Loan finance software, loan management software, machinery loan software

CHIT FUND AND BANK LOAN ANALYSIS

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CHIT FUND AND BANK LOAN •Many common people who foresee requirement of money joins chits funds.

•They might want to source fund to construct house or for daughter’s marriage or for business purpose.

•Sometimes people use proceeds from chits to buy vehicles and consumer goods. Most of them believe it to be a cheaper option also

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CHIT FUND AND BANK LOAN • Most of the time, people do not go to bank and seek a loan thinking that it is a cumbersome process. • They think that banks will ask for lot of documents which they will not be able to give unless they have a salaried job

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ANALYSIS Let us analyze here if it is better to take a bank loan or to go for chit. Let us first consider short term chit and short term bank loan According to KSFE (Kerala State Financial Enterprise, which is a state owned company running chit schemes) , for a chit for a period of 30 months, the total repayment will be 90% of the salary amount.

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CHIT FUNDS • The chit will be better if the bank interest rate is higher than 16.25%.

• It will be also better if the reduction due to bidding is lesser than 25% of the sala.

• In case of chitty, if there is more than 1 person ready to bid for maximum reduction rate of 25% of sala, then KSFE will conduct a draw and the lucky one will get the bid amount.

• This means that you need luck also at the time of urgency to get the chit amount.

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WHICH IS BETTER? If the bank interest rate is lower than 16.25% then, the loan from bank will be better.

For example a salaried person can get personal loan at about 14 to 15%.

His total repayment will be less by Rs.700 to Rs.1300 compared to chitty.

If there was vigorous auction during most of the months, then the total chit payment will be low which make it look attractive. But you will not know how fierce will be the bidding, at the time of Page 6 joining.

EXAMPLE • A home loan for Rs.1.35 lacs for a term of 90 months at an interest rate of 10% will have EMI of Rs.2138.

• The total repayment will be Rs.1.92 lacs.

• Suppose a person joined a KSFE chit with sala of Rs.1.8 lacs for a term of 90 months.

• He won the bid in the second month at a reduction of 25%.

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EXAMPLE He got about Rs.1.35 lacs. His total repayment is Rs1.35 lac which means that the interest rate is zero.

This is not believable. This will happen only when every bid is won at maximum reduction of 25%.

The maximum total payment to a chit is expected to be 90% of the sala as per KSFE. If so for the above mentioned chit, the total payment will be Rs.1.6 lacs which is equal to a home loan at 4.62% Page 8 interest p.a.

CONSLUSION •Therefore it can be fairly assumed that for longer period chit will be a low cost borrowing option compared to bank loans.

•Only drawback is that you are not sure if you will win the bid when you require the money.

•All the above analysis was done on the basis of winning the bid at the beginning of the chit.

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CONSLUSION But if you win the bid after a few months, then you have to take into account the interest that you would have got if you have saved the installment amounts in a bank RD account.

So if you have taken the chit for borrowing, then you should try to win the bid in the beginning itself as it will be profitable for you.

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