulfilled.

Most young and single people tend to increase credit card spends when faced with sudden large expenses. It is better to plan for it in advance and avoid high cost debt.

You do not need any income from your investments since you are earning. Allow your investment income to accumulate, it will compound and get the chance to grow big.

One of my friends told me that I should live by the principle: if you have money to buy a car, buy a motor bike. How far is this true?

Looking at the loans freely available and the tax benefits on home loan, I feel I am missing out on the opportunities.

 - Ramesh Pavadai

If you are running a business, and you are able to put in such a stellar performance that your creditors trust you, then you should do what your friend has advised.

But if you are a saver, and have no business opportunity to make your money run for you, borrowing in whatever form, is harmful.

The home loan scene is different because of the tax concession. If you did not have the loan, you would have paid more tax, so the effective cost of your home loan is lower because of the tax saved.

A car loan is a good idea only if you like to enjoy the benefits without having saved for it in advance. The condition is that you pay the loan later, and if the interest rate is 14%, your money would go into paying off the loan rather than being invested and making returns for you.

You have to judge what is the balance you like, and as a rule, to a salaried person who is not creating wealth, saving and investing is always superior to borrowing and debt.